March 24 (Bloomberg) -- Congress may not need to impose a heavy tax on bonuses paid by American International Group Inc. if employees continue to return the payments, a House leader said after the Senate slowed consideration of its proposal.

“If we see the return of the payments, there won’t be anything to tax,” House Majority Leader Steny Hoyer, a Maryland Democrat, told reporters today in Washington. Legislation “may not be necessary.”

A House-passed measure to impose a 90 percent tax on bonuses at companies receiving federal bailouts appears to be having the desired effect of causing bonuses to be returned, Hoyer said. New York Attorney General Andrew Cuomo said yesterday that nine of the top 10 recipients at AIG agreed to give back their checks and half of the $165 million in bonuses may be returned.

Hoyer said he wasn’t advocating the Senate drop its own proposal, which would impose a 70 percent tax on bonuses. Yesterday, Senate Majority Leader Harry Reid, a Nevada Democrat, said he will give Republicans more time to study the plan. AIG got $182.5 billion in U.S. bailout funds, according to the Government Accountability Office.

Republican opposition to the proposal in the Senate is more uniform than it was in the House, where party members split almost evenly in the vote on the chamber’s bonus-tax bill last week, said the party’s top Senate vote counter, Jon Kyl of Arizona. While Republicans are in the minority in the Senate, they can more easily block legislation with procedural hurdles.

‘Significant Opposition’

If Reid “wants this bill, he’s going to have significant opposition,” Kyl told reporters yesterday. He also said he was surprised to find calls from constituents running six to one against the measure.

This week and next, Reid said, the Senate will work on a national-service bill and President Barack Obama’s budget proposal. Congress begins a two-week recess on April 6. Reid spokesman Jim Manley said unanimous agreement would be needed to proceed with the bonus-tax legislation in the Senate before the recess.

“We will continue to work to right this egregious misuse of taxpayer dollars,” Reid said. “With Republican cooperation, we can quickly and responsibly return these funds to the American people.”

Representative Chris Van Hollen, a Maryland Democrat, said in an interview today the delay was “a little breather, a little time-out, to see if there’s an alternative way.” He added, “We are certainly open to other suggestions.”

15 of Top 20

Cuomo said 15 of the top 20 bonus recipients at AIG agreed to return their entire bonuses, accounting for $30 million. Employees have agreed to give back $50 million in all, and it might be possible to recoup $80 million, Cuomo said.

“Hopefully, this is a problem that can be resolved in a different way,” said Conrad, who said “we’ll see,” when asked whether the Senate might drop the AIG bonus bill.

On March 19, the House voted 328-93 for its measure. It would affect employees with household income of more than $250,000 a year who received bonuses from companies that took more than $5 billion in aid from the Troubled Asset Relief Program.

Voting for the bill were 243 Democrats and 85 Republicans; opposing it were 87 Republicans and six Democrats.

Senate Version

Four senators then introduced a measure to impose the 70 percent tax on bonuses, with the levy split between the employee and company. Reid sought immediate Senate passage, though Republicans objected.

Obama said on CBS’s “60 Minutes,” aired March 22, that the government shouldn’t act in “anger” on the bonus issue and he questioned the legality of imposing the punitive tax. “As a general proposition, you don’t want to be passing laws that are just targeting a handful of individuals,” Obama said on the program.

To show there is a precedent for the legislation, some Senate aides have pointed to tax laws that target small groups of financiers, such as a 50 percent excise tax enacted in 1987 on certain payments known as “greenmail” that aimed to avoid hostile takeovers.

Legal scholars have said the push for a new tax on bonuses would likely withstand a constitutional challenge.

Comments From Republicans

Comments from a stream of Republicans yesterday, some quoting remarks by Obama over the weekend, indicated the cooperation Reid said he needs for action on the Senate bill won’t be forthcoming.

Senator Susan Collins of Maine, who helped shape and provided one of the three Republican Senate votes for Obama’s $787 billion stimulus last month, criticized the bonus-tax bill as “too broad” and likely to have “unintended, seriously damaging consequences.”

She said it would punish one of her constituents who “had nothing to do with any of the risky decisions made by anyone” but who happened to work for a company that was bought by Wachovia, which had received TARP funds.

Senate Republican Leader Mitch McConnell of Kentucky also said the Senate “ought to slow down” on the bonus-tax bill and think through its ramifications. “We need to be careful,” he said.

Obama spokesman Robert Gibbs yesterday reiterated that Obama is reviewing the legislation using two criteria. “We cannot and should not reward failure with bonuses and the message that would send, but also to make sure that we don’t do harm to the financial system,” he told reporters.

Build a Case

The delay in the Senate will give the financial services industry more time to build a case against the legislation.

In a letter to lawmakers yesterday, Steve Bartlett, president and chief executive of the Financial Services Roundtable, said the taxes “will undermine the recovery effort.”

“The events of last week could have a chilling effect on participation in the toxic-asset purchase plan released this morning,” Bartlett wrote.

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net; Laura Litvan in Washington at llitvan@bloomberg.net

Last Updated: March 24, 2009 13:19 EDT