The Volokh Conspiracy - The AIG Bonus Tax and the Spending Clause:

Even if courts are unwilling to strike down a 90 percent tax on bonuses paid to AIG executives as a unconstitutional Bill of Attainder, might the provision be vulnerable on other grounds? As written, the provision would seem to present Equal Protection and ex post facto issues — though such arguments might well be losers in court. I am also wondering whether the tax could run afoul of the constitutional limits on the spending power.

There are not too many judicially enforceable limitations on the spending power. One of the few is that Congress must impose conditions on the receipt of federal funds "unambiguously." This requirement ensures that the recipient of federal funds has, in fact, consented to the conditions when accepting the federal money, and prevents the federal government from altering the terms of the deal after the fact. Congress may impose new conditions going forward, but it may not impose new conditions on federal grants after the fact or interpret ambiguous language in order to impose limitations that were not clear to the recipient up front.

In this case, there is no question that the tax on bonuses was imposed after the fact. So the question would be whether the tax can be viewed as a condition placed on the receipt of federal funds. While not put forward as a condition, the tax would seem to operate that way. The tax would explicitly apply only to those who receive federal TARP funds. So, in effect, the tax is a condition on the receipt of federal money: If you take TARP money, you cannot reward executives with bonuses that the federal government deems to be exorbitant. If Congress could not explicitly impose such a condition after the TARP money went out, why should Congress be able to achieve the same end by labeling the condition a "tax" on bonuses paid by fund recipients?

Most of the relevant cases in this area involve grants to state governments (see, e.g., Pennhurst, Dole, Va. Dept. of Education v. Riley), but it is not clear to me why the principle should not carry over to the private context. Insofar as Congress is using the spending power to regulate (or punish) behavior, it seems to me that this restriction should apply. Congress may be free to tax all exorbitant bonuses paid by financial firms, and it is free to limit the payment of such bonuses by future recipients of federal funds, but why should Congress be able to selectively "tax" bonuses paid by TARP recipients after the fact.

Another potential difficulty would be that the individual challenging the tax would be a bonus recipient, and not a direct recipient of federal TARP funds. Again, however, I am not sure why this should make a principled difference. (Whether a court would ever accept this argument is another matter entirely.)

	[Jonathan Adler, March 23, 2009 at 2:29pm] Trackbacks The AIG Bonus Tax and the Spending Clause: Even if courts are unwilling to strike down a 90 percent tax on bonuses paid to AIG executives as a unconstitutional Bill of Attainder, might the provision be vulnerable on other grounds? As written, the provision would seem to present Equal Protection and ex post facto issues — though such arguments might well be losers in court. I am also wondering whether the tax could run afoul of the constitutional limits on the spending power. There are not too many judicially enforceable limitations on the spending power. One of the few is that Congress must impose conditions on the receipt of federal funds "unambiguously." This requirement ensures that the recipient of federal funds has, in fact, consented to the conditions when accepting the federal money, and prevents the federal government from altering the terms of the deal after the fact. Congress may impose new conditions going forward, but it may not impose new conditions on federal grants after the fact or interpret ambiguous language in order to impose limitations that were not clear to the recipient up front. In this case, there is no question that the tax on bonuses was imposed after the fact. So the question would be whether the tax can be viewed as a condition placed on the receipt of federal funds. While not put forward as a condition, the tax would seem to operate that way. The tax would explicitly apply only to those who receive federal TARP funds. So, in effect, the tax is a condition on the receipt of federal money: If you take TARP money, you cannot reward executives with bonuses that the federal government deems to be exorbitant. If Congress could not explicitly impose such a condition after the TARP money went out, why should Congress be able to achieve the same end by labeling the condition a "tax" on bonuses paid by fund recipients? Most of the relevant cases in this area involve grants to state governments (see, e.g., Pennhurst, Dole, Va. Dept. of Education v. Riley), but it is not clear to me why the principle should not carry over to the private context. Insofar as Congress is using the spending power to regulate (or punish) behavior, it seems to me that this restriction should apply. Congress may be free to tax all exorbitant bonuses paid by financial firms, and it is free to limit the payment of such bonuses by future recipients of federal funds, but why should Congress be able to selectively "tax" bonuses paid by TARP recipients after the fact. Another potential difficulty would be that the individual challenging the tax would be a bonus recipient, and not a direct recipient of federal TARP funds. Again, however, I am not sure why this should make a principled difference. (Whether a court would ever accept this argument is another matter entirely.)