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United States. Congress. House. Committee on the J.

State taxation of nonresidents' pension income : hearing before the Subcommittee on Commercial and Administrative Law of the Committee on the Judiciary, House of Representatives, One Hundred Fourth Congress, first session, on H.R. 371, H.R. 394, and H.R. 744, June 28, 1995 online

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Online LibraryUnited States. Congress. House. Committee on the JState taxation of nonresidents' pension income : hearing before the Subcommittee on Commercial and Administrative Law of the Committee on the Judiciary, House of Representatives, One Hundred Fourth Congress, first session, on H.R. 371, H.R. 394, and H.R. 744, June 28, 1995 → online text (page 1 of 13)
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A"^ STATE TAXATION OF NONRESIDENTS' PENSION
^ INCOME



Y 4, J 89/1:104/11



State Taxation of Nonresidents' Pen.



ING



THE

SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW

OF THE

COMMITTEE ON THE JUDICIAKY
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS

FIRST SESSION
ON

H.R. 371, H.R. 394, and H.R 744



JUNE 28, 1995



Serial No. 11




Printed for the use of the Committee on




""^^'A^-

'y ^"'^gUt^,



U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1995




For sale by the U.S. Government Piinting Office
Superintendent of Documents, Congressional Sales Office. Washington, DC 20402
ISBN 0-16-047683-6



A^ STATE TAXATION OF NONRESIDENTS' PENSION
^ INCOME



Y 4. J 89/1:104/11



State Taxation of Nonresidents' Pen.



ING



THE

SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW

OF THE

COMMITTEE ON THE JUDICIAKY
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS

FIRST SESSION
ON

H.R. 371, H.R. 394, and H.R, 744



JUNE 28. 1995



Serial No. 11




Printed for the use of the Committee on



U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1995




For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office, Washington. DC 20402
ISBN 0-16-047683-6



COMMITTEE ON THE JUDICIARY



HENRY J. HYDE. Illinois, Chairman



CARLOS J. MOORHEAD, California
F. JAMES SENSENBRENNER, JR.,

Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
STEVEN SCHIFF, New Mexico
ELTON GALLEGLY, California
CHARLES T. CANADY. Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
MARTIN R. HOKE. Ohio
SONNY BONO, California
FRED HEINEMAN, North Carolina
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
MICHAEL PATRICK FLANAGAN, Ilhnois
BOB BARR, Georgia



JOHN CONYERS. Jr., Michigan
PATRICIA SCHROEDER, Colorado
BARNEY FRANK, Massachusetts
CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JOHN BRYANT, Texas
JACK REED, Rhode Island
JERROLD NADLER. New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
XAVIER BECERRA, California
JOSE E. SERRANO, New York
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas



Alan F. Coffey, Jr., General Counsel /Staff Director
JUUAN Epstein. Minority Staff Director



SuBCOMMirrEE ON Commercial and Administrative Law



GEORGE W. GEKAS. Pennsylvania. Chairman



HENRY J. HYDE. IlHnois

BOB INGLIS, South Carolina

STEVE CHABOT. Ohio

MICHAEL PATRICK FLANAGAN, Illinois

BOB BARR. Georgia



JACK REED, Rhode Island
JOHN BRYANT, Texas
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia



Raymond V. Smietanka. Chief Counsel

Charles E. Kern II, Counsel

Roger T. Fleming, Counsel

AGNIESZKA FRYSZMAN, Minority Counsel



(II)



CONTENTS



HEARING DATE

Page

June 28, 1995 1

TEXTS OF BILLS

H.R. 371 2

H.R. 394 4

H.R. 744 7

OPENING STATEMENT

Gekas, George W., a Representative in Congress from the State of Pennsylva-
nia, and chairman, Subcommittee on Commercial and Administrative Law . 1

WITNESSES

Duncan, Harley T., executive director. Federation of Tax Administrators 52

Farrell, W. Christopher, legislative representative. National Association of

Retired Federal Employees (NARFE) 47

Hoffman, William C, president. Retirees To Eliminate State Income Source

Tax (RESIST) 38

Johnson, Randall L., director of benefits planning. Motorola 58

Reid, Hon. Harry, a Senator in Congress from the State of Nevada 29

Smith, James C, professor of law, University of Georgia School of Law 21

Stump, Hon. Bob, a Representative in Congress from the State of Arizona 15

Vucanovich, Hon. Barbara F., a Representative in Congress from the State

of Nevada 13

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

American Institute of Certified Public Accountants: Prepared statement 77

Babbitt, J. Randolph, president. Air Line Pilots Association 80

Bryan, Hon. Richard, a Senator in Congress from the State of Nevada: Pre-
pared statement 70

Dawes, James W., Washington State Chapter, RESIST of America: Prepared

statement 72

Duncan, Harley T., executive director. Federation of Tax Administrators:

Prepared statement 53

Farrell, W. Christopher, legislative representative, National Association of
Retired Federal Employees (NARFE): Prepared statement 49

Fink, Matthew P., president. Investment Company Institute 81

Goldberg, Gerald H., executive director, California Franchise Tax Board: Pre-
pared statement 74

Hoffman, William C, president, Retirees To Eliminate State Income Source

Tax (RESIST): Prepared statement 40

Johnson, Randall L., director of benefits planning, Motorola: Prepared state-
ment 59

Kelley, Carolyn M., director of Government Affairs, American Payroll Associa-
tion: Prepared statement 82

Lokovic, CM. Sgt., James E., USAF (Ret.), director, military and government
relations. Air Force Sergeants Association: Prepared statement 80

Military Coalition: Prepared statement 76

Reid, Hon. Harry, a Senator in Congress from the State of Nevada: Prepared

statement 30

(III)



IV

Page

Scully, Robert T., executive director, National Association of Police Organiza-
tions: Prepared statement 81

Smith, James C, professor of law, University of Georgia School of Law:

Prepared statement 23

Smith, Hon. Linda, a Representative in Congress from the State of Washing-
ton: Prepared statement 71

Stump, Hon. Bob, a Representative in Congress from the State of Arizona:

Prepared statement 16

Tobias, Robert M., national president. National Treasury Employees Union:

Prepared statement 72

Vucanovich, Hon. Barbara F., a Representative in Congress from the State

of Nevada: Prepared statement 15



STATE TAXATION OF NONRESIDENTS'
PENSION INCOME



WEDNESDAY, JUNE 28, 1995

House of Representatives,
Subcommittee on Commercial and

Administrative Law,
Committee on the Judiciary,

Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in room
2226, Raybum House Office Building, Hon. George W. Gekas
(chairman of the subcommittee) presiding.

Present: Representatives George W. Gekas, Bob IngHs, Steve
Chabot, Jack Reed, and Robert C. Scott.

Also present: Charles E. Kern H, counsel; Rebecca Ward, sec-
retary; and Agnieszka Fryszman, minority counsel.

OPENING STATEMENT OF CHAIRMAN GEKAS

Mr. Gekas. The hour of 10 o'clock having arrived, this session of
the Commercial and Administrative Law Subcommittee of the Ju-
diciary will come to order.

We will begin the hearing. I see now that Representative Stump
has been joined by Representative Vucanovich, so once they take
their place at the witness table, we can begin.

The issue before us is not as thrilling or as adventurous as to
whether or not we should have a continuation of the B-2 program
or any such thrilling kind of issue, but it is very important. It has
to do with source taxation, a vexatious issue that touches many,
many thousands of our fellow Americans and an issue which de-
serves our full attention.

The witnesses will cover the waterfront, as it were, from Mem-
bers of the House of Representatives and the Senate plus people
from academia who have analysis to offer on this issue, to people
who are directly affected by it — retirees, employees, employers, tax
administrators, et cetera.

So by the time we are finished with this hearing, we on the sub-
committee will be better educated on how best to proceed. It is not
a new issue, but we acknowledge and promise that it will become
a fresher issue as a result of this hearing.

[The bills, H.R. 371, H.R. 394, and H.R. 744, follow:]



(1)



104TII CONGRESS
1st Session



H.R.371



To prohibit a State from imposing an income tax on the pension income
of indi\iduals who are not residents or domiciharies of that State.



IN THE HOUSE OF REPRESEXTATR^ES

Jaxlary 4, 1995

Mr. Stump (for him.self and Mrs. VuCANOMCH) introduced the folloM-inf!: bill;

which was referred to the Committee on the Judieian-



A BILL

To proliibit a State from imposing an income tcix on the
pension income of individuals who are not residents or
domiciharies of that State.

1 Be it enacted by the Senate and House of Representa-

2 tives of the United States of America in Congress assembled,

3 SECTION 1. LIMITATION ON STATE TAXATION OF' PENSION

4 INCOME.

5 (a) Ix GEXER.VL. — Chapter 4 of title 4 of the United

6 States Code is amended by adding at the end thereof the

7 following new section:



3



2

1 "§114. Limitation on State income taxation of pen-

2 sion income

3 "(a) Xo State may impose an income tax (as defined

4 in section 110(c)) on the pension income of any indi\idual

5 who is not a resident or domicihar\' of such State.

6 "(b) For purjioses of subsection (a), the term 'State'

7 includes any political subdi\'ision of a State, the District

8 of Columbia, and the possessions of the United States.".

9 (b) Clerical Amendment. — The table of sections

10 for such chapter 4 is amended by adding at the end there-

1 1 of the following new item:

"114. Limitation on State income taxation of pension income."

12 (c) Effectrt: Date. — The amendments made by

13 this section shall apply to taxable years beginning after

14 the date of the enactment of this Act.

O



104th congress
1st Session



H. R. 394



To amend title 4 of the United States Code to limit State taxation of
certain pension income.



IN THE HOUSE OF REPRESENTATIVES

January 4, 1995
Mrs. VucANOMCH (for herself, Mr. Ensign, Mr. Stump, Mr. Doolittle,
and Mr. Burton of Indiana) introduced the followng bill; which was re-
ferred to the Committee on the Judiciary



A BILL

To amend title 4 of the United States Code to limit State
taxation of certain pension income.

1 Be it enacted hy the Senate and House of Representa-

2 tives of the United States of America in Congress assembled,

3 SECTION 1. LIMITATION ON STATE INCOME TAXATION OF

4 CERTAIN PENSION INCOME.

5 (a) Amendment. — Chapter 4 of title 4, United

6 States Code, is amended by adding at the end the follow-

7 ing:



2

1 **§ 114. Limitation on State income taxation of certain

2 pension income

3 "(a) No State may impose an income tax on any re-

4 tirement income of an individual who is not £i resident or

5 domiciliary of such State (as determined under the laws

6 of such State).

7 "(b) For purposes of this section —

8 "(1) The term 'retirement income' means any

9 income from —

10 "(A) a qualified trust under section 401(a)

11 of the Internal Revenue Code that is exempt

12 under section 501(a) ft-om taxation;

13 "(B) a simphfied employee pension as de-

14 fined in section 408(k) of such Code;

15 "(C) an annuity plan described in section

16 403(a) of such Code;

17 "(D) an annuity contract described in sec-

18 tion 403(b) of such Code;

19 "(E) an individual retirement plan de-

20 scribed in section 7701(a)(37) of such Code;

21 "(F) an eligible deferred compensation

22 plan (as defined in section 457 of such Code);

23 "(G) a governmental plan (as defined in

24 section 414(d) of such Code);

25 "(H) a tnist described in section

26 501(c) (18) of such Code; or



6

3

1 "(I) any plan, program or arrangement de-

2 scribed in section 3121(v)(2)(C) of such Code.

3 Such term includes any retired or retainer pay of a

4 member or former member of a uniform service com-

5 puted under chapter 71 of title 10, United States

6 Code.

7 "(2) The term 'income tax' has the meaning

8 given such term by section 110(c).

9 "(3) The term 'State' includes any political sub-

10 division of a State, the District of Columbia, and the

1 1 possessions of the United States.

12 "(c) Nothing in this section shall be construed as hav-

13 ing any effect on the application of section 514 of the Em-

14 ployee Retirement Income Security Act of 1974.".

15 (b) Conforming Amendment. — The table of sec-

16 tions for chapter 4 of title 4, United States Code, is

17 amended by adding at the end the following:

"114. Limitation on State income taxation of certain pension income".

18 (c) Effective Date. — The amendments made by

19 this section shall apply to amounts received after Decem-

20 berSl, 1994.

O



104th congress
1st Session



H. R. 744



To limit State taxation of certain pension income, and for other purposes.



IN THE HOUSE OF REPRESENTATIVES

January 30, 1995

Mr. Pickett introduced the following bill; which was referred to the

Committee on the Judiciary



A BILL

To limit State taxation of certain pension income, and for
other purposes.

1 Be it enacted by the Senate and House of Representa-

2 tives of the United States of America in Congress assembled,

3 SECTION 1. LIMITATION ON STATE TAXATION OF CERTAIN

4 PENSION INCOME.

5 (a) Ix General. — Chapter 4 of title 4, United

6 States Code, is amended by adding at the end the follow-

7 ing new section:

8 '*§ 114. Limitation on State income taxation ol* pen-

9 sion income

10 "(a) No State may impose an income tax (as defined

11 in section 110(c)) on the qualified pension income of any



8



2

1 individual who is not a resident or domiciliary of such

2 State.

3 "(b)(1) For purposes of subsection (a), the term

4 'qualified pension income' means any payment from a

5 qualified plan —

6 "(A) which is part of a series of substantially

7 equal periodic payments (not less frequently than

8 annually) made for —

9 "(i) the life or life expectancy of the recipi-

10 ent or for the joint lives or joint life

11 expectancies of the recipient and the recipient's

12 designated beneficiary, or

13 "(ii) a period of not less than 10 years, or

14 "(B) which is not described in subparagraph

15 (A) and which —

16 "(i) is received in a ta>:able year for

17 which an election under this subsection is

18 in effect, and

19 "(ii) is received on or after the date

20 on which the recipient has attained the age

21 of 59 ¥2,

22 except that the aggregate amount of pa\Tnents to

23 which this subparagraph may apply for any taxable

24 year shall not exceed $25,000.



9

3

1 "(2) For purposes of paragraph (1), the term 'quaU-

2 fied plan' means —

3 "(A) an employees' trust described in section

4 401(a) of the Internal Revenue Code of 1986 which

5 is exempt from tax under section 501(a) of such

6 Code,

7 "(B) a simplified employee pension described in

8 section 408(k) of such Code,

9 "(C) an annuity plan described in section

10 403(a) of such Code,

11 "(D) an annuity contract described in section

12 403(b) of such Code,

13 "(E) an individual retirement plan described in

14 section 7701(a)(37) of such Code,

15 "(F) an eligible deferred compensation plan

16 under section 457 of such Code, or

17 "(G) a governmental plan described in section

18 414(d) of such Code, other than a plan established

19 and maintained by a State or political subdivision of

20 a State, or an agency or instrumentality of either.

21 "(3) (A) An election under paragraph (1)(B), once

22 made for a taxable year, may not be made for any other

23 taxable year.

24 "(B)(i) If more than 1 State would (but for para-

25 graph (1)(B)) impose an income tax on qualified pension



10



4

1 income received by an individual during a taxable year,

2 the dollar amount otherwise applicable under paragraph

3 (1)(B) for such taxable year shall be allocated among such

4 States in such amounts as such individual may determine.

5 "(ii) The Secretary of the Treasury shall prescribe

6 regulations for the application of paragraph (1)(B) in any

7 case in which more than 1 individual receive qualified pen-

8 sion income during a taxable year which iis attributable

9 to services performed by 1 individual.

10 "(C) In calendar years beginning after 1995, the

11 $25,000 amount referred to in paragraph (1)(B) shall be

12 increased by an amount equal to such dollar amount, mul-

13 tiplied by the cost-of-living adjustment determined under

14 section 1(f)(3) of such Code for such calendiar year by sub-

15 stituting 'calendar year 1994' for 'calendar' year 1992' in

16 subparagraph (B) thereof.

17 "(c) For purposes of subsection (a), the term 'State'

18 includes any political subdivision of a Sta1:e, the District

19 of Columbia, and the possessions of the United States."

20 (b) Clerical A.me.\dme\t. — The table of sections

21 for such chapter 4 is amended by adding at the end the

22 following new item:

"114. Limitation on State income t;ixation of pension income."



11



5

1 (c) Effective Date. — The amendments made by

2 this section shall apply to taxable years be^nning after

3 the date of the enactment of this Act.

O



12

Mr. Gekas. First, I would like to jdeld to the gentleman from
Rhode Island, Mr. Reed, the ranking member on the minority, for
his opening statement if he has one.

Mr. Reed. Thank you very much, Mr. Chairman.

I would first like to start on a very positive note and commend
you and your counsel, Charles Kern, for the way you have put this
hearing together today. This is a model of how a hearing should
work. We have cooperation, fair notice, and we will be able to hear
from a range of witnesses with varying viewpoints. Sadly though,
that model is not always used, and I will have some comments
about that in a moment.

The subject of today's hearing, the source tax, is a very impor-
tant one. Last year we supported legislation similar to many of the
bills that are before us today. There is a difference from one of the
bills, H.R. 394, and I believe we have to thoroughly examine this
legislation. Last year's bill was limited to qualified pension plans
and capped the exemption at $30,000 annually for all pension in-
come, including lump sum payments as well as periodic payments.

I am concerned that H.R. 394 expands the coverage of legislation
to nonqualified plans, which could create an opportunity for tax
avoidance from the States for very highly compensated individuals,
and I don't think that Congress should be in a position of providing
escape hatches from State taxes for golden parachutes and other
particularized and individualized retirement arrangements.

Recently we concluded extensive debate about allowing U.S. citi-
zens to avoid t£ix liability by renouncing their citizenship, and
there is something similar in this regard if someone could forgo
their obligations to a State by simply declaring their residency in
another State.

Again, I mentioned before, Mr. Chairman, that this hearing is
one of, I think, a model of how it should be done, but unfortunately
tomorrow's hearing is one that upsets this pattern. We have not yet
been officially notified by staff of the witnesses. Indeed, I had to
read about the witnesses in today's Congressional Monitor. I think
it is unfair and unfortunate that the ranking member and the mi-
nority in general has to get its information from commercial
sources rather than from direct contact with the staff.

I have been told that the administration has been placed on the
third panel. In fact, I read it here. We haven't really been told any-
thing. It is custom — and I think this custom was applied equally
to Democratic and Republican administrations — to provide them an
opportunity to testify in the first panel or certainly at least imme-
diately following Members of Congress.

Also, there has been some discussion about witnesses on our
side. We have made you aware of who we want as witnesses. There
is some difficulty in getting in all the witnesses that we would like,
particularly the Federal attorney from Kansas whom we requested
to put on.

I would hope that between now and tomorrow, Mr. Chairman, we
could work out these differences and, more importantly, we could
resume the models of cooperation, collaboration, and I think effec-
tive hearings that I think have been established before and indeed
represented by this particular hearing.



13

So I would ask your consideration, and I know working together
we can probably resolve these problems. I am interested, as you
are, in hearing these witnesses on this important topic.

Mr. Gekas. Is the gentleman finished?

Mr. Reed. I am finished.

Mr. Gekas. I am disappointed that the gentleman chose this
time, in front of this audience to launder internal bickering regard-
ing situations that may have arisen. I resent any implication that
you have stated or will state about any unfair treatment on the
part of the Chair or the members of the majority of this sub-
committee.

Given the acknowledgment by the gentleman from Rhode Island
that in the past my counsels and I have communicated openly and
fairly, and knowing that even if a meeting had happened tomorrow,
a hearing at which some witnesses might appear who were not on
the list or about which the gentleman from Rhode Island did not
know, that we would give him ample opportunity for submission of
written interrogatories, or a recall of those witnesses to another
hearing or other witnesses to counter those who have testified. So
we are going to put that aside for now, and if the gentleman wants
to approach me privately again, we will do so. But I hope this
doesn't establish a precedent whenever the minority has com-
plaints about how the minority is being treated by the majority re-
garding a hearing that is not related to the subject-at-hand.

With that, we will proceed with the hearing, with no further
comments from anyone. I will now acknowledge the presence of the
lady from Nevada and ask her to proceed with her testimony.

STATEMENT OF HON. BARBARA F. VUCANOVICH, A REP-
RESENTATIVE IN CONGRESS FROM THE STATE OF NEVADA

Mrs. VUCANOVICH. Thank you very much, Mr. Chairman and
members of the subcommittee. I thought I was going to have flow-
ers, a bouquet here.

Mr. Gekas. I did promise you that, and then I remembered about
the gift ban.

Mrs. VUCANOVICH. Right. That is it. Thank you very much. I
want to thank you for holding this hearing on the pension source
tax issue, and I might comment that Senator Reid is probably fol-
lowing me testifying at an earlier hearing, but as most of you know
I was the first Member of Congress to introduce legislation prohib-
iting States from reaching across State lines to dip into the pocket-
books of retirees. It was in 1988 in the 100th Congress that I intro-
duced a measure to stop States from taxing the pension income of
nonresidents. I have introduced similar legislation in every Con-
gress since then. My bill in this Congress, H.R. 394, currently has
111 cosponsors.

I first became aware of the source tax on retirees from Bill Hoff-
man, the founder of RESIST, from whom you will soon be hearing.
Back then I thought that this tax on pensions was unfair. Some
States are squeezing money from retirees who don't live in the tax-
ing State and may not have lived there for years. These folks no
longer receive any benefits from those States and cannot vote
there. That is unfair. But the more I learn about how source-taxing



93-421 - 95



14

States implement their source taxes on retirees, the more I think
that it is not just unfair, it is unjust.

One of the principles of the source tax is that the State in which
income is earned has the right to tax that income. I don't dispute
this thesis one way or the other. However, even on the assumption
that this principle is carved in stone, when States go to tax the in-
come of retirees who have moved, they do far more than just re-
coup taxes that might be their due under this principle.

I am aware that testimony you will hear later today will explain
what I am saying here in detail, so I won't belabor the point. But
the fact is, given the data available, source-taxing States also actu-
ally tax more than just the amount that a retiree earned in the
taxing State. Even in the best of situations, this can cause double
taxation, and that is wrong.

But why should Congress step in? Isn't this an issue that should
be left to the States? And aren't we trampling on States' rights if
we enact legislation like H.R. 394?

Congress needs to step in, Mr. Chairman, because what is hap-
pening is wrong. Without congressional action, some States will
continue to source tax retirees living in other States, violating in
practice their own main principle that only the State of origin
should have the authority to tax income. If this situation needs cor-
recting, then it needs correcting by Congress.

On the issue of States' rights, I would like to make this point.
The information does not exist for a State to determine the actual


1 3 4 5 6 7 8 9 10 11 12 13

Online LibraryUnited States. Congress. House. Committee on the JState taxation of nonresidents' pension income : hearing before the Subcommittee on Commercial and Administrative Law of the Committee on the Judiciary, House of Representatives, One Hundred Fourth Congress, first session, on H.R. 371, H.R. 394, and H.R. 744, June 28, 1995 → online text (page 1 of 13)