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

residents are taxed on all source income regardless of residence.

To make matters worse, California hired collection agencies that use "Gestapo
Tactics" to harass and threaten Senior Citizens for the collection of these unfair
taxes. We have been criticized by Hellerstein and Smith for using the phrase "Ge-
stapo Tactics" to describe California's uncivilized procedures. This phrase was used,
because it applies. We have been unable to find a more suitable phrase. They also
offer rewards for information on delinquent taxpayers. Other states will probably
follow California's lead, as they have for the nonresident Professional Athlete tax
discussed later.

INCOME EARNED IN OTHER STATES ALSO TAXED

There is another point that has irritated Seniors Citizens. Several states use total
income earned (including income earned in other states) to establish the highest
rate for taxing pensions (the California Method). The income from other states in-
cludes property sold, wife's income (even a new wife that never lived in the taxing
state), investments, etc. Even so, these states claim they do not tax out of state in-
come. However, any increase in taxes as a result of including income not earned in
the former state, is clearly a tax against that income.

This procedure creates inequality between retirees. A retiree, that supplements
their income through investments, can decrease their tax liability by investing in
items (such as Federal Securities) that states cannot tax. Those retirees that must
work to supplement their pension have no opt inns and must include the additional
income. As a result, they pay more taxes than the retiree that invests, even if their
total income is the same.

CALIFORNIA, PERHAPS OTHER ^ATES, TAX NONRESIDENT, MILITARY PENSIONS

Some believe that California does not tax the nonresident pensions of military
personnel. Don't you believe it. Check California tax forms 1005 and 1032. Califor-
nia previously gave an exemption for military personnel (the maximum exemption
was a generous $40.00 per year). Effective January 1993, they repealed the exemp-
tion. Other states have not answered the question of whether they tax military pen-
sions. We suspect most do.



46

CAN WE SOLVE THIS PROBLEM AT THE STATE LEVEL?

There are some Congressmen and organizations (AARP for example) that believe
that we should work through the states and organizations like the Multi-State Tax
Commission to end this tax on nonresident pensions. We have tried. It is almost im-

fiossible to sway State Legislators when you are not represented. New Jersey and
owa are the only states that have been persuaded to stop taxing nonresident pen-
sions. This success occurred in New Jersey's case, because of the efforts of one the
National Association of Retired Federal Employees (NARFE) member; and due to
a study by New Jersey that demonstrated the collection of these taxes was not eco-
nomical. Iowa investigated all asjaects of the tax and concluded that the income from
the tax did not compensate for the negative factors Iowa faced from imposing this
unpopular tax.

Our efforts with California have been futile to say the least. In 1990, the Califor-
nia Legislature introduced two bills to prevent or limit the taxation of nonresident
pensions. AB-3976, that would have completely ended this unfair tax and AB-3963,
that would have given a $20,000 credit to nonresidents, but income earned in other
states would still be used to determine the tax rate. AB-3963 also contained a "sun-
set clause" that automatically repealed the law 6 years after enactment.

Trice Harvey, an Assemblyman from Bakersfield, invited me. Pierce Powers (Na-
tional Association of Retired Federal Employees — NARFE), Elton Hipport also from
NARFE, and Douglas Baldwin, representing the Air Force Association, to testify be-
fore the Revenue and Taxation Committee for AB-3976.

Johan Klehs, Chairman of this conunittee (District San Leandro) refused to let us
testify, claiming there was not enough time and that we were "out of order." The
testimony for and against the previous issue, to grant tax exempt status for busi-
nesses that grow ostriches for food involved less than a dozen people. They listened
to testimony for more than two hours (not counting two hours for the ostrich bar-
becue).

Our issue involved millions of Senior Citizens and Future Senior Citizens in the
State. Clearly, we were faced with a "stacked deck." The committee has every right
to oppose our position; however, there is never a reason to be rude and inconsiderate
to anyone. Johan Klehs treated us like people without representation.

I had subsequently written a letter to the former Speaker of the California Assem-
bly, Willie Brown, and suggested a plan that would end their unfair tax method and
yield California more income. We have had no success with him.

The following year AB-1513, SB^27, and AJR-25 were introduced. The two bills
would have repealed the tax on nonresident pensions, and the joint resolution urged
the United States Congress to pass the bills that prohibit this tax. This time it was
Dick Millington (former Regional Vice President — NARFE) who received the rude
treatment.

In 1994, the California FTB sponsored state legislation AB-300 to give a $30,000
deduction to nonresident pensions. It included a two year "sunset clause." While this
legislation would reduce taxes for retirees, it doesn't solve the basic problem. Retir-
ees would still be under the control of the California FTB. Furthermore, about a
dozen other states are still taxing nonresident pensions. One wonders if the Califor-
nia FTB isn't trying to difTuse the momentum of our effort and "pull the wool over
the eyes of Congress." AB-300 failed to get through Johan Klehs' Committee.

"STOP GAP" LEGISLATION PASSED BY MANY STATES

Nine states have passed legislation to prevent the seizure of property for the col-
lection of taxes on pensions or retirement income (Arizona, Colorado, Florida, Lou-
isiana, Nevada, New Hampshire, New Mexico, Texas, and Washington). A number
of other states are considering similar legislation. An economic war between the
states has begun.

Where can we turn for help? We can only turn to you, the Congress of the United
States. When state borders are crossed, individual rights must be protected by the
Federal Government.

We Need Federal Legislation! The Congress of the United States Is Our
Last Hope!

We are asking you. The Congress to help us end this terrible injustice to our Sen-
iors and our Future Seniors. The issue or taxation of nonresident pensions by the
states affects every American. Even if a citizen does not have a pension or if they
never leave the state where the pension is earned, they are affected.

Many states give credits or rebates to retirees that pay taxes to another state.
If they do, then the taxpayers of that state are paying for the benefits, services, and



47

cost of government for these retirees. The taxes paid by the retirees, are instead
paid to their former state, that doesn't give anji;hing to the retirees or the resident
state's economy. Even if the resident state does not give credits or rebates for these
taxes, their citizens still lose, because the money paid by the retirees for taxes is
not available for expenditure in the resident state.

There is a better way. Taxpayers should pay taxes only to their state of residence,
where they receive benefits, services and government protection, where they have
the right to vote, petition, and otherwise influence their representatives.

The states, that tax nonresident pensions, consider those without income tax as
"nontaxing" states. While this is obviously not true, retirees in these states are truly
double taxed. Because the former state does not recognize any of these taxes as off-
sets against their tax, these retirees pay taxes to both states and therefore are dou-
ble taxed.

Four bills have been introduced into the House of Representatives to stop states
from taxing nonresident pensions, (H.R. 394, H.R. 371, H.R. 744, and H.R. 1762).
Representative Barbara Vucanovich, Nevada, introduced H.R. 394 into the House
Judiciary Committee. Senator Harry Reid, Nevada, introduced an identical Senate
Bill S. 44 into the Senate Finance Committee. These bills would end the injustice
to Senior Citizens, including members of Congress. Representative Bob Stump, Ari-
zona, introduced Bill, H.R. 371, into the Judiciary Committee, Wednesday, January
4, 1995. This bill is similar to the bill originally introduced bv Representative
Vucanovich. Representative Stump was a cosponsor on the first bill in 1988. He has
supported our legislation from the beginning and only introduced H.R. 371 to get
early attention in the House, not to compete with the other bills. Representative
Owen Pickett, Virginia, introduced Bill H.R. 744 Monday, January 30, 1995. His bill
is similar to the Bill H.R. 702 introduced in the 103rd Congress by Representative
Vucanovich. Representative John Ensign, Nevada, introduced Bill H.R. 1762
Wednesday, June 7, 1995, into the Ways and Means Committee. This bill accom-
plishes most of the objectives of Bill H.R. 394. It conforms to the rules of the Ways
and Means Committee and imposes a penalty on the states if they tax nonresident
pensions.

DO THESE BILLS COST THE FEDERAL GOVERNMENT?

Unlike most people requesting legislation, we are not asking for money, only Jus-
tice. The Federal Government should realize a slight increase in tax revenue if H.R.
394 passes, because those retirees that still itemize on their Federal taxes would
have fewer deductions.

States would not lose income either if our bills pass. Ironically, if we do not pass
H.R. 394 and the Senate Bill S. 44, the most aggressive state, California would lose.
They are one of the two top retirement States (Florida is the other). When states
that currently don't impose the tax, realize that California or other states in
Brinker's "Hall of Shame" are stealing money from their economy, you can bet they
will retaliate and impose nonresident taxes on their retirees. The retaliation has al-
ready started in the case of nonresident professional athletes.

California taxes these athletes for every game they play in the state. At least Col-
orado, Maryland, Massachusetts, Louisiana, Michigan, Minnesota, Missouri, Oregon,
Pennsylvania, Illinois, New Jersey, New York, Ohio, Wisconsin, and a city (Philadel-
phia) have retaliated. The Illinois Legislature called their tax "Jordan's revenge."
See The Wall Street Journal Article, Thursday, April 15, 1993, by Earl C.
Gottschalk Jr., "Welcome Traveler." See also. Money, Southwest Airlines (Spirit) by
Jim Henderson, "Tax Down." It is difficult to predict which state would lose the
most, but one situation is easy to predict. If taxes are paid to the State of Residence,
where the retiree can vote, petition, receive services and benefits, everyone gains,
including the states.

We urge you to pass H.R. 394 and end the tyranny of "Taxation Without Rep-
resentation, without a financial loss to the Federal Government and without a loss
to the states.

Stop this terrible injustice to our Senior Citizens and to all Americans.

Mr. Gekas. We now turn to Mr. Farrell.

STATEMENT OF W. CHRISTOPHER FARRELL, LEGISLATIVE
REPRESENTATIVE, NATIONAL ASSOCIATION OF RETIRED
FEDERAL EMPLOYEES (NARFE)

Mr. Farrell. Chairman Gekas and members of the committee,
for the record, I am Chris Farrell, legislative representative for the



48

National Association of Retired Federal Employees. On behalf of
the half-million members of NARFE, I would like to express our
appreciation for this opportunity to testify on the State taxation of
nonresident pension income.

NARFE's interest in this subject stems from three biennial na-
tional conventions that have adopted resolutions seeking enact-
ment of Federal legislation to allow retirees to relocate without
being financially indentured to a jurisdiction of previous residence.

Our California members, the vast majority of whom have no in-
tention of leaving, oppose the source-tEixing practice of their own
State government and seek enactment of legislation to allow them
to relocate to any other State if they so choose without continued
tax obligations to California.

NARFE strongly supports the legislation pending before the sub-
committee that would prohibit the current practice of several
States, namely the taxation of disbursements of pension funds —
pension plans of former residents. Specifically, NARFE supports
H.R. 394 sponsored by Representative Vucanovich.

In 1991, NARFE submitted testimony in support of similar legis-
lation to the hearing record of the Senate Subcommittee on Tax-
ation. In 1993, we testified at an oversight hearing of your prede-
cessor subcommittee on two 103d Congress bills previously men-
tioned by their sponsors. The developments in this legislation owe
much to the efforts of Nevada's Senator Harry Reid, the Joint Tax
Committee, and consideration in the Finance Committee during
1991 and 1992.

Taxation deferred should not be converted into tax avoidance.
Rather, States defer taxation during the peak wage earning years
so that citizens will continue to be contributing taxpayers rather
than needy paupers when retired.

Sometimes this issue is seen only as an issue for public sector
retirees. While State and municipal retirees are the most exposed
to pension source tax because their paymaster is able to withhold
before disbursement, as is occurring in the documented case that
appeared on the "CBS Evening News," private sector employers
consider source tax compliance extremely difficult, if not impos-
sible. The American Payroll Association and the Tax Executive In-
stitute have considerable expertise in this area to provide to the
subcommittee.

Rather than seeing the present practice of a small number of
States as a clear and present danger to Western civilization as we
know it, left unaddressed by a higher legislature, the Congress, ra-
tional State legislative behavior will lead to an increasing number
of States initiating an aggressive source tax in retaliation, if noth-
ing else, for the egregious behavior of the California Franchise Tax
Board. Why should any State with the authority allow its depart-
ing citizens to leave unencumbered when citizens, late of Califor-
nia, are umbilical to Sacramento?

Several State legislatures, at least eight, we believe, perhaps
nine, have enacted legislation to prevent their State courts from
being party to the enforcement of liens for debts claimed to be owed
to other States based on pension source tax. This too is rational
State legislative behavior but detrimental to the basic philosophy
of voluntary compliance.



49

Left unaddressed by Congress, as the legislature of last resort,
this issue will become more and more salient. You may have newly
arrived constituents who are not now aroused, but will be if their
former State of residence seeks to tax them using the source tax.
Should this occur, they must turn to you as they can no longer par-
ticipate in any meaningful way in the civic life of the State they
have left behind.

In its opportunistic application, the source tax has created a lit-
any of horror stories well recounted by RESIST. While these case
histories are happening primarily in a few Western States now, the
experience will necessarily spread.

Increased labor mobility, one of the great engines of the Amer-
ican economy, provides ripe targets. Faster computers combing
through larger data bases provide the means, and the States' appe-
tite for revenue to supply essential and mandated services provide
ample motive. This problem will not go a way. Just the opposite
is true. Rational State legislators believe the old tax theory: Don't
tax thee, don't tax me, tax the man behind the tree, who just hap-
pens to be over the State line.

Some trade unions and progressive tax theorists believe State
source taxes are a device for the income-tax States to punish non-
income-tax States. This contention is worthy of closer examination,
and I will be ready to answer any questions that you might have
about my testimony in the question period.

Thank you.

[The prepared statement of Mr. Farrell follows:]

Prepared Statement of Christopher Farrell, Legislative Representative,
National Association of Retired Federal Employees (NARFE)

Chairman Gekas and Members of the Committee, for the record, I am Chris
Farrell, Legislative Representative of the National Association of Retired Federal
Employees (NARFE). On behalf of the half million members of NARFE, I would like
to express our appreciation for this opportunity to testify on State Taxation of Non-
residents' Pension Income.

NARFE's interest in this subject stems from the three biennial national conven-
tions (1990, 1992 and 1994) that have adopted resolutions seeking enactment of fed-
eral legislation to allow retirees to relocate without being financially indentured to
a jurisdiction of previous residence. Our California mernbers, the vast majority of
whom have no intention of leaving, oppose the source-taxing practices of their own
state government and seek enactment of legislation to allow them to relocate to an-
other state, if thev so choose, without continued tax obligations to California.

NARFE strongly supports the legislation pending before the Subcommittee that
would prohibit the current practice of several states, namely the taxation of the dis-
bursements of pension plans of former residents. Specifically, NARFE supports H.R.
394 sponsored by Representative Vucanovich.

In 1991, NARFE submitted testimony in support of similar legislation to the hear-
ing record of the Senate Subcommittee on Taxation. In 1993, we testified at an over-
sight hearing by your predecessor subcommittee on two 103rd Congress bills, H.R.
702 and H.R. 546. These measures were a limitation rather than outright prohibi-
tion of state authority to source tax.

The developments in this legislation owe much to the efforts of Nevada's Senator
Harry Reid, the Joint Tax Committee, and the consideration in the Finance Com-
mittee during 1991 and 1992.

Taxation deferred should not be converted into tax avoidance. Rather, states defer
taxation during the peak wage earning years so that citizens will continue to be con-
tributing taxpayers rather than needy paupers when retired.

Sometimes this issue is seen as only an issue for public sector retirees. While
state and municipal retirees are the most exposed to pension source tax because
their paymaster is able to withhold before disbursement, as is occurring in the case
documented in Ray Brady's report on the CBS Evening News, private sector employ-
ers consider source tax compliance extremely difficult. The American Payroll Asso-



50

ciation and Tax Executives Institute have considerable expertise in this area to pro-
vide to the Subcommittee.

Rather than seeing the present practice of a small number of states as a clear
and present danger to western civilization as we know it, left unaddressed by a
higher legislature, the Congress, rational state legislative behavior will lead to an
increasing number of states initiating an aggressive source tax in retaliation, if
nothing else, for the egregious behavior of the California Franchise Tax Board. Why
should any state with the authority (only New Jersey and Iowa among the states
with a broad based income tax are specifically prohibited from source taxing) allow
its departing citizens to leave unencumbered when citizens, late of California, are
umbilicated to Sacramento. Several state legislatures (Arizona, Colorado, Florida,
Louisiana, Nevada, New Mexico, Texas and Washington) have enacted legislation to
prevent their state courts from being a party to the enforcement of liens for debts
claimed to be owed to other states based on pension source tax. This too is rational
state solon behavior but detrimental to the basic philosophy of voluntary compli-
ance.

Left unaddressed by Congress, as the legislature of last resort, this issue will be-
come more and more salient. You may have newly arrived constituents who are not
aroused now, but will be if their former state of residence seeks to tax them using
the source tax. Should this occur they must turn to you as they can no longer par-
ticipate in a meaningful way in the civic life of their former state(s). In addition to
paying taxes to a jurisdiction where they no longer consume state services, the new
state of residence where they currently do consume resources must do without the
economic benefit the source taxed individual would otherwise provide it in various
taxes and greater consumer spending.

In its opportunistic application, the source tax has created a litany of horror sto-
ries well recounted in the RESIST of America testimony in June of 1991 and July
1993 and quite likely today. While these case histories are happening primarily in
a few western states now, the experience will spread. Increased labor mobility, one
of the great engines of the American economy, provides ripe targets, faster comput-
ers combing larger databases provide the means, and the states' appetites for reve-
nue to supply essential and mandated services provides ample motive. This problem
will not go away. Just the opposite is true. Rational state legislators believe the old
tax theory, "don't tax thee, don't tax me, tax the man behind the tree" who just hap-
pens to be over the state line.

Some trade unions and progressive tax theorists believe state source taxes are a
device for the income tax states to punish the non-income tax states. This conten-
tion is worthy of closer examination. The California-Nevada and New York-Florida
retirement trails are well worn but they are not the only paths, and there is no one
reason why people migrate in retirement.

Before state tax administrations require the exchange of computer tapes with
every other jurisdiction, this Committee could look over tne horizon and save ration-
al actors from the logical consequences of their actions. Efficient administration of
state government is consistent with the collection of taxes on the income of current
resident citizens but inefficient and inherently discriminatory when aimed at some,
easily found, former residents now domiciled in other states. On behalf of our mem-
bers in every state and district, NARFE urges you and the Subcommittee to favor-
ably report H.R. 394.

Again, I thank you, Mr. Chairman, for the chance to present the convention estab-
lished views of NARFE members.



51



STATE SOURCE TAX FACT SHEET



States Which Are Known to Tax Nonresidenu
on Federal Annuities Earned There

California: State law explidlly imposes taxes on the
retirement income of nonresidenu who earned the right
such income within California's boundaries.



Idaho: State law includes a provision under which
nonresidents are subject to tax for "[ajny ..income which
is not spedfically exempt under the IRS code. '

Oregon: The state taxes nonresidents retirement income
\o the extent the right to receive it was earned as a result
of personal services performed within its boundaries.



States Which Do Not Tax Nonresidents
on Federal Annuities Earned There

Colorado: The stale generajlv does tax nonresidents on
income they earn within its border, although
nonresidents' pension income is excluded from taxable
income.

Connecticut: Income distributed from a qualified pension
or retirement plan to nonresidents is exempt from suie
taxation: Note: a nonqualified pension or retirement plan
is not exempt

Delaware: 'If the taxpayer is now not a resident of
Delaware and receives a pension from the Federal
government, the pension is not taxable." Delaware Tax
Newsgram

Hawaii: State law allows exclusions from taxable income
for any "public" retirement system and "[aJny
compensation received in the form of a pension for past
services.

Iowa: SF 2074 was passed during the 1994 legislative
session and signed by Governor Branstad. As a result of
the enactment of this bill. Iowa becomes only the second
state (New Jersey being the other) to relinquish its right
to collect source lax Iowa was previously an aggressive
source taxing

Nebraska: "Nonresidents who are receiving pensions,
deferred compensation, or annuities based on service
performed within Nebraska in an earlier lax year do not



hav



from Nebraska



New Jersey: The income of a nonresident individual
shall not include income derived from sources within NJ
from pensions and annuities as set forth in New Jersey