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

So it is my belief that if Congress should decide to intervene, dol-
lar-amount limitations, either imposed upon annuities or upon
lump sum distributions, are not the best way to go.

Mr. Gekas. Also, Senator Reid mentioned that perhaps there
would be a retiree living in his jurisdiction who might have one
source of income which is the pension check from California. That
would imply that California might not even have a minimum above
which only would there be taxation for indigent or disadvantaged
or low-income people who would be rendered low-income even with
a pension check coming monthly. Is that a consideration we ought
to have on our table?

Mr. Smith. In my mind, not a very substantial one because Cali-
fornia would have to give to the Nevada retiree the same personal
exemptions and credits that it gives to its in-State retirees.

Mr. Gekas. Do you know that for a fact that — first of all, we
don't know if California does have this minimum — I suspect they
do — secondly, whether they apply that to pensioners. We don't
know that for sure, do we?

Mr. Smith. I do not know what their present policy or non-
resident forms provide, but I am strongly of the opinion that, con-
stitutionally under the privileges and immunities clause, they
would have to give nonresident taxpayers the same exemption
structure and the same progressive rate structure as they do to the
in-State retirees.

Mr. Gekas. All right. I have no further questions.

The gentleman from Rhode Island.

Mr. Reed. Thank you, Mr. Chairman.

Senator, you said last year that the measure failed at the very
end of session. Could you tell us what caused the failure, any spe-
cific reasons?

Mr. Reid. You don't have to have a reason. Senator Wallop said,
it was my understanding, that he was concerned about a large com-
pany and how its retirees would be treated.

Mr. Reed. That might go to my second question, Senator, that
that there were two issues that have been — several issues, but two
prominent issues. One is a cap, which Professor Smith has talked
about. The other is the inclusion of nonqualified pension plans.

One concern would be, some of these nonqualified pension plans,
literally individualized deals that an executive might make or some
prominent member of a company makes for a great deal of income
that is deferred, it is not a plan that applies to everyone. It is not —
as you well know, it is not something that is a routine pension situ-
ation.

I am wondering what your attitude or feeling is with respect to
those types of plans and being able literally to escape State tax-
ation by deferring income to a pension plan, then leaving the State.

Mr. Reid. Congressman, this is, in my mind, typical of what we
worry about back here and that we have become so concerned with



33

individual rights that we lose sight of what are the rights of soci-
ety.

There may be particular instances where somebody, in effect,
does something that borders on being dishonest, and I of course
would hope that there would be a way of making sure that they
pay fair tax on that. But we are talking about hundreds of thou-
sands, if not millions, of people who are being taxed. They don't use
any of the public facilities in a State, they don't drive their high-
ways, they don't use any of their medical facilities, they use none
of their recreational facilities, and they are asked to pay an income
tax from the simple twist of fate that they worked there for part
of the time.

It is so unfair that not only do they collect taxes on the income
from the pension but they collect taxes from other income that
these people have. This is the rankest form of taxation without rep-
resentation. And, Congressman Reed, my concern is — it sounds like
I am talking to myself — my concern

Mr. Reed. You spell it wrong.

Mr. Reid. My concern is that I think we should, in my opinion,
just pass a law to prohibit this. If there are specific instances
where people are cheating, are being dishonest, then let's deal with
that; the two money committees can do that. Finance and Ways
and Means.

Mr. Reed. I am not suggesting anyone is doing anything wrong.
What I am suggesting is that someone legally could, to properly
avoid taxes in a State, simply take deferred compensation in some
type of unqualified plan with substantial amounts of moneys with
the idea that within 1, 2, 3, or 6 years they would be in another
State which would not have any taxes. I think that is something
we should at least consider.

Mr. Reid. I am sure we should consider it. I don't know enough
about how to handle that.

Mr. Reed. Professor Smith, you might have a thought on that in
that regard.

Mr. Smith. On that point, I recommend that Federal legislation
not shelter distributions made from nonqualified plans. Virtually
all Americans are eligible for, or in fact participate in, some type
of qualified plan, whether it is through an employer, whether it is
an IRA, or whether it is something else. The potential for tax
avoidance by highly compensated individuals who funnel amounts
into nonqualified plans in the last years before retirement is simply
too great of a risk.

By definition, nonqualification generally means there aren't dol-
lar caps to how much can be deferred, so that such individuals
could consciously forgo what normally would be regular salary or
regular bonuses, electing to put them into a nonqualified plan or
nonqualified trust mechanism and receive it later on. Those indi-
viduals, I would think, would be sufficiently sheltered by Federal
legislation that exempts their normal qualified plan, whatever that
happens to be.

Mr. Reed. Thank you. Professor.

Let me address one other issue which you alluded to in your tes-
timony. You said that States could in fact — and we all know what
pressure they are under in terms of their budget — react to that by



34

simply accelerating the recognition of this income. How likely do
you think that would be — you are someone who is looking at State
tax policy on a constant basis — that they would essentially react to
our legislation by recognizing the income as it is earned and not
allowing deferral?

Mr. Smith. I find that difficult to predict. A State, in order for
it to make sense, from its own cost-benefit analysis, will have to
conclude that many more of its employees are retiring out of State
than are coming in. Only then will the State see a really substan-
tial cash drain from simply living with the Federal legislation and
not modifying their State tax code to require reporting imme-
diately.

If one or several States did make that change, I don't know that
Congress necessarily should believe, if several States do that, that
it made the wrong policy decision.

True, it is a little more work for taxpayers in those States, who
then have to, for State income tax purposes, add to their Federal
adjusted gross income the amount of their employer or employee
contributions to the pension plan, each time they file a yearly re-
turn while they are working. But it can be done.

In Georgia, where I live, when I first moved there, Georgia did
not follow Federal deferral rules for the State teachers retirement
plan that I am in, and they had a smaller IRA deduction. And so
for tax returns for those years you did have to do a little bit more
work for the State tax return, but not overwhelmingly so.

Mr. Reed. Thank you.

Mr. Chairman, I don't have another question, but I would like to
raise one issue. That is, we should consider whether this might in
some way constitute an unfunded mandate.

Mr. Gekas. Yes, I have that in mind, and we will consider that
in the premarkup consideration of this legislation.

Mr. Reed. Thank you, Mr. Chairman.

Mr. Gekas. The gentleman from South Carolina, Mr. Inglis.

Mr. Inglis. Thank you, Mr. Chairman.

Professor Smith, I was interested in your observation that — did
I get this down right? — that the two bases of— basis I think, isn't
it? About which a State may tax residents or nonresidents. One is
the source. Is that correct? Artd the other was residence? Is that
right?

Mr. Smith. Right.

Mr. Inglis. So let me make sure I have got this straight. If I live
in South Carolina but work in Georgia, the State of South Carolina
may tax my income because

Mr. Smith. Because you are a South Carolina resident. But the
State of Georgia also may do that because they are the source
State where your services are performed where you work. Then
typically. South Carolina, when you file a resident tax return, will
give you a credit for the taxes paid to Georgia.

Mr. Inglis. That is right. Arid if I own property in North Caro-
lina, living in South Carolina, then obviously the State of North
Carolina may tax the real estate because it is resident in North
Carolina, but I am not resident there; right?



35

Mr. Smith. Correct. And assuming that it is rental property, they
could also tax your North Carolina income that represents the
rents from that property.

Mr. Inglis. Correct. However, if I simply own property in North
Carolina, am resident in South Carolina, but work in Georgia,
North Carolina cannot tax the income from Georgia. They have no
contact with the income.

Mr. Smith. Right.

Mr. Inglis. So if I, by similar logic, move from California and no
longer have any contacts with that State, how it is that they would
assert the capacity to tax me. Isn't it the same thing as me owning
that property in North Carolina but not being there?

Actually, no, it is not even that. It is that I have completely va-
cated California. I have no property. I have no income. I have no
contact with the State. I am wondering. You asserted that it is con-
stitutionally correct for them, I think we should do this legislation
regardless, and that is probably your point, too, regardless of
whether it is constitutional or not. I think is Mr. Scott's point ear-
lier. Regardless of whether it is constitutional or not, we should do
it.

Mr. Scott. It is constitutional, and therefore we may do it.

Mr. Inglis. That is the point. That is the point. In other words,
that California may be able to do this, may be able to do what they
are doing, but for public policy reasons we are exercising our con-
stitutional authority, which you have just asserted that we have at
the Federal level, may choose to eliminate that capacity to do this.

I am really sort of stuck on whether they have got the constitu-
tional ability to do it, to do what they are doing, that California has
the ability.

Mr. Smith. I believe your hypothetical is distinguishable in this
sense. The property you mentioned in North Carolina is presum-
ably property you purchased with assets or other income that is
unconnected to Georgia, and, as you rightly say, Georgia has noth-
ing whatsoever to do with it.

This particular situation, where the situs of property is clearly
outside of the source State, is different than the situation where we
are talking about income that was definitely earned in the source
State, where the person lived and worked. And, later on, that in-
come is now in a particular deposit or a fund, and the person
moves to another State and with them somehow managed to move
the account.

Here, for the Georgia-North Carolina situation, you didn't say
that the property in North Carolina happens to be proceeds of in-
come that was earned in Georgia and Georgia never taxed that but
deferred it with the expectation that later on a tax would be due
when that income was recognized federally

Mr. Reid. Could I interrupt? My beeper went off, and I already
missed one vote. Could I be excused?

Mr. Gekas. Obey the beeper.

Mr. Reid. One thing. I don't have the latest count. We have had
a significant number of California Members of Congress who sup-
port this legislation. So we are not here beating up on California.
Members of the California delegation understand how unfair it is.



36

Mr. Gp:kas. We thank you, Senator, for taking time to present
yourself here.

Mr. Reid. Thank you. Pardon me.

Mr. INGLIS. The red light is on. I think my time is up.

Mr. Gekas. We can extend it if you want, but think about some-
thing else you might want to ask and then avoid the temptation.

We turn to the gentleman from Virginia.

Mr. Scott. Thank you, Mr. Chairman.

I wanted to qualify one of the suggestions from the gentleman
from South Carolina. We would consider passing this legislation be-
cause we think it is constitutional, not irregardless of its constitu-
tionality. If it wasn't constitutional I would nope that we would re-
frain, whatever we thought about the practical aspects of it.

Speaking from a practical aspect, who gets hit with this source
tax on an ongoing basis other than some hapless soul who gets
tripped up after the 4 or 5 years, and they come after 3, 4, 5 years
of back taxes? Who actually pays this source tax voluntarily today?

Mr. Smith. This is a major problem. From the research I have
done, I believe it simply happens to be those who are unlucky, who
tvpically are State employees whose records are easily available to
the source State, or perhaps those who are honest and realize they
have an obligation to continue to file nonresident tax returns for
States such as California.

Mr. Scott. These honest people would probably be those who
have an income tax in their State they would have to pay. So it
is either pay it to California or pay it at home, because they are
going to get a tax credit for it, so it didn't make any difference.

But those in Arizona or Nevada, I think they have no income tax.
The only people that get hit with it are those who have State
checks where the State actually has the record and can withhold
and enforce their source tax.

Mr. Smith. As a practical matter, that is what I believe is hap-
pening now, although I have not personally done empirical re-
search,

Mr. Scott. Although theoretically the limit doesn't make sense,
either you want to do it or you don't. If you had a limit — maybe
not $30,000, maybe $100,000— people making more than that in
pension income can in fact do the paperwork and comply, but those
regular employees, it would be just too complicated to figure out
where you got the money.

So if had you a limit of over $100,000, wouldn't it be possible to
do the work and also catch the people that are doing these large
deals where they defer massive amounts of income into a time
where they are in a nontax, non-income-tax State? If had you a
limit of $100,000, could that work?

Mr. Smith. I think a very high limit like that would substantially
solve all of the problems of retirees, and, as you say, those who
have income of that amount clearly can or should be able to afford
a tax accountant or other expert to help sort out their tax liabil-
ities, even if several different States have a claim to tax their in-
come.

Mr. Scott. Thank you.

Let me kind of switch subjects. The form of the money I think
gets complicated. If you have a deferred income versus pension in-



37

come, would they be treated different in a source tax situation, in
an IRA that you roll over? Can you say a little bit about how we
get caught up in the form of the money?

For example, if you have a pension, an IRA for instance, move
out shortly thereafter and 20 years later start withdrawing from
the IRA, it is your suggestion that the increase in value of the IRA
would not be taxable, just the original $2,000 that you put in?

Mr. Smith. Yes. I think clearly under the due process clause,
once the person has become a nonresident and once it is clear, as
in this situation, that the plan is no longer administered or located
in the source State, at that point in time the source State has lost
all of its jurisdictional contact with both the taxpayer and the
money and has only that piece of the pie that represents the
amount of income put into the IRA or other plan while the person
was in the State.

In the situation that you gave, yes, if they moved and it was two
decades later when they began taking IRA funds out, they would
at that point in time, as a matter of principle, be required to report
just a fraction. With the time value of money, the fraction might
be considerably less than half of their IRA annuity payments or
their IRA lump sum distribution. In my mind, the complexity of
doing that computation properly so that the source State does not
overreach but precisely calculates what it should tax is one of the
prime reasons why Congress should act.

Mr. Scott. Could I ask one more question, Mr. Chairman?

Mr. Gekas. Yes, without objection.

Mr. Scott. Thank you.

What would happen if you were to sell your pension?

Mr. Gekas. What was the question?

Mr. Scott. What would happen if you were to sell your pension?
Can you sell a pension?

Mr. Smith. I am really not positive. I am not a specialist in pen-
sion matters generally. I deal with income tax matters and I don't
really know the answer to that.

Mr. Scott. Thank you.

Mr. Gekas. We note the presence of the gentleman from Ohio,
Mr. Chabot, and turn to him for any questions that he might wish
to present.

Mr. Chabot. Thank you, Mr. Chairman.

I guess just a quick preliminary observation I would make. It
would seem to me if some States, kept their taxes at reasonable
levels and didn't have them go so high, perhaps residents wouldn't
flee the States to begin with and they wouldn't have to go back and
try to collect them again. That is just a preliminary observation on
my part.

How many States, Professor, if you know, have source taxes, tax
where they go after folks after they have left the States? Is it a lot,
or do you nave a list available?

Mr. Smith. Some of the other witnesses may have a list. My
recollection from materials that I have studied is that presently
only a handful, maybe seven or eight, have any announced policy
of requiring filing by nonresidents.

A point that I would make, though, is that most States with
broad-based income taxes have general language in their tax codes



38

that requires that nonresidents file tax returns for income earned
within the State. Such general language could be interpreted by
States such as Georgia, tnat presently don't have started positions
as requiring source taxes for nonresidents who previously worked
within the State.

So that as it stands now many States, as an administrative mat-
ter, could become more active in the area probably without amend-
ing their tax codes.

Mr. Chabot. Also, our colleague. Representative Vucanovich, had
mentioned earlier that the State of Nevada has passed legislation
to prevent California from imposing this tax and the tension, for
example, that's created between these two States. Might that be an
independent reason for Congress to act because we in this case
have two States that are at odds on this issue.

Mr. Smith. It may be. You are seeing a situation where those
States and others are perhaps not at war but are yet having sig-
nificant friction due to those particular acts. I think that their con-
stitutionality is doubtful under the full faith and credit clause of
the Constitution. But, even so, as you pointed out, there is a sig-
nificant amount of friction that may be solved by congressional ac-
tion.

Mr. Chabot. My final question is: If States want to tax pension
benefits, I guess they could. Those States could tax that money
while it is earned. But if they did, those people who are voters
could vote them out of office.

On the other hand, if you tax somebody after they have left your
State, they can no longer vote against you. So perhaps it doesn't
matter as much, and maybe that is why they have chosen to take
this route.

I appreciate your testimony here this morning and yield back the
balance of my time.

Mr. Gekas. All right. The subcommittee thanks the professor for
appearing and presenting his testimony, and we will count on him
as we move toward the final production of legislation for any fur-
ther inquiries that we might want to make of him.

Mr. Smith. Thank you very much, Mr. Chairman and members
of the subcommittee.

Mr. Gekas. Thank you. We now invite William Hoffman, presi-
dent of RESIST, to the witness table; with Christopher Farrell of
NARFE, the National Association of Retired Federal Employees;
Harley Duncan, executive director of the Federation of Tax Admin-
istrators; Randall Johnson, director of benefits planning at Motor-
ola, on behalf of several entities also interested in this subject.

What we will do, without objection, is invoke the 5-minute rule
for the testimony to be offered by each. We will begin in the order
in which their names were announced and then reserve question-
ing until all have testified.

Mr. Hoffman will begin.

STATEMENT OF WILLIAM C. HOFFMAN, PRESIDENT, RETIREES
TO ELIMINATE STATE INCOME SOURCE TAX (RESIST)

Mr. Hoffman. Good morning. I would like to thank the chairman
and the committee for hearing the source tax issue and inviting me
to speak.



39

My name is Bill Hoffman. I am president of RESIST of America,
a nonprofit corporation whose only goal is to end the tax on non-
resident pensions by the States. We are a grassroots organization
that operates entirely through unpaid volunteers. We are not, how-
ever, against fair taxation with representation. As Senator Reid
said, we have been trying to pass legislation for 8 years. It has
passed the Senate three times and the House once, unfortunately
not at the same time.

Taxation of nonresident pension by the States affects every
American at every income level and is a totally bipartisan issue.
Our senior population faces many problems and uncertainties as
they grow older, including failing health and shrinking financial re-
sources. The ignoble practice by the States of taxing retirees on
nonresident pensions adds significantly to their burdens.

Most retirees were totally unaware that their former States
would tax them for the rest of their lives without giving any bene-
fits or rights. Even worse, a State like California mailed letters in
the seventies to retirees telling them they did not owe this tax, and
then they had the nerve to go back to these same retirees and say:
We made a mistake, and you not only owe us the taxes but 55 per-
cent in penalties plus daily interest.

Now, this tax really hits retirees hard. I have included in my
written testimony five examples of the thousands we have received
about real people affected by this unfair tax. An example involving
a family who was told they didn't have to pay the nonresident tax
and then wound up having their pension check garnished; one in-
volving double taxation through intimidation, which happens quite
a bit, of true double taxation which the States say never happens;
one that shows how States even go after retirees with low income;
and an example, finally, of how uncontrolled and unsympathetic
tax agencies can be.

Our current bills, unfortunately, do not provide a solution for re-
tirees that are now faced with a huge nonresident tax bill. Adding
an amnesty clause in the current bill would solve this problem. I
would encourage Congress to consider this addition but without
jeopardizing the basic bill.

Now, this tax also hits companies hard. Under present law, com-
panies are required to keep extensive records of present and former
employees that have vested in a pension plan. These records are
expensive and difficult, if not impossible, to implement.

In my written testimony I reviewed a paper and tax notes by
Walter Hellerstein and James Charles Smith you just heard from,
both professors of law at the University of Georgia. There are com-
ments in the written testimony on both their theoretical and prac-
tical analysis.

The following points should be addressed now, however.
Hellerstein and Smith claim we would have a pyrrhic victory for
nonresidents if our bill passed because the States would either stop
deferring the tax or would collect it when the retiree left the State.

Now, we don't believe the States will stop deferring the tax be-
cause they can't predict which retirees will remain in the State. If
they stop deferring the tax, they can probably not tax resident pen-
sions.



40

If the States collect the tax when the retiree leaves the State,
there should be requirements put on them. One, they should have
informed those in the pension plan about their State's nonresident
tax policy when contributions are made to the plan, not years later.
If retirees are not informed, they should not be taxed. Second, they
should use a fair settlement option similar to a 10-year average