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

my written testimony, you will see some of the cases were not be-
tween California. The one was between Iowa and Oklahoma, I be-
lieve. Now, Iowa has repealed their tax, so that case has probably
gone away, but not necessarily because States don't always do this
retroactively.

Mr. Gekas. For our next hearing we will probably invite a sheik
of Saudi Arabia to testify on how this legislation might affect them.

We thank the panel. You have been extremely helpful, and

Mr. Johnson. Congressman, could I make one other point?

Mr. Gekas. Go ahead.

Mr. Johnson. Thank you.

I apologize. I responded to Congressman Scott regarding how
long we keep earnings and accruals payroll records. It is important
to know that pension accruals do not actually track payroll records,
and we don't have those pension accrual records year-by-year or
any other kind of retirement records year-by-year, whether they be
nonqualified plans or qualified plans, and I didn't want to mislead
you all with that.

Thank you.

Mr. Gekas. We thank the panel for their participation, and we
will be back to them if necessary. Thank you very much. I would
like to submit the following statements for the record: Senator
Richard Bryan; Reprensentative Linda Smith; RESIST of America
Washington State Chapter; Robert Tobias, National Treasury Em-
ployees Union; Gerald H. Goldberg, California Franchise Tax
Board; the Military Coalition; American Institute of Certified Pub-
lic Accountants; CM. Sgt. James E. Lokovic, Air Force Sergeants
Association; J. Randolph Babbitt, Air Line Pilots Association; Mat-
thew P. Fink, Investment Company Institute; Robert T. Scully, Na-
tional Association of Police Organizations; and Carolyn M. Kelley,
American Payroll Association

[The statements follow:]

Prepared Statement of Hon. Richard Bryan, a Senator in Congress From the
State of Nevada

Thank you, Mr. Chairman and members of the Subcommittee, for this opportunity
to provide testimony on the issue of state source taxation of pension income. This
outrageous form of taxation without representation has long been a confiscatory
thorn in the side of many residents of my state of Nevada.

Over the past decade, Nevada has become the top destination of retirees. There
are an estimated 100,000 retirees who have moved to Nevada from the State of Cali-
fornia alone. I do not think anyone would deny a retiree their right to move to any
state of their choosing. Unfortunately for many retirees, particularly those who have
relocated from California, some state tax boards disagree and have embarked upon
a policy of relentlessly pursuing retired former residents across the nation. These
long-armed tax collectors have located retirees, often many years after they have re-
tired and moved away from the State, and presented them with huge tax bills. For
many of these retirees on fixed incomes, they cannot possibly pay the taxes, pen-
alties and fines that are imposed.

Many pensioners move to Nevada with no regard, or awareness, of the tax status
of their pensions. It is only when the out-of-state tax collector shows up on their
doorstep that they are informed they have a tax obligation to their former state.
Considering the longer lives that Americans are enjoying, retirees could well be pay-
ing taxes to a state from which they derive no benefit for twenty years or more.

This source taxation of non-resident pension income is unfair on several counts.
First, it is clearly taxation without representation, a concept that is antithetical to
the very ideals of our democracy. Second, source taxation requires pensioners to pay
for services they cannot ever receive. In the case of retirees moving to Nevada from



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California, retirees receive all services from the state of Nevada, not California. Yet
the state of California believes it has a claim on their pension income. As residents
of Nevada, retirees have the right to express their opinions at the ballot box as to
how tax dollars are spent. For retirees who must pay taxes to California, they have
absolutely no say over spending decisions.

This issue is not just about Nevada and California however. Bill Hoffman, a Ne-
vadan who is testifying at this hearing today, should be commended for taking on
this fight in behalf of tens of thousands of retirees who face state source tax bur-
dens. He formed an organization to fight this unfair taxation and today his organi-
zation, RESIST, has tens of thousands of members from all fifty states and several
foreign countries.

Obviously, the burden of source taxes on pension income falls most heavily on re-
tirees. However, other entities are also burdened as a result of this form of taxation.
While retirees living in states that do not impose a state income tax bear the great-
est burden of this tax policy, other states also feel an impact. For example, most
states allow a tax credit against income taxes paid to other states. This reduces the
tax revenue available to the state in which the retiree has residence — even though
this state is responsible for providing government services to the retiree. Other tax-
payers in the state necessarily bear the burden of replacing this lost revenue.

A burden is also placed on the shoulders of private business. Source taxation is
a record-keeping nightmare for companies that run pension plans. If source taxation
of pension income becomes the norm, businesses, or the companies administering
their pension plans, will be required to construct detailed work histories of individ-
uals showing when a person worked in each state, how much a person earned in
that state, and how much of the retirees pension can be attributed to that income.
In today's job market, most retirees will have worked for more than one company
throughout their careers, adding to the burden.

Nevada and several other states have attempted to eliminate this unfair tax prac-
tice. In fact, as Governor of Nevada, I signed into law legislation which prohibits
out of state tax collectors from crossing state lines into Nevada to seize the property
of Nevada retirees. Unfortunately, providing protection within Nevada's borders is
not enough to solve the problem. Federal action is required, indeed it is the only
solution.

Legislation Senator Reid and I have introduced in the Senate to eliminate source
taxes and similar legislation ofi'ered by Congresswoman Vucanovich is essential to
provide fairness and to protect the right of thousands of retirees across the nation.
Legislation was introduced during the last Congress and passed by both Houses but
was held up in the final days of the session. I urge the Subcommittee to pass legisla-
tion this session eliminating this form of taxation and resolve this issue once and
for all.



Prepared Statement of Hon. Linda Smith, a Representative in Congress
From the State of Washington

Mr. Chairman, I commend you for your leadership and willingness to receive tes-
timony on the source tax. Having fought this unfair tax at the state level when I
served in the Washington state Legislature, I am quite familiar with the long, hard
journey that retirees have traveled to see this tax repealed.

The source tax is truly "taxation without representation." By levying a source tax,
states are able to target the retirement income of non-residents even though the
non-residents receive no benefits or services in return for the assessed taxes. Thou-
sands of residents throughout my home state of Washington have been burdened
by this unfair tax. Many of these retirees once worked in the neighboring states of
Oregon or California and found Washington to be a popular place to retire since
Washington did not impose a state income tax. Unfortunately, these retirees have
seen a good portion of their retirement income go to another state's coffers. These
retirees are paying for another state's taxes and do not even get the benefit of the
services that their taxes finance.

Congress must put an end to this practice once and for all. I am hopeful that the
104th Congress will send a clear message to America's seniors by eliminating the
source tax. I applaud Mrs. Vucanovich for her hard work in furthering this fight
and as a cosponsor of her bill, H.R. 394, stand ready to advance this legislation.



72

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

Chairman Gekas and Members of the Committee, I am submitting testimony fa-
voring the passage of HR-394: "No State may impose an income tax on any retire-
ment income of an individual who is not a resident or domiciliary of such State."

1. Constitutionality of the proposed law has been determined, and is in limited
operation. (Chapter 4 of Title 4, Section 113— United States Code.)

2. Paying taxes and not receiving benefits from the payments is: "Taxation With-
out Representation!" As former Representative Craig Washington (TX) has so aptly
phrased it: "As citizens, our right to vote and our obligation to pay taxes go hand
in hand. To enforce the obligation without extending the right is in no way fair or
just."

3. Most pensions were never specified as being tax deferred, and in many cases
an income tax was paid, at least on the employee s contribution. It should be unlaw-
ful to tax that portion of the retirement income again.

4. A study by the Kiowa Taxpayer's Assc. (Jan. 1992) finds that it is almost im-
possible to administer a nonresident tax equitably. They state in concluding: "It
seems to us that it is one thing to evade a tax which is uniformly proposed and
quite another to imposed a tax which by it's own imposition creates evasion." (Iowa
has since, passed State law that prohibits their tax agency from pursuing retirees
across their borders.)

5. Under the present method used by some States in computing this tax on pen-
sion income, they use total income (investment earnings, salaries, etc.) which may
be sourced outside the taxing State. A retiree in Washington State, who has once
resided in California, is required to pay California income tax on Washington lottery
winnings. Lottery winnings in California are State tax exempt.

6. When a citizen moves to another State and both States demand income tax
payments, a credit is usually given, either by the former State of residency or (in
most cases) by the State in which they now hve. Only about seven States are with-
out income tax programs, and few others exempt pension income. Why must the mi-
grants to these few States suffer the brunt of this ordeal under the current practice
of States taxing nonresidents? Reciprocal tax agreements between States is an ex-
pensive procedure with little financial benefit Tor anyone, and very unnecessarily
costly to the filing retiree. This superfluous paperwork should be eliminated.

7. Many income States do not pursue retirees across their borders. Some, probably
because of the limited income derived by doing so, or perhaps like Colorado, feel the
individual becomes the "award" and responsibility of his new State.

8. These pensioners have sacrificed and saved for many years, and recent eco-
nomic reversals have reduced their supplemental income, while the cost of living
has increased. It's not unusual for a pension to be near or even below the deter-
mined poverty level (the greatest percent of Federal Retirees receive, on average,
Appx. $1,300 a month).

9. Continued taxing of a nonresident's pension income can only hamper the incen-
tive of workers to make preparation for the years when they can no longer be pro-
ductive. Destroying this incentive will add to the possibility of Government assist-
ance for them in "old age" (Golden Years).

10. The fact that a sizeable number of nonresident retirees have not yet been ap-
proached for this tax, and will when the demand for payment is made, have to pay
nigh interest and exorbitant penalties, provides an atmosphere of anxiety that can
readily lead to disruptive nervous disorders for these older citizens. Most of these
individuals have always met fair service demands of them. They are not criminals
who purposely avoid payment of responsible obligations.

11. Removing "pension income" from being classified as "source income" and abol-
ishing the taxing of the pension by other than the State of residency is a must, and
the problem will be corrected by passing a bill such as H.R. 394.



Prepared Statement of Robert M. Tobias, National President, National
Treasury Employees Union

Mr. Chairman, Members of the subcommittee, thank you for scheduling this hear-
ing today to explore the issue of source taxes. On behalf of the more than 150,000
members of the National Treasury Employees Union, I appreciate this opportunity
to share our views on the subject of states taxing the px^nsion income of former resi-
dents.

A majority of states currently have laws on their books that permit them to reach
beyond their borders to collect taxes on pension income received by former residents.
Currently, only a handful of states have actually activated their laws and aggres-



73

sively pursue former residents. In many cases financially strapped states have been
driven to collecting source taxes in a desperate attempt to make up for revenue
shortfalls within their own borders. Absent federal legislation, curtailing the prac-
tice, source taxes are likely to become even more frequently used by states as a
source of revenue in the future.

The state of California is by far the most aggressive collector of source taxes. It
is my understanding that not only does California go after unsuspecting pensioners
for the back taxes, but the state assesses penalties as well as daily interest charges
on the balance owed. Furthermore, when computing what it believes to be the
amount of taxes owed, the California Franchise Tax Board bases the tax rate on the
retiree's total out of state income — not just the pension, or portion of the pension
earned in the state. In this way, the retiree's entire annual income is effectively
taxed.

Oftentimes, the retiree first becomes aware of his tax obligations to a former state
many years after retiring or leaving the state. The bill may arrive carrying years
of back taxes, penalties and interest. It is not difficult to imagine how this could
come as quite a surprise to the unsuspecting retiree on a fixed and limited income.
It is wrong for states to levy such burdens on retirees who happen to be former resi-
dents and it is wrong for the federal government to condone the policy. The source
taxes that several states now actively pursue are particularly aggravating and un-
fair to the retiree who may have purposely retired to a state that does not levy a
personal income tax in order to preserve a greater portion of his or her limited re-
tirement income.

It is unfair to view the nation's retirees as "cash cows" to bolster state tax reve-
nues, particularly while at the same time, the Congress is once again recommending
deep cuts in federal retirement annuities. As you may know, the Fiscal Year 1996
House Budget Resolution seeks to impose an additional 2.5% payroll tax on federal
workers. This provision first appeared as part of the tax cut legislation as an offset
to provide tax cuts to some of this nation's wealthiest citizens. Federal workers al-
ready pay 7% of their salaries toward their retirement. For the average federal em-
ployee earning $30,000 annually, this will mean a tax hike of $750.00 per year, the
equivalent of a mortgage payment for these middle income earners.

The Budget Resolution would also lower future pension benefits by basing pen-
sions on the highest five years of salary instead of the current highest 3 years. Not
only does this Budget ask federal workers to pay more for their annuities — which
I might add, 97% of private sector employers pay for entirely without any employee
contributions — but it would lower future retirement benefits at the same time by re-
ducing the annuity computation formula.

NTEU staunchly opposes these pension changes just as we have opposed the im-
position of source taxes on unsuspecting federal retirees.

With source taxes, the individual has no advance notice of taxes, penalties and
interest owed to a former state. The affected retiree no longer has access to state
services, no longer uses schools or roads and is no longer given a voice at the ballot
box as to how his or her tax dollars are spent. While it is true that the retiree once
had access to these state services, the individual paid his or her fair share of taxes
to the state while a resident. As a nonresident, all tax liability to the former state
should rightly cease.

And, the burden of source taxes is particularly onerous for public sector retirees.
States often have more ready access to employment records for public sector retirees
and increasingly source taxes are being levied on this group. For those employed
by the federal government, it is not uncommon to hold federal positions in several
different states during the course of a career. If a federal retiree settles in a state
that does not assess a personal income tax, that individual could well find himself
receiving tax liability notices from each state where he resided during his working
career — each seeking taxes on the pwrtion of the pension earned in that particular
state. Americans are a very mobile people, moving from state to state and often job
to job. As states continue to face uncertain economic futures, the day may not be
far off when a retiree might be required to file numerous state income tax returns
to satisfy each state where pension rights were earned. The economic and personal
hardships this practice may increasingly levy on unsuspecting retirees must be ad-
dressed by Congress. At a minimum, the capacity of states to levy source taxes on
those with limited abilities to alter their incomes must be restricted.

I urge this Subcommittee to address the source tax questions and act on the legis-
lation pending before this Congress without delay. Thank you again for this oppor-
tunity to share our concerns.



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Prepared Statement of Gerald H. Goldberg, Executive Director, California
Franchise Tax Board

I am the Executive Officer of the California Franchise Tax Board (FTB) which ad-
ministers the personal income tax for the State of California. I appreciate your deci-
sion to hold hearings on the issue of State source taxation of former residents' pen-
sion income and regret I was unable to have someone testify in person at this hear-
ing. I ask that this statement be made a part of the hearing record.

This statement will serve to explain California's rationale for enforcing its source
tax laws on former residents who have retired out-of-state. It also describes how
pending Federal legislation goes far beyond solving some isolated problems in ad-
ministering the source tax on former residents' pension income.

I would urge the members of the Subcommittee to carefully scrutinize the policy
implications of proposed pension source tax bills for potential conflicts with other
significant policy positions adopted by the Congress this session. These positions in-
clude the unfunded mandates bill adopted with strong bipartisan support and
signed by the President, and proposals to correct tax avoidance by wealthy expatri-
ates. The source tax measures being considered are clearly an unfunded mandate.
Further, the source tax principle under attack by these measures is the same prin-
ciple used to advocate closing tax loopholes exploited by some billionaires.

For the record, the Franchise Tax Board is willing to accept the limits on source
taxation as contained in Federal legislation reported out by this Committee last
year. State legislative proposals to limit the source tax burden on low income retir-
ees have been supported oy the Franchise Tax Board — but unfortunately were not
passed. However, the expansive income exemptions included in H.R. 394 are not ac-
ceptable and could effectively provide tax free income to high income retirees.

Rationale for Taxing Pension Income of Former Residents

Under existing State and Federal law, an employer's contributions to a qualified
retirement plan on behalf of employees are considered compensation and may be de-
ducted as a business expense by the employer. Usually, employer contributions to
a qualified retirement plan, as well as any pre-tax employee contributions and any
accumulated earnings generated by the plan, are tax-deferred. As such they are not
declared as taxable income by the employee until they are distributed.

Under the current State law, California exercises its taxing powers based on two
well established and constitutionally approved jurisdictional standards — the resi-
dency of the individual and the source of the income. Residents of California are
taxed on all income regardless of the geographical source and are provided credits
for source taxes paid to another State. Nonresidents are subject to source taxation
on income earned in California, such as income earned due to business, property or
employment in this State. Business income is taxed using the source principle, and
it is the legal basis for States and the U.S. to tax foreign corporations on income
earned within our borders.

California also taxes pension and annuity income based on its geographical
source. Income, which originally is earned in California, may be deposited tor retire-
ment in a nontaxable trust and not taxed until it is distributed by the pension plan
administrator. This tax-deferred income remains taxable by California, nowever, re-
gardless of the recipient's State of residency at the time of its distribution.

To avoid the inequity of double taxation, if the State of residency at the time of
distribution also taxes the pension income originally earned in California, a tax
credit, roughly equal to the amount of taxes paid to California, is generally available
from the State in which the taxpayer resides. California also allows an analogous
tax credit. The reciprocal other State's tax credit usually acts to ensure that only
one State tax is assessed on the income in question. Consequently, the source tax
on pension income mainly affects those retirees who work in California and retire
to a State which does not impose an income tax.

Beginning in 1988, electronic data gathering technology was used to identify re-
cipients of pensions from the California Puolic Employees' Retirement System
(CalPERS) and the California State Teachers' Retirement System (CalSTRS) who
failed to file income tax returns. The out-of-state pensioners in these systems are,
for administrative reasons, effectively the only such group that is subject to Califor-
nia enforcement efforts. This inequity between public ana private sector retirees oc-
curs because it is difficult to obtain retirement information when both the pay or
and the payee are outside the State at the time the retirement income is paid. In
addition, ERISA prohibits States from establishing reporting requirements which
exceed F'ederal requirements for the administrators of pension plans. Accordingly,
the source tax is relatively easy to collect from non-resident former California public
employees, but not from others.



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Progressive tax systems are based on the principle that a taxpayer's rate of tax
should be determined by the taxpayer's ability to pay. Since 1982, California has
required nonresidents to use their total net income from all sources when referring
to the tax tables or rate schedules. The resulting tax amount is then apportioned
by the ratio California adjusted gross income bears to total adjusted income. This
method of determining the rate at which this income is taxed is commonly referred
to as the "California method." Roughly 20 States use the "California method" of tax-
ing nonresidents. Existing case law also supports this methodology (Brady v. New
York 607 NE 2d 1060, cert. den. 113 S. Ct. 2998; U.S. v. Kansas, 810 F2d 935;
Wheeler v. Vermont 249 A. 2d. 887, cert. den. 396 U.S. 949).

Legitimate concerns have been raised that if Federal source tax restrictions are
enacted for out-of-state retirees, in-state retirees could be reasonably expected to
ask for the same tax relief. If California were to provide tax-free retirement income
to all former residents and to in-state retirees, the loss to the California treasuiy
as a result would jump from an estimated $25 million attributable to former resi-
dents to a hefly $1.2 billion annually.

Such substantial losses in revenues would inevitably lead California to reconsider
its adoption of Federal deferral techniques. If Congress insists on limiting States'