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Monday, February 1, 2010
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The constitutionality of the Obama administration's proposed "Financial Crisis Responsibility Fee" is clearly questionable. For starters, several prominent legal scholars note that it may run afoul of the Constitution's prohibition on "bills of attainder." A bill of attainder is a law designed to "punish" the subject of the legislation. The Constitution makes clear that "punishment" is a judicial function and may occur only after judicial procedures. When Congress enacts legislation that seeks to punish particular individuals or entities, it impermissibly usurps the judicial function.
The history of the administration's proposed "fee" illustrates that it plainly is designed to "punish" the subject banks and satisfy a populist uprising in the wake of significant Wall Street bonuses. The administration proposed a similar measure last year that targeted AIG, a company that distributed significant bonuses to employees after receiving generous taxpayer subsidies. The rhetoric surrounding that proposed measure clearly indicated a congressional intent to punish AIG for honoring contractually-required bonuses despite receiving significant government funding. Accordingly, critics at the time argued that the proposed measure violated several constitutional provisions, including the Constitution's prohibition of bills of attainder.
The administration's latest proposal for a "bank tax" on the nation's largest financial entities resurrects that measure in a different form. Instead of singling out a single company, the administration targets a small group of companies. At the same time, it attempts to avoid some of the rhetoric that would clearly indicate the punitive nature of its proposal.
However, despite the administration's efforts to argue that the bank tax is merely a general legislative measure that does not seek to "punish" any particular entities, the constitutional problems raised by such legislation are no less significant. President Obama specifically cites the banks' "billions of dollars in profits" and large "bonuses and compensation" in the wake of a financial collapse he claims was a "crisis of their own creation" and resulted in a "distasteful but necessary" taxpayer-funded bailout as the reason for the proposed legislation. Thus, at bottom, the measure is designed to target and punish certain entities to satisfy the populist uprising caused by the administration's bailouts of the financial industry.
While administration defenders, such as Harvard law professor Laurence Tribe, argue that the proposed legislation's constitutionality is "not even a close question," when members of Congress proposed the tax on AIG, Mr. Tribe's initial reaction was that it was "hard to argue that this isn't an attempt to punish an identifiable set of individuals," rendering it vulnerable to constitutional challenge under the Bill of Attainder Clause (a position he later retracted). Moreover, while he now suggests that a judicial challenge to such legislation would be meritless, Mr. Tribe previously litigated such challenges to the Federal Telecommunications Act in multiple courts across the country - even though the case for the unconstitutionality of that legislation was much weaker.
In the prior litigation, Mr. Tribe correctly observed that "[t]he Supreme Court has given 'broad and generous meaning to the constitutional protection against bills of attainder.'" He maintained that the Tele- communications Act violated this constitutional guarantee because it contained provisions targeting specific companies in the telecommunications industry, even though Congress enacted the provisions not to punish those companies, but to open telecommunications markets to competition after a court-approved a consent decree settled claims of antitrust violations in the telecommunications industry.
While Mr. Tribe was ultimately unsuccessful in challenging that particular legislation, the resulting appellate decisions provide useful guidance for the current controversy. Even though the courts found that Congress articulated a legitimate nonpunitive purpose in enacting the Telecommunications Act, the decisions were far from unanimous, and included vigorous dissents. Moreover, even those judges holding that the Telecommunications Act did not constitute legislative punishment, but rather a legitimate attempt to foster competition, underscored that courts must be vigilant in reviewing future challenges to prevent "Congress from circumventing the [bill of attainder] clause by cooking up newfangled ways to punish disfavored individuals or groups."
That is exactly the situation here, where the administration seeks to impose legislative punishment in the guise of a "tax" bill. Here, there has been no judicial finding of any wrongdoing. Nor is the so-called "bank tax" designed to serve any legitimate legislative purpose. Rather, its history and the rhetoric surrounding it make clear that it is designed solely to punish. In sum, the claim that the constitutionality of the administration's proposal is beyond question is overblown, and indeed unsupportable. As with many of the administration's recent actions, it raises significant constitutional concerns.
Douglas G. Smith is a litigation partner at Kirkland & Ellis LLP, and a scholar in residence at Loyola University Chicago School of Law.
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