Senate Democrats Tuesday were preparing legislation that would levy up to a 91% excise tax on the bonuses paid to executives at American International Group Inc. (AIG) that have stirred outrage.

In a letter sent to Edward Liddy, AIG's chairman and chief executive, 10 Democratic senators urged him to renegotiate the $165million paid out in bonuses to executives at the company's troubled financial products division.

If not, the letter said, lawmakers wouldn't hesitate to recoup the bonuses through legislation.

"We stand ready to take the difficult, but necessary step of working to enact legislation that would allow the government to recoup these bonus payments, perhaps by imposing a steep tax - as high as 91 percent - that will have the effect of recovering nearly all of the bonuses that have been paid out since AIG turned to taxpayers for help," the letter said.

Liddy was installed as head of AIG after the federal government stepped in last year to rescue the ailing insurer.

Senate Finance Committee Chairman Max Baucus, D-Mont., said Tuesday that lawmakers of both parties were working on legislation that would be introduced soon.

Since last fall, taxpayers have pumped more than $170 billion into AIG to keep the beleaguered company afloat. This past weekend, the company disclosed that around $90 billion of that money had been paid out to third parties it had outstanding contracts with, including large U.S. and international banks.

House Majority Leader Steny Hoyer, D-Md., said that he was unsure how legislation could be drafted that would impose a tax against executives working for a particular firm.

He said one possibility would be to pass a law going after bonuses paid out to any firm that had received taxpayer money through the Troubled Asset Relief Program.

A senior Democratic Senate aide acknowledged that writing the bill so that it was narrow in scope would be difficult, and that any effort would be likely to impact more than just AIG executives.

The aide said that one idea that was being debated would be to impose the tax on firms that had received a certain amount of taxpayer money, or establish a threshold of public ownership at which point the excise tax would be applied.

Since the financial markets came to the brink of collapse last year, the taxpayer has assumed around an 80% ownership stake in AIG. It has in effect taken over Fannie Mae (FNM) and Freddie Mac (FRE), and has also taken equity in a number of large banks.

Of those, officials said recently the federal government's stake in Citigroup Inc. (C) could reach as high as 36% if it required a further injection of taxpayer money.

Despite his doubts about the imposition of a tax aimed at reclaiming the bonuses, Hoyer said there was no question in his mind the executives should give the money back, saying if "they had any common sense at all," they would.

"If they were at all sensitive to what the American people had done to keep their company afloat ... they would simply give this money back."

House Minority Leader John Boehner, R-Ohio, reserved his anger for the Obama administration's handling of the AIG situation.

At a press conference Tuesday morning, he questioned why officials agreed to give the beleaguered company a further $30 billion only weeks ago, without ensuring there were sufficient controls in place to limit how the firm used the money.

"I think this is outrageous, and I think the American people are rightly outraged that their tax money is going to pay bonuses to the very people that got this company in trouble," Boehner said.

-By Martin Vaughan and Corey Boles, Dow Jones Newswires; 202-862-9244; martin.vaughan@dowjones.com