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

plan.

Now, we hope States will not make these changes, but if they do,
it is still better than being taxed for the rest of your life without
representation.

In addition to the Federal legislation, we have tried to work this
problem at the State level, as some Congressmen and AARP have
suggested. The written testimony describes our efforts toward this
goal in detail. It was generally a failure, except for New Jersey and
Iowa. Both States have repealed their nonresident tax on pensions
and thus removed themselves from Bob Brinker's "Hall of Shame."
He is a host of a weekly radio show, "Money Talks," and mentions
this every week.

We have stopgap measures in nine States, some with income tax,
to prevent the seizure of property for the collection of these taxes.
A number of other States are considering similar legislation. An
economic war between the States has begun.

When State borders are crossed, individual rights must be pro-
tected by the Federal Government. Therefore, with the millions of
people in our coalition, we urge you to pass H.R. 394 or similar leg-
islation, a bipartisan bill with little cost impact on either the Fed-
eral Government or the States. Stop taxation without representa-
tion, an issue that caused our revolution. Stop this injustice to sen-
iors and future seniors. We are not asking for money, only justice.

Thank you for a your attention. I will be pleased to answer ques-
tions.

I would like to make one comment. I sent a lot of letters in the
last session of Congress about our members.

Mr. Gekas. Without objection, the written statement will be re-
ceived for the record.

[The prepared statement of Mr. Hoffman follows:]

Prepared Statement of William C. Hoffman, President, Retirees To
Eliminate State Income Source Tax (RESIST)

The Best Kept Secret in America

The RESIST of America members and the members of the Coalition, (shown in
Attachment A); urge the House to pass H.R. 394. The Library of Congress concluded
that Congress has the constitutional right to prohibit states from imposing a tax on
nonresident pensions. They reported their results in a Senate Finance Committee
hearing, June 11, 1991.

Issue

'Taxation Without Representation" still exists in America. The taxation of non-
resident pensions by the states is a prime example. This tax affects every American
without regard to gender, race, religion, or even income level. It is a totally biparti-
san issue. Our Senior population faces many problems and uncertainties as they
grow older; including failing health and shrinking financial resources. The ignoble
practice by the states of taxing retirees on nonresident pensions adds to these bur-
dens. Most retirees were totally unaware that their former state(s) would tax them
for the rest of their lives without giving any benefits or rights. Even worse, states
like California, mailed letters to retirees in the 1970's; telling them they did not owe



41

this tax. Then they have the nerve to send these people a tax bill that includes 5
percent in penalties plus daily interest. What would you do if you or your parents
were suddenly faced with a huge tax bill that equaled or exceeded yearly income?
A few of these tragic cases are included later.

My wife, Joanne, has worked with me from the beginning. She handles most of
our phone calls and letters. After eight years of this activity, tears still flow when
she reads or hears another of these tragic stories. She asked me to invite you to
spend time with her and listen to these stories. I wish we could confirm the sus-
pected heart attacks that occurred as a result of these tax shocks.

How can a nation that was formed over the issue of "Taxation Without Reoresen-
tation" allow this to happen? Because it was the best kept secret in America! No one
was told about this unfair tax that interferes with our right to travel across our
country and live where we choose without suffering a financial penalty. It is un-
thinkable for an individual in the United States of America to be controlled bv a
taxing agency without recourse. More important, how can our great Nation allow
Senior Citizens to be treated in this terribfe manner.

Background

Many states (41) have source tax laws and each of them could implement the tax
on nonresident pensions. About 12 states currently impose this tax. I will frequently
use California as an example during this presentation for three reasons:

1. They are the most aggressive state,

2. They often lead the Nation in new trends, and

3. We have a better understanding of their nonresident laws and procedures.
The 41 states mentioned above, tax nonresidents on various types of source income.
There are legitimate reasons for some of these taxes. An individual could operate
a business, own property or work in a nonresident state. In these cases, tne re-
sources of the state are being used or jobs are taken from the residents. If the non-
resident doesn't want to pay these taxes, they can remove the business or property
from the state or not work tnere. They have a choice.

Nonresident taxation of pensions is different; because unlike a business, job, or
investment, the pension tax debt cannot be removed from the state. The retiree is
trapped for the rest of their lives by the state in "financial slavery."

States can raise taxes whenever they like. What can nonresidents do about it?
Nothing! We can't vote or petition in our former state.

One of our members tried to regjister in California as a nonresident voter. After
the usual bureaucratic exchange, his request for registration was, of course, denied,
even though he is expected to pay California taxes. This persistent member has
proven that at least California will not allow a nonresident to register and vote.

What services do we get as nonresident taxpayers? None! We can't use schools,
or even buy a fishing license at resident rates. Of course, you can use the schools
and buy a fishing license at nonresident rates, which are much higher.

What do we get from the government of the taxing state? Nothing! Except harass-
ment from collection agencies.

This Tax Hits Retirees Hard!

I am including only five letters of the thousands we have received about real peo-
ple affected by this unfair tax. An example: involving a family who was told they
didn't have to pay the non-resident tax and then had their pension garnished; in-
volving "double taxation through intimidation"; of true double taxation; that shows
how states even go after retirees with low incomes; and an example of just how un-
controlled and unsympathetic tax agencies can be.

Example One: Howard Smith retired from the Los Angeles Police Department in
1974. In 1988, Howard and his wife Nancy were contacted by the California Fran-
chise Tax Board (CFTB). They told him that he had not been paying taxes on his
f>ension. His accountant (now deceased) was told by the California FTB, years ear-
ier, that he did not have to pay these taxes. Jim Reber, spokesman for this agency,
stated in a Sacramento Bee Article, May 20, 1989, that they sent letters to non-
resident retirees throughout the 1970's telling them they did not have to pay taxes
on their pension. He then said; "It was a mistake."

When the California FTB is challenged, they search through the years for more
unpaid taxes on the individual. In Howard's case, they wentl)ack to 1983. His tax
liability continued to grow. Washington is one of the states that passed a law pro-
hibiting the seizure of assets for the collection of these taxes. The FTB was un-
daunted, however. In March 1993, Howard's pension check did not arrive. He subse-
quently received a notice from the California FTB, through his pension office, stat-
ing that his check had been seized. Furthermore, they would withhold 25 percent



42

of his subsequent checks until his debt was paid, unless he settled in 30 days. At
this point, his tax liability was $26,394.59. Howard Smith's pension is about $27,000
per year.

We believe that pensions are exempt from garnishments. Federal law protects, the
military, ERISA (Private), and Federal pensions from garnishments, except for child
or spousal support. We thought California's own law under Enforcement of Judg-
ments, Title 9, Art. 704.110 exempted state pensions from garnishments, except for
child or spousal support. The California FTB admitted they could not garnish most
pensions, but Howard's police pension was an exception. Whether they are correct
or not, the only recourse for the retiree is to sue tne state. This costs money and
causes anguish.

Howard's case has been published in the Wall Street Journal, Thursday, April 15,
1993, by Earl C. Gottschalk Jr., "Welcome Traveler," and on Dan Rather's CBS
Evening News, Friday, May 21, 1993. His debt had grown to more than $28,000
when the show was broadcast and is now more than $35,000. Even though his pen-
sion has been garnished, he continues to lose ground financially.

Example Two: The states continue to say that retirees are never double taxed.
They claim one state or the other always gives credits. This contention is not always
true. If a reciprocal agreement does not exist between the states involved, the tax-
payer often finds himself caught in a legal quagmire. David Sheehan and his wife.
Dawn, for several years paid taxes to South Carolina. California demanded that
they pay taxes on essentially the same income for several years. Later, South Caro-
lina changed their law and gave them a credit for taxes paid to California. In the
meantime, the Sheehan's incurred a large tax debt (more than $5,000) to California.
Later, the Sheehans moved to Maine. Maine does not tax nonresident pensions and
therefore does not give rebates for taxes paid to other states on pensions. Because
of their earlier experience, the Sheehans were afraid to challenge California and are
paying taxes to both states on the same income. It is probable that California would
give some credit for taxes paid to Maine. But as David told me, they live more than
three thousand miles from California, and they cannot afford to travel there or hire
an attorney to fight them. This amounts to double taxation through intimidation!
It is almost impossible for an isolated retiree to fight a powerful lax agency. I'm con-
fident that many other Senior Citizens find themselves in similar dilemmas.

Example Three: There are cases of authentic double taxation as well. Mr. Earl
Cornwell worked 33 years for Rockwell International, the first 22 years in Iowa and
the last 11 years in Oklahoma. He is now retired in Oklahoma. He is required to
pay Iowa on 66 percent of his retirement income. Oklahoma gives only a partial
credit. For the years 1991 and 1992 he paid Iowa $2,290. Oklahoma only allowed
a credit of $769. He was double taxed on the $1,521 difierence. The tax payers of
Oklahoma also suffer because they pay for the services, etc., of retirees like Earl
and the states that receive the retirees' taxes contribute nothing to their support.
Iowa repealed their tax on nonresident pensions on Wednesday, May 5, 1994, and
thus removed themselves from Bob Brinker's "Hall of Shame.' Bob Brinker hosts
a weekly radio show "Money Talks." Perhaps Mr. Cornwell's problem is now solved.

Example Four: Gertrude Eberly calls herself the "Bag Lady" of Fallon. She has
had national publicity regarding her case. Nevertheless, her saga continues. She
owes the State of California more than $13,000. Her yearly income is about $13,000.
Because of the publicity, the California FTB agreed to let her pay $50 per month
on her tax debt. She made the payments until it became a choice between paying
the tax and paying her gas and electric bills. She decided to pay the gas and electric
bill. She is now forced to depend on Nevada's law that prohibits seizure of property
for nonpayment of these taxes. Unfortunately, she was a state worker and Califor-
nia may now seize her pension check at the source as they did in Howard Smith's
case. Gertrude's plight is getting worse as she is now legally blind and is being har-
assed by collection agencies.

Example Five: We often get letters that are so outrageous that they not only bring
tears to Joanne's eyes, but to mine also. We are adding to the hundreds of letters
submitted to the last Congress, one from Ellen Wight of Arizona. Her problem illus-
trates the terrible burden that the nonresident tax imposes on Seniors. Ellen wrote
us to thank us for our last newsletter and to donate to our cause. In that letter she
told us that her husband, Bert, had terminal colon cancer. Their California taxes
for 1994 were $4,799 because Ellen had to withdraw $6,000 from their IRA to help
pay the medical bills. Unbelievably, California had also added a tax for earthquakes.
We returned her donation and offered her our condolences. She wrote us again and
told us Bert had died. One of his last acts was to write Representative Stump of
Arizona and urge him to keep up the fight to repeal the tax on nonresident pensions
because his fight was over.



43

Rhetorical Question: If Gertrude or others in her situation go broke because of this
tax, which state pays for the required welfare, (the resident or former state)?

TAX ALSO HITS COMPANIES HARD

Another aspect of this tax often forgotten, is the financial impact on companies.
Under present law, they are required to keep extensive records of present and
former employees that have vested in a pension plan. These records are expensive
and difficult to implement. The main reason companies did not support the com-
promise Bill passed in the 103rd Congress was that it didn't provide relief from this
expensive record keeping.

STATES POSITION

Some states correctly assume pensions are intangibles, similar to savings ac-
counts. Others claim pensions are deferred income.

Defining pensions as "deferred income" is totally incorrect. Income that is deferred
should be paid unconditionally, either to the retiree or to their heirs. Pensions clear-
ly do not meet this requirement. If you unfortunately die one day before you retire,
your heirs receive only your own contributions plus a small amount of interest. Your
estate receives none of the so called "deferred income."

Most retirees paid taxes on contributions to their pension plans. Apparently, Com-
panies, Federal, and State agencies did not pay taxes on their contributions to pen-
sion plans or investment interest. Before the publicity that RESIST of America initi-
ated, no one was informed, by either their State or employer, about nonresident tax-
ation of retirement income. Why weren't we informed about this unfair tax that
would lead to 'Taxation Without Representation" in the future? Why weren't options
to settle offered to the employees?

My Company, Hughes Aircraft, held a 3 day seminar for future retirees and their
wives. Just about every topic regarding retirement was covered, except one. They
didn't even give us a hint that California would tax nonresident pensions. Hughes
had more than 12,000 nonresident retirees when I retired in 1987.

I do not generally use our personal situation to illustrate a point. However, I am
unaware of anyone else that has olTered to settle with the State of California, except
my wife and me. It is our unshakable belief that it is intolerable to be taxed by a
taxing agency over which you have no control. However, we learned our employer
did not pay taxes on their contributions, and there was an unpaid tax obligation.
Therefore, even though we had never been told about this obligation, we made a
written offer of settlement in 1990. The only provision to the settlement was that
we would be exempt from any more nonresident taxes on our pension. The ofTer was
based on estimates of unpaid taxes by my employer and on the income California
would realize by investing our settlement. The income California would derive
through the settlement was greater than the taxes they would collect by taxing me
and/or my wife each year until we die. We had many conversations with the Legal
Council of the California FTB. We even traveled to Sacramento and met with tne
Chief Counsel, Glen Rigby, and Terry Collins, who is responsible for nonresident
taxes. They both agreed that our settlement was fair, but they could not find the
means to accept our offer. When you examine all the unconscionable things the FTB
has accomplished, you find their preliminary conclusions unbelievable. If collecting
money is not their objective, what is?

The only reason for deferring taxable income is to pay fewer taxes on the income
later. Nonresident retirees might pay significantly more taxes instead of less. It is
particularly frightening to speculate on how high nonresident taxes could become
in the future. When a State needs more income, and raises taxes, a nonresident can
do nothing about it. The retiree cannot vote, petition, receive benefits or enjoy gov-
ernmental protection from the taxing State. This situation is intolerable.



I have been concerned by an issue that is not addressed in the current bills. The
current bills will stop the taxation of nonresident pensions from the date of passage.
They do not provide a solution for retirees that are now faced with a huge non-
resident tax bill. Adding an amnesty clause in the current bill would solve this prob-
lem. I would encourage Congress to consider this addition. I do not, however, want
to jeopardize the passage of the important legislation (H.R. 394). Amnesty, raises
problems concerning those retirees that have paid the tax. Do you require the states
to refund these taxes or provide some other solution? States previously have offered
amnesty for resident tax payers. As far as I know these states didn't worry about
the honest residents that faithfully paid their taxes.



44

Reference: Tax Notes, July 13, 1992, "State Taxation of Nonresident's Pension In-
come," by Walter Hellerstein and James Charles Smith, both Professors of Law at
the University of Georgia.

At first glance, the article written by these professors from the University of Geor-
gia, supports the arguments of our opposition. When the article is read carefully,
it becomes clear that there are several points that do support our position. Although
the paper doesn't find theoretical grounds for stopping states from imposing taxes
on nonresident pensions, they do find practical objections.

I agree with the theoretical analysis with one exception. The authors assume that
if residents and nonresidents are taxed equally, then the tax is appropriate. They
miss an important point. The former states claim that benefits were received when
the retirees were earning the pension. Therefore, they owe taxes for the rest of their
lives, and do not deserve any additional benefits.

There is a fallacy to this argument. Consider two similar retirees. One decides to
remain in the state where the pension was earned and the other moves to another
state. The resident pays taxes, but continues to receive benefits from the state, can
vote, petition, and otherwise be represented by the government of that state. The
nonresident pays taxes, but receives nothing. Didn't the retiree who remained in the
state also get benefits while they were earning their pension? Isn't this discrimina-
tion? How can this be equal treatment?

One practical objection Hellerstein and Smith raised is that the states are never
concerned about the precise amount of taxes owed by the retiree. They conclude that
the state must precisely determine how much tax is owed, before the retiree leaves
the state.

Quote from referenced article. Page 226, Paragraph 3:

Because states generally lack the constitutional power to tax the portion
of a former resident's pension income that reflects accumulations after the
taxpayer's change of residence, states must limit their taxation of non-
resident pension income to the deferred employment income and the income
accumulated prior to the retiree's change of residence. As a practical mat-
ter, it may be difficult, if not impossible, for a state (or for an employer with
state withholding tax obligations) to determine, on a pension-check-by-pen-
sion-check basis, what proportion of the payment reflects deferred payment
for services rendered in the state and what proportion represents invest-
ment income that accrued while the taxpayer was a nonresident of the
state.
This paper also states that we would have a Pyrrhic victory for nonresidents if
our bills pass, because the states would either stop deferring the tax or would collect
it when the retiree left the state.

It is my belief, that states will probably not stop deferring the tax. They can't pre-
dict which employees would remain in the state. Therefore, if the state stopped the
tax deferment, they could not tax resident or nonresident pensions. We have sug-
gested from the beginning that states should collect the tax when the retiree leaves
the state. It is not only appropriate that states ask for a settlement when a retiree
leaves the state, but economical for the state. The only provisions that they should
be required to follow are:

1. Use a fair settlement option similar to a 401(K) and;

2. Inform those in the pension plans about their states' nonresident tax policy,
when contributions are made to tne plan.

This option would yield the states more money, and stop the "financial slavery"
caused by taxing nonresident pensions for life. Apparently the authors of this paper
believe that a lump sum settlement when you leave the state would be unconstitu-
tional, while a settlement over the entire lifetime of a retiree is constitutional. As
an engineer and scientist, trained to think logically, I am baffled by this conclusion.

Throughout the paper there is the implication that "Taxation Without Representa-
tion" is a trite phrase, used to emotionally incite the retirees. This implication is
without foundation. Any society that permits a taxing agency to tax people with im-
punity when the taxed person has no means (legal or other) to prevent or influence
the amount of tax is doomed. Our Founding Fathers did not consider this issue trite.

RESIST OF AMERICA IS FORMED

It was this unfair tax that prompted us to form RESIST of America. We are a
nonprofit organization that was incorporated July 28, 1988. Our only goal is to end
the tax on nonresident pensions by the states. It is a "grass roots" organization,
under U.S.C. 501, (Ch. 4), that operates entirely through unpaid volunteers, unlike



45

the American Association of Retired Persons (AARP). We are not against fair tax-
ation with representation.

CONSTITUTIONALITY OF NONRESIDENT TAXES

One of the first ofiicials contacted by our organization about this issue was The
Attorney General of Nevada. It was our hope that he would challenge the constitu-
tionality of the nonresident tax on pensions by the states. We knew that it was un-
constitutional for a citizen to sue a state in a Federal court. Unfortunately, Brian
McKay, who was Nevada's Attorney General in 1988, told us that the U.S. Supreme
court had upheld the nonresident taxes about 70 years ago. He sent us the Michigan
State Law review, that discussed many cases covering this general issue. He rec-
ommended that we try to get Federal Legislation passed. Research into other court
cases and investigation of The California State Law Review confirmed his position.

CALIFORNIA HAS IT BOTH WAYS

California has obtained (from their point of view) delightfully contradictory court
rulings. One such contradiction is described in the following paragraphs:

BORCHER-BAUSTIAN

The Borcher case, which was overlooked by the Library of Congress, was tried in
district court 2 of Los Angeles, California. It involved a man who earned his pension
in Illinois; and moved to California to retire. Borcher claimed that he didn't owe
California taxes on his pension income because the Source of his pension was Illi-
nois. California disagreed. Borcher lost, after a ten-year court battle. The court de-
cided he must pay taxes on his pension to California.

The Baustian case involved a man who earned his pension in California and re-
tired to Idaho. California claimed that he owed nonresident taxes on his pension be-
cause the Source of his pension was California. This decision was made by the State
Board of Equalization. The cases occurred about the same time.

As a spokesperson for the California FTB cheerfully acknowledged, in Barron's
National Business and Financial Weekly, September 11, 1989, by Michael Brody:

No-Escape Clause,

Residents can be taxed on all income, regardless of its source; non-