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

amount of a pension that was earned in that State. This means
that source-taxing States are dipping into the coffers of other
States. Take Nevada for example. A Nevada retiree paying a source
tax to another State has that much less to spend in Nevada. Since
we don't have an income tax and so rely heavily on sales taxes, we
are losing out to the source-taxing State. I think H.R. 394 protects
States' rights.

Finally, let me explain some changes in H.R. 394 as compared
to the bill I introduced in the last Congress, which was H.R. 702.
H.R. 394 differs in two ways from H.R. 702 in the 103d Congress.
In the 103d Congress, H.R. 702 included a cap — and that was men-
tioned by Congressman Reed — included a cap on the amount of
lump sum distributions exempted from the source tax. My new bill
will have no caps.

As you will hear from subsequent testimony, including any caps
at all is problematic. Also, it seems to me that if we prohibit the
source tax we should not discriminate against retirees who are in
different situations. The other change in my bill for this Congress
is that the measure covers all retirement plans, not just those that
qualify for special tax treatment by the Federal Government.

Again, it is a question of fairness to make the law apply equally
to all retirees. These changes which extend the measure to all re-
tirement income make the bill more fair because it will treat all re-
tirees equal.

Thousands of retirees are asking us to protect them from the
source tax on their pensions. I believe it is high time that we do
that.

Thank you very much, Mr. Chairman, for allowing me to testify.

[The prepared statement of Mrs. Vucanovich follows:]



15

Prepared Statement of Hon. Barbara Vucanovich, a Representative in
Congress From the State of Nevada

Good Morning Mr. Chairman and Members of the Subcommittee, I want to thank
you for holding this hearing on the pension source tax issue. As most of you know,
I was the first Member of Congress to introduce legislation prohibiting States from
reaching across state lines to dip into the pocketbooks of retirees.

It was in 1988— in the 100th Congress— that I introduced a measure to stop
states from taxing the pension income of non-residents. I have introduced similar
legislation in every Congress since then. My bill in this Congress, H.R. 394, cur-
rently has 111 cosf>onsors.

I first became aware of the source tax on retirees from Bill Hoffman, 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 taxing State and may not have lived there for years. These folks no
longer receive any benefits from those States and cannot vote there. That's unfair.

But the more I learn about how source taxing states implement their source taxes
on retirees, the more I think that it's not just unfair. It's 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 income 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 that is
available, source taxing States actually tax more than just the amount that a retiree
earned in the taxing State. Even in the best of situations, this can cause double tax-
ation. That's 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 happening 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 correcting,
then it needs correcting by Congress.

On the issue of State's rights, I would like to make this point. The information
does not exist for a State to determine the actual amount of a pension that was
earned in that State. This means that source taxing States are 'dipping" into the
coffers of other States. Take Nevada, for example. A Nevada retiree paying a source
tax to another State has that much less to spend in Nevada. Since we don't have
an income tax, and so rely heavily on sales taxes, we are losing out to the source
taxing State. I think H.R. 394 protects States' rights.

Finally, let me explain some changes in H.R. 394 as compared to the bill I intro-
duced in the last Congress (H.R. 702). H.R. 394 differs in two ways from H.R. 702
in the 103rd Congress. In the 103rd Congress, H.R. 702 included a cap on the
amount of lump-sum distributions exempted from the source tax. My new bill will
have no caps. As you will hear from suDsequent testimony, including any caps at
all is problematic. Also, it seems to me that if we prohibit the source tax, we should
not discriminate against retirees who are in different situations.

The other change in my bill for this Congress is that the measure covers all re-
tirement plans, not just those that qualify for special tax treatment by the federal
government. Again, it is a question of fairness to make the law apply equally to all
retirees. These changes, which extend the measure to all retirement income, make
the bill more fair because it will treat all retirees equally.

Thousands of retirees are asking us to protect them from the source tax on their
pensions. I believe it is high time we do that.

Thank you, Mr. Chairman.

Mr. Gekas. We thank the lady, and we now turn to the gen-
tleman from Arizona, Mr. Stump.

STATEMENT OF HON. BOB STUMP, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ARIZONA

Mr. Stump. Thank you, Mr. Chairman, and let me thank you and
the committee for allowing us to testify and for holding this meet-
ing today.



16

I would ask unanimous consent that my statement be made a
part of the record, and I will be very brief.

Mr. Gekas. Without objection.

Mr. Stump. Mr. Chairman, let me say that first I would like to
commend my colleague, Barbara Vucanovich. She indeed was the
leader in this effort, and because we share probably almost all of
the California water between our two States, it is a particular
problem to us because of the high taxes in California.

A lot of people who have fied California moved into our two
States for that very reason, and it is just an issue of fairness, I did
think, because California is now trying to collect their taxes while
they still have to pay taxes in our respective States, as I am sure
they do in all of your States if it becomes a problem with people
moving in there.

I have my own bill, which was H.R. 371, but let me say that Bar-
bara has a better bill. She delineates more thoroughly the types of
pensions and covers them all, while mine refers to just pensions,
period, and I would like to concur in her statement and her re-
marks and endorse her bill, H.R. 394.

Mrs. Vucanovich. Thank you very much.

Mr. Stump. Mr. Chairman, I will answer any questions that you
may have. With that, I will stop.

[The prepared statement of Mr. Stump follows:]

Prepared Statement of Hon. Bob Stump, a Representative in Congress From
THE State of Arizona

Mr. Chairman, thank you for the opportunity to testify today on behalf of thou-
sands of Arizona residents, as well as tne residents of other states, who have fallen
victim to what has become known as the "source tax." I would also like to thank
my friend and colleague, Barbara Vucanovich, of Nevada, for her efforts to move
this issue from one in which only a handful of Members had an interest, to one
which has garnered the attention of the Subcommittee today.

I became involved in the source tax issue many years ago after several constitu-
ents contacted me regarding what they believed to be an error on the part of the
California Franchise Tax Board. They had received notices from the State of Califor-
nia that they owed income taxes, and they were convinced that the notices were
sent in error, as they had neither lived nor worked in California for many years.
After making inquiries to the Franchise Tax Board, I was surprised to learn that
the notices my constituents received were not sent by mistake; the State of Califor-
nia indeed expected them to file and pay California income tax, even though they
were no longer California residents.

I am not an expert on the Constitutional and other legal intricacies of the issue
before the Subcommittee today. However, I think I recognize unfairness when I see
it. What has been going on over the past several years with regard to this issue
has been not only unfair, it has been mean-spirited. For California and other states
to say that anyone who has ever worked and earned a pension within their jurisdic-
tions must pay income tax to them for the rest of their lives cannot be considered
fair regardless of the arguments source-tax states put forward. My constituents and
yours have been asked to pay income tax to a state in which they do not live, do
not receive any of the benefits or services financed by those taxes and, most impor-
tantly, cannot vote against those who have levied the tax against them.

Earlier this year, Congresswoman Vucanovich and I introduced legislation that
seeks to correct the current inequity toward our constituents and the thousands of
others across the country who happen to have worked in one or more states during
their careers but subsequently retired in a different state. While only a few states
are now actively attempting to tax their former residents, many others contend that
they have the authority to do so and are moving in that direction. This means that
over time, retirees could be taxed on the same income by multiple state taxing juris-
dictions because of the defects inherent in the various state crediting systems, as
well as the different state tax rates. In addition, since employees may work in a
number of states over their working careers, they as well as their employers and



17

retirement plan administrators would be faced with extensive record keeping, allo-
cation and apportionment problems in trying to keep track of the correct amounts
to be taxed by each of the states in which they had worked. Unless states are pro-
hibited from taxing the pensions of non-resident retirees, more and more such retir-
ees will be subject to double taxation, while an increasing number of their employ-
ers will be subject to overwhelming administrative costs and increasingly complex
tax accounting problems.

My bill, H.R. 371, would prohibit a state from imposing an income tax on the
"pension income" of any individual who is not a resident or domiciliary of that state.
It is a straightforward and simple prohibition on the ability of states to coerce their
former residents into paying income taxes for services they do not receive, or for
policies and programs against which these former residents cannot vote. My bUl,
though, does not define the term "pension income," a fact which some in the pension
area believe may lead to litigation in order to eliminate all uncertainties. This po-
tential problem does not exist under H.R. 394, the bill introduced by Congress-
woman Vucanovich, and which I was an original cosponsor. Her bill defines specifi-
cally what it is we seek to protect from out-of-state tax collectors.

It is my understanding that neither of our bills would result in a revenue loss
to the U.S. Treasury. In fact, our legislation might even increase Federal revenues
due to the fact that many retirees would claim smaller state income tax deductions
against their Federal tax liability based upon the reduced state tax payment which
would result from eliminating multiple state taxation.

I also understand that H.R. 394 has generated wide support from among the lead-
ing associations in the pension industry. The Profit Sharing Council of America, the
ERISA Industry Committee, the Association of Private Pension and Welfare Plans,
and the Committee on State Taxation have all stated their support, as well as the
National Association of Retired Federal Employees, the National Association of Uni-
formed Services, the Airline Pilots Association and the National Society of Public
Accountants.

Either of our bills would solve the problem of multiple-state taxing jurisdictions
going after the retirement income of their former residents. They both represent a
better approach than one which exempts only a specified amount of retirement in-
come from tax, but allows states to go after whatever pension income exceeds the
specified threshold. Protecting some, but not all of a retiree's pension from out-of-
state tax collectors seems to me to be only a partial solution; in effect condoning
source taxes and allowing states to violate the basic tenant that there should be no
taxation without representation. It would as well create an accounting nightmare
for employers who have employees in more than one state, or whose former employ-
ees no longer reside in the state in which they worked. Further, such an approach
would not protect retirees who choose to take a lump sum distribution from their
pension plan, or who happen to receive benefits from a plan which provides benefits
in excess of the limitations imposed by the Internal Revenue Code for tax-qualified
plans.

Retirees are justifiably upset when they are threatened or coerced into filing in-
come tax returns and paying income taxes to states in which they no longer live.
For many, the reason they no longer live in the state in which they worked was
because of taxes and the fear that they could not live on a fixed retirement income
and still pay the high taxes many states demand. They want us to put an end to
the inequity which exists in paying income tax to a state they have long ago left,
or the uncertainty of wondering when the long arm of the tax man will reach across
the state border, or across the country.

In conclusion, I would ask that the Chairman and Members of this Subcommittee
support the approach of H.R. 394 — to remove the uncertainty and unfairness cre-
ated by the existing state source tax by making clear that states cannot tax the re-
tirement income of individuals who are not residents or domiciliaries of those states.

Mr. Gekas. Yes. We will begin the questioning of our two col-
leagues who are present here pending the arrival of Senator Reid,
and then we will interrupt the questions, seizing the prerogative of
the Chair to do so, to allow the Senator to testify, and then we will
resume the questioning.

The Chair will ask just a couple of routine questions.

You have properly stated that Nevada and Arizona are of course
geographically touched by this problem. What can you tell the sub-
committee about other States that may have the same problem.



18

perhaps not in quantity or volume or number of residents, but are
there other States that are affected?

Mrs. VUCANOVICH. Of course there are, Mr. Chairman. There are
States — naturally all of them are looking for revenue in these days,
and I think that the State of New York collects and many other
States that do or are considering collecting those, that they have
the ability to do that. That is why we think before it gets too far
out of hand that we need to speak up and change the law.

Now, California has a lot of citizens, and they have lots of needs
for revenue, and they are, I use the word most aggressive of all of
the States that I know that are doing that.

Now, there are other States, and there are some States that, be-
cause of this, have actually introduced State legislation preventing
this from happening. Texas is one of those. But there probably are
others who are doing it and are looking at it and Congressman
Stump may know of others.

Mr. Stump. Mr. Chairman, I would add one other State. That is
Illinois.

California is our number one contributor as far as population
goes, and Illinois is number two for moving into Arizona, and, as
Barbara mentioned. New York is also one of those three. Just hear-
ing from hundreds of constituents of mine that have moved from
those areas, I know it is a problem there. I cannot tell you any
other States.

Mr. Gekas. Are there any Arizonians in Arizona?

Mr. Stump. There are a few, but we are there.

Mr. Gekas. The other question I have: Does anyone have a figure
of what revenue loss this would cause to California? That is an-
other part of what we must consider.

Mrs. VucANOViCH. I would hope that some other people who will
be testifying would know that. I don't happen to know.

Mr. Stump. No, Mr. Chairman, I can't answer that either, I am
sorry.

Mr. Gekas. All right. I will reserve the balance of my question
time and yield to the gentleman from Rhode Island for any ques-
tions that he might want to pose to our colleagues.

Mr. Reed. Thank you, Mr. Chairman. I have no questions.

I want to commend both of my colleagues for your efforts. As you
know, I support, as so many of us did last year, a variation of this
legislation, and the two questions I have which I would like to ex-
plore with other witnesses are simply the elimination of the cap
and inclusion of nonqualified pension plans. I think that is a tech-
nical question that we should address. But I commend you for your
efforts and thank you.

Mrs. VUCANOVICH. Thank you.

Mr. Gekas. The gentleman from South Carolina, whose presence
is noted for the record, is now called upon to ask any questions or
make any comments.

Mr. Inglis. Thank you, Mr. Chairman.

I wonder, the rationale for California reaching out to these pen-
sion funds, is that that the corpus of the retirement fund remains
located in California, or are they reaching out even — for example,
if I have an IRA and I moved from California to Nevada or to Ari-



19

zona, are they also reaching out to that in an attempt to tax that,
or only if the corpus remains in California?

Mrs. VucANOViCH. If I understand the way they do that, it is
whatever pensions are earned and invested — earned in the State,
the source of the State, and again someone else may be able to en-
lighten a little bit more, but they are, and I don't know the answer
to that. Whether those funds are taken to purchase an IRA, I don't
know that, but whatever funds are earned as pensions in that
State are subject to their tax.

Mr. Stump. I would concur in that and also that that is what
makes her bill better than mine, because she does delineate all the
known pension taxes at least.

Mr. Inglis. Are you familiar or aware of any litigation that any
of those pensioners might have brought

Mrs. VucANOViCH. In some instances in my State they have
been — the State of California has attempted to collect those, and
our State passed a State law that said that they could not come
in and take those. But, again, that is just on a very local basis, and
whether they have actually come in and tried to collect those, I
don't know, but they have filed suit against many people who live
in my State.

Mr. Inglis. I am of course in complete agreement with what you
are attempting to do. I appreciate your work on it. I am just won-
dering where California would assert its right, particularly if the
person has left the State and has taken the corpus with them.
There seems to be no contact with the State of California.

Mrs. VUCANOVICH. They receive no benefits, and it seems terribly
unfair. It seems to me that it is taxation without representation.

Mr. Inglis. I wonder if anybody has brought any litigation to as-
sert. It is not possible for the State of California to tax that. And
of course, I also agree with you that it is important that we move
to head this off so that other States don't get similarly creative.

Mrs. VUCANOVICH. I think the problem is, of course, we know
that States are looking for revenue in every way, and they will look
at every source, and I don't blame them, but a lot of people come
to my State and I think also to Congressman Stump's because we
have no State income tax, and we feel it is an attraction. Some-
times we think it is too much of an attraction. We have a lot more
people moving into our State than we are able to handle with our
resources, but if they come, we want them to be welcome and not
be pursued by other States.

Mr. Inglis. Thank you, Mr. Chairman.

Mr. Gekas. The Chair notes the presence of the gentleman from
Virginia, Mr. Scott, and turns to him for any opening statement
that he might want to make or questions that he wants to pose to
our colleagues.

Mr. Scott. Thank you, Mr. Chairman.

I am not sure I have a question, but my concerns are similar to
the concerns of the gentleman from South Carolina because as you
try to track the theory of this — and I am comfortable with the the-
ory that theoretically the source State ought to be able to apply the
tax, theoretically. My problem is that, in effect, I don't see any way
you can do it fairly.



20

The gentleman from South CaroHna mentioned IRA's and roll-
overs, and when you roll it over to another fund which came from
California and which came from Virginia and which came from Illi-
nois and how you apportion that, I don't know how you can do it
fairly; you have got deferred income and pension income and dif-
ferent kinds of categories.

I guess we have got some witnesses that would know the tech-
nical answers to these questions, but I don't see how you can at
all fairly apply this tax.

We have people here from States with no income tax. I would as-
sume that there would be a tax credit, and I guess that is not a
question for you because it wouldn't apply to you, but I would hope
there would be a tax credit for taxes paid somewhere else, and then
I assume the State really doesn't have to give a tax credit if it
doesn't want to.

I mean there are a lot of technical questions that in the final
analysis make these bills the proper course. Although theoretically
we can tax, constitutionally we can probably do it, just from a prac-
tical, fair point of view, I don't see how we can do it, and I think
the bills ought to be favorably considered.

Mrs. VucANOViCH. I just would like to comment, too. We have so
many people who worked, say, in the Federal Government or with
corporations or in the military or whatever and earned their pen-
sions in many different States, and that makes it very complicated,
and it seems to me that it is totally unfair, and that is why we
have pushed this.

But I think other people will be able, particularly people who
have moved around from State to State in their employment. It
makes it very difficult for them, but they can be subject to being
taixed by many States many times.

Mr. Gekas. The gentleman from Virginia reminds me that, look-
ing at it from the standpoint of California for a moment so that we
can get a full idea of the problem, the only nonresidents of which
they would have recorded information and rolls, as it were, are re-
tired State workers, it seems to me. But someone who worked for
mom and pop in a grocery store and then moved to Arizona, how
would they ever find out who that individual is? They would have
to have a massive investigative force on the borders of Arizona and
Nevada.

Mrs. VucANOViCH. Almost, yes.

Mr. Gekas. So it becomes now even a situation where the only
ones who are affected by this unfairly are recorded employees like
State pensioners.

Mrs. VUCANOVICH. That is true.

Mr. Gekas. Where California actually has a record of who they
are and to whom they send the pension checks, et cetera.

Well, any further questions on the part of anyone?

Mr. Scott. Let me just make another comment. The gentle-
woman from Nevada pointed out that when you have a company,
you have traveled around for that company, all they know is you
have got one pension check, and they send that out to you into Ne-
vada, and you may have five or six different States that want a lit-
tle piece of it, and I just think the practical aspects make this im-



21

possible and if the States are going to insist on it, I think we ought
to take Federal action to prohibit it.

Mr. Gekas. Senator Reid is causing problems here.

Mrs. VUCANOVICH. We left him at a nuclear waste hearing. I tes-