H. Rept. 104-389 - STATE TAXATION OF PENSION INCOME ACT OF 1995104th Congress (1995-1996)
Committee Report
Hide OverviewReport text available as:
- TXT
- PDF (PDF provides a complete and accurate display of this text.) Tip ?
104th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 104-389
_______________________________________________________________________
STATE TAXATION OF PENSION INCOME ACT OF 1995
_______________________________________________________________________
December 7, 1995.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Gekas, from the Committee on the Judiciary, submitted the following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 394]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to whom was referred the bill
(H.R. 394) to amend title 4 of the United States Code to limit
State taxation of certain pension income, having considered the
same, report favorably thereon with an amendment and recommend
that the bill as amended do pass.
CONTENTS
Page
The Amendment.................................................... 2
Purpose and Summary.............................................. 2
Background and Need for the Legislation.......................... 3
Hearings......................................................... 6
Committee Consideration.......................................... 7
Vote of the Committee............................................ 7
Committee Oversight Findings..................................... 8
Committee on Government Reform and Oversight Findings............ 8
New Budget Authority and Tax Expenditures........................ 8
Congressional Budget Office Estimate............................. 8
Inflationary Impact Statement.................................... 10
Section-by-Section Analysis and Discussion....................... 10
Changes in Existing Law Made by the Bill, as Reported............ 13
Dissenting Views................................................. 16
The amendment is as follows:
Strike out all after the enacting clause and insert in lieu
thereof the following:
SECTION 1. LIMITATION ON STATE INCOME TAXATION OF CERTAIN PENSION
INCOME.
(a) Amendment.--Chapter 4 of title 4, United States Code, is amended
by adding at the end the following:
``Sec. 114. Limitation on State income taxation of certain pension
income
``(a) No State may impose an income tax on any retirement income of
an individual who is not a resident or domiciliary of such State (as
determined under the laws of such State).
``(b) For purposes of this section--
``(1) The term `retirement income' means any income from--
``(A) a qualified trust under section 401(a) of the
Internal Revenue Code that is exempt under section
501(a) of such Code from taxation;
``(B) a simplified employee pension as defined in
section 408(k) of such Code;
``(C) an annuity plan described in section 403(a) of
such Code;
``(D) an annuity contract described in section 403(b)
of such Code;
``(E) an individual retirement plan described in
section 7701(a)(37) of such Code;
``(F) an eligible deferred compensation plan (as
defined in section 457 of such Code);
``(G) a governmental plan (as defined in section
414(d) of such Code);
``(H) a trust described in section 501(c)(18) of such
Code; or
``(I) any plan, program or arrangement described in
section 3121(v)(2)(C) of such Code, if such income is
part of a series of substantially equal periodic
payments (not less frequently than annually) made for--
``(i) the life or life expectancy of the
recipient (or the joint lives or joint life
expectancies of the recipient and the
designated beneficiary of the recipient), or
``(ii) a period of not less than 10 years.
The periodic payment rule under subparagraph (I) shall not
apply to a plan, program, or arrangement which would (but for
sections 401(a)(17) and 415 of such Code) be described in
subparagraph (A). Such term includes any retired or retainer
pay of a member or former member of a uniform service computed
under chapter 71 of title 10, United States Code.
``(2) The term `income tax' has the meaning given such term
by section 110(c).
``(3) The term `State' includes any political subdivision of
a State, the District of Columbia, and the possessions of the
United States.
``(c)(1) Subsection (a) shall not apply to any retirement income
which is received by an individual during the calendar year of the loss
of nationality of the individual under chapter 3 of title 3 of the
Immigration and Nationality Act for reasons of avoiding taxation by the
United States or any State (as determined by the Attorney General), or
during any succeeding calendar year.
``(2) Notwithstanding any other provision of law, not later than 30
days after the close of each calendar quarter, the Attorney General
shall publish in the Federal Register the name of each individual with
respect to whom a loss of nationality described in paragraph (1) occurs
during such quarter.
``(d) Nothing in this section shall be construed as having any effect
on the application of section 514 of the Employee Retirement Income
Security Act of 1974.''.
(b) Conforming Amendment.--The table of sections for chapter 4 of
title 4, United States Code, is amended by adding at the end the
following:
``114. Limitation on State income taxation of certain pension
income.''.
(c) Effective Date.--The amendments made by this section shall apply
to amounts received after December 31, 1995.
Purpose and Summary
The purpose of H.R. 394 is to prohibit State taxation of
certain retirement income of a nonresident of the taxing State.
It would protect all income received from pension plans
recognized as ``qualified'' under the Internal Revenue Code. It
would also exempt income which is received under deferred
compensation plans that are ``non-qualified'' retirement plans
under the tax code, but which meet additional requirements.
To be exempt from State taxation, distributions from non-
qualified plans will have to be made in substantially equal
installments, not less frequently than annually, over the
lifetime of the beneficiary or at least ten years. In addition,
the bill protects from State taxation any ``excess benefit''
plans that are set up because a qualified plan (1) exceeds the
$150,000 in employee compensation that may be considered in
qualifying for such a plan, (2) exceeds the present limit on
the amount of allowable benefits from a defined benefit plan,
or (3) exceeds the present limit on contributions to a defined
contribution plan.
Background and Need for the Legislation
It is settled Constitutional law that States have the power
to tax personal income on the basis of (1) the residence of the
taxpayer within the taxing State,\1\ or (2) the source of the
income originating within that jurisdiction.\2\ While a
resident may be taxed on all of his or her income, regardless
of origin, therefore, a nonresident may be taxed only on income
derived from past or present employment within the taxing
state.
\1\ New York ex rel. Cohn v. Graves, 300 U.S. 308 (1937); Lawrence
v. State Tax Comm'n, 286 U.S. 276 (1932).
\2\ Shaffer v. Carter, 252 U.S. 37 (1920).
---------------------------------------------------------------------------
With respect to the source-based theory of taxation, the
United States Supreme Court has declared:
In our system of government the States have general
dominion, and, saving as restricted by particular
provisions of the Federal Constitution, complete
dominion over all persons, property, and business
transactions within their borders; they assume and
perform the duty of preserving and protecting all such
persons, property and business, and, in consequence,
have the power normally pertaining to governments to
resort to all reasonable forms of taxation in order to
defray the governmental expenses.\3\
\3\ Id. at 50.
---------------------------------------------------------------------------
[W]e deem it clear, upon principle as well as
authority, that just as a State may impose general
income taxes upon its own citizens and residents whose
persons are subject to its control, it may, as a
necessary consequence, levy a duty of like character,
and not more onerous in effect, upon incomes accruing
to nonresidents from their property or business within
the State, or their occupations carried on therein. * *
* \4\
\4\ Id. at 52.
States have typically followed the Federal practice of
deferring income taxes on pension contributions and related
investment earnings until they are distributed to the taxpayer
after his or her retirement. Objections arise, however, when at
that point the retiree has relocated to another State. One
State in particular, California, has aggressively sought to tax
annuity payments made to retirees who have moved elsewhere.
Kansas, Louisiana and Oregon also have the statutory right to
tax all types of nonresident pension income. Colorado and New
York allow some taxation over a de minimis amount, and at least
nine other States, including Connecticut, Delaware, Illinois,
Massachusetts, Michigan, Minnesota, Pennsylvania, Vermont and
Wisconsin, can tax only non-qualified or other limited types of
deferred compensation. A number of other States may have
concluded that it is administratively impossible or simply not
cost-effective to attempt to tax nonresident pension income.
According to the Federal of Tax Administrators, an
association of the principal tax administration agencies in
each of the 50 States, the District of Columbia, and New York
City, all States with a broad-based income tax provide a tax
credit to residents for income taxes paid to another State on
income which is also included in the tax base on the State of
residence. This system of reciprocal credits or, in some
instances, other reciprocal agreements, generally prevents
retirement and other income from being taxed in both the State
in which it is earned and in the State of residence.\5\
\5\ Testimony of Harley T. Duncan, State Taxation of Nonresidents'
Pension Income: Hearing Before the Subcommittee on Commercial and
Administrative Law of the House Committee on the Judiciary, 104th
Congress, 1st Session, June 28, 1995 [hereinafter Subcommittee
Hearing], p. 55.
---------------------------------------------------------------------------
If the retiree has moved to a State that does not impose an
income tax, however, there is no system of income tax credits
to offset payments made to another State.\6\ Residents of such
States who are subject to a pension source tax imposed by
another State will clearly pay more in taxes than they would in
the absence of source taxation.
\6\ Forty-one States and the District of Columbia levy a broad-
based personal income tax. New Hampshire and Tennessee levy an income
tax on limited types of interest, dividend and capital gains income.
Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming do
not levy a personal income tax. Testimony of Harley T. Duncan,
Subcommittee Hearing, p. 55, n. 4.
---------------------------------------------------------------------------
The opponents of pension source taxes condemn this practice
as ``taxation without representation,'' and cite many examples
of nonresident pensioners who have been adversely affected by
the frequently unexpected imposition of source taxes on their
pensions.\7\ They strongly believe that nonresidents should not
be taxed if they receive no current benefits from their tax
payments.
\7\ See generally the testimony of William C. Hoffman, Subcommittee
Hearing, pp. 38-47.
---------------------------------------------------------------------------
A response to the ``taxation without representation''
argument was provided by Professor James C. Smith, who observed
that:
[T]his misses the mark because it looks to the wrong
point on the time continuum. Instead, the time during
which the income was earned is the key, The State
provided the nonresident with ample benefits * * *
while the income was being earned in the State. The
fact that the income is taxed at a time when the
individual is no longer receiving benefits from a State
does not mean that such benefits were never received.
[D]eferral of recognition is a matter of legislative
grace. The State could have taxed the pension rights
prior to retirement, when they were earned. Had it done
so, thereby recouping a fair share of the costs of
government while the taxpayer was still a resident and
still employed, no objection on the basis of lack of
benefit or fairness could conceivably have arisen.\8\
\8\ Testimony of James C. Smith, Subcommittee Hearing, p. 25.
Private sector employers are concerned about the
complexities of record-keeping necessitated by source taxation,
particularly as more States attempt to tax their absent
retirees. In many instances the records do not exist that would
enable them to re-create their current and former employees'
retirement account histories, many of which involve rollovers
from previous employers' plans. More complications arise when
the retired nonresident taxpayer has previously worked in
several different States, each of which seeks to impose a
source tax. Also, there are the problems of complying with the
requirement that a State must exclude from its pension tax any
investment income accumulated while the taxpayer was a
nonresident of the taxing State. The employers also stress the
enormous and perhaps unmanageable tax filing burden that
widespread source taxation would place upon their retirees. The
Subcommittee was told by Randall L. Johnson, representing the
Profit Sharing Council of America and other employer groups,
---------------------------------------------------------------------------
that:
[R]etirees can be taxed on the same income by
multiple jurisdictions, and retirees, employers, and
plan administrators face insoluble record keeping,
allocation, and apportionment problems. Unless States
are prohibited from taxing nonresidents on their
retirement income, increasing numbers of retirees will
be overtaxed, and more and more retirees, employers and
plan administrators may be forced to endure an endless
and mind-boggling tax-accounting nightmare. A
nonresident retiree is in a weak position from which to
contest a tax assessment made by a distant State,
especially when he is unfamiliar with the State's tax
laws and unable to obtain any records that might
support his position.\9\
\9\ Testimony of Randall L. Johnson, Subcommittee Hearing, p. 60.
The Committee fully recognizes the rights of States to
raise revenues in a manner of their own choosing and that
Congress should restrict State taxing authority only when such
action is clearly necessary. The Committee concludes, however,
that the practice of taxing nonresidents' pension income
represents such a case. Despite the legal and conceptual bases
for pension source taxes, the burdens imposed on retirees,
especially those with relatively low incomes, are all too often
simply unreasonable.
Congress has the clear authority under the commerce clause
of the Constitution \10\ to prohibit State taxation of
nonresidents' pension income. The activity that is being
regulated under H.R. 394 is the economic relationship between a
State and its former resident. The transactions at issue are
both within the stream of interstate commerce. Both the person
who has retired and the pension payments have crossed State
lines.
\10\ U.S. Const. art. I, Sec. 8, cl. 3.
---------------------------------------------------------------------------
Under H.R. 394 as introduced, States were prohibited from
imposing an income tax on any retirement income of an
individual who is not a resident or domiciliary of such State.
Retirement income was defined to include any income from a
specified list of qualified plans as well as non-qualified
deferred compensation arrangements and retirement pay received
by former members of the armed forces and other specified
uniformed services.
At the October 19, 1995 Subcommittee markup of H.R. 394,
Mr. Nadler offered an amendment to eliminate all non-qualified
plans from the protection of the bill. This amendment was
defeated by a vote of 3 to 7. An amendment by Mr. Reed was
adopted by voice vote striking the original text of section
114(b)(I) and substituting language allowing favorable
treatment for non-qualified plans only if they provide for
substantially equal periodic payments, made not less often than
annually, over the life of the beneficiary or at least 10
years. In addition, Mr. Reed's amendment would allow favorable
treatment of ``excess benefit'' plans that are set up because
the qualified plan in a particular instance (1) exceeds the
$150,000 ceiling in compensation that may be considered in
qualifying for a plan (26 U.S.C. 401(a)(17)), (2) exceeds the
present limits on the amount of allowable benefits from a
defined benefit plan or (3) exceeds the present limit on
contributions to a defined contribution plan (26 U.S.C. 415).
By voice vote the bill was reported favorably to the full
Committee in the form of a single amendment in the nature of a
substitute incorporating the amendment adopted during the
markup.
At the full Committee markup on October 31, 1995, an
amendment by Mr. Nadler was adopted by voice vote that would
deny the exemption from State taxation to any retirement income
which is received by an individual who has left the United
States and renounced his citizenship, and is found by the
Attorney General to have renounced his citizenship in order to
avoid taxation by the United States or any State. By a vote of
12 to 17 an amendment by Mr. Conyers was defeated that would
have made the Act inapplicable unless the provisions of Title I
of the Unfunded Mandates Reform Act of 1995 \11\ were complied
with. By a vote of 9 to 21 a second amendment by Mr. Conyers
was defeated that would place a $100,000 cap on the amount of
pension payments that could be received by a nonresident
retiree each year without being subject to source taxation. By
voice vote, the Committee favorably reported H.R. 394, with a
single amendment in the nature of a substitute.
\11\ Pub. L. No. 104-4; 109 Stat. 48.
---------------------------------------------------------------------------
Hearings
On June 28, 1995, the Committee's Subcommittee on
Commercial and Administrative Law held a hearing on H.R. 394,
H.R. 371, and H.R. 744, three bills regarding state taxation of
nonresidents' pension income. Testimony was received from
Representatives Barbara F. Vucanovich and Bob Stump; Senator
Harry Reid; Professor James C. Smith, University of Georgia
School of Law; William C. Hoffman, President, Retirees to
Eliminate State Income Source Tax (RESIST); W. Christopher
Farrell, Legislative Representative, National Association of
Retired Federal Employees (NARFE); Harley T. Duncan, Executive
Director, Federation of Tax Administrators; and Randall L.
Johnson, Director of Benefits Planning, Motorola, Inc., on
behalf of The American Council of Life Insurance, The
Association of Private Pension and Welfare Plans, The Committee
on State Taxation, The ERISA Industry Committee, and The Profit
Sharing Council of America.
Committee Consideration
On October 19, 1995, the Subcommittee on Commercial and
Administrative Law met in open session and ordered reported the
bill H.R. 394, as amended, by a voice vote, a quorum being
present. On October 31, 1995, the Committee met in open session
and ordered reported the bill H.R. 394 with amendment by voice
vote, a quorum being present.
Vote of the Committee
There were two roll callvotes on amendments offered during
full Committee markup:
1. An amendment by Mr. Conyers, to provide that none of the
provisions in this legislation take effect unless the Unfunded
Mandates Reform Act is complied with. The Conyers amendment was
defeated by a roll call vote of 12-17.
YEAS NAYS
Mr. Conyers Mr. Hyde
Mrs. Schroeder Mr. Moorehead
Mr. Frank Mr. Gekas
Mr. Schumer Mr. Coble
Mr. Boucher Mr. Smith (TX)
Mr. Reed Mr. Schiff
Mr. Nadler Mr. Gallegly
Mr. Scott Mr. Canady
Mr. Watt Mr. Inglis
Mr. Becerra Mr. Goodlatte
Mr. Serrano Mr. Hoke
Ms. Lofgren Mr. Bono
Mr. Heineman
Mr. Bryant (TN)
Mr. Chabot
Mr. Flanagan
Mr. Barr
2. An amendment by Mr. Conyers, providing for a $100,000
cap in retirement income. The Conyers amendment was defeated by
a roll call vote of 9-21.
YEAS NAYS
Mr. Conyers Mr. Hyde
Mrs. Schroeder Mr. Moorehead
Mr. Frank Mr. McCollum
Mr. Schumer Mr. Gekas
Mr. Nadler Mr. Coble
Mr. Scott Mr. Smith (TX)
Mr. Watt Mr. Schiff
Mr. Becerra Mr. Gallegly
Mr. Serrano Mr. Canady
Mr. Inglis
Mr. Goodlatte
Mr. Hoke
Mr. Bono
Mr. Heineman
Mr. Bryant (TN)
Mr. Chabot
Mr. Flanagan
Mr. Barr
Mr. Boucher
Mr. Reed
Ms. Lofgren
Committee Oversight Findings
In compliance with clause 2(l)(3)(A) of rule XI of the
Rules of the House of Representatives, the Committee reports
that the findings and recommendations of the Committee, based
on oversight activities under clause 2(b)(1) or rule X of the
Rules of the House of Representatives are incorporated in the
descriptive portions of this report.
Committee on Government Reform and Oversight Findings
No findings or recommendations of the Committee on
Government Reform and Oversight were received as referred to in
clause 2(l)(3)(D) of rule XI of the Rules of the House of
Representatives.
New Budget Authority and Tax Expenditures
Clause 2(l)(3)(B) of House rule XI is inapplicable because
this legislation does not provide new budgetary authority or
increased expenditures.
Congressional Budget Office Cost Estimate
In compliance with clause 2(l)(C)(3) or rule XI of Rules of
the House of Representatives, the Committee sets forth, with
respect to H.R. 394, the following estimate and comparison
prepared by the Director of the Congressional Budget Office
under section 403 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, December 1, 1995.
Hon. Henry J. Hyde,
Chairman, Committee on the Judiciary,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
reviewed H.R. 394, a bill to amend title 4 of the United States
Code to limit state taxation of certain pension income, as
ordered reported by the House Committee on the Judiciary on
October 31, 1995. We estimate that enacting this bill would
have no direct effect on federal spending or revenues.
Therefore, pay-as-you-go procedures would not apply. CBO
estimates that enacting H.R. 394 would result in a net
nationwide cost to state governments, in the form of lost tax
revenues, totaling at least $25 million per year.
H.R. 394 would prohibit a state from taxing the retirement
income of individuals who are no longer residing in that state.
Based on information from the Federation of Tax Administrators
and from the departments of revenue in 16 states, CBO estimates
that this limitation on states' taxing authority would have two
primary effects:
States that tax retirement income of nonresidents would
lose revenues. Currently, 16 states tax nonresidents on some
portion of the retirement income affected by this bill. These
states generate at least $70 million in revenue annually from
these sources; all of these revenues would be forgone under the
bill. Most of the losses would be concentrated in a few states.
Revenue losses could be higher, however, because of the
bill's impact on the taxation of certain types of deferred
compensation. Most of the 16 states were not able to isolate
this particular income in their databases and, therefore, could
not provide a dollar estimate of revenue from this source.
Based on figures available from a few small states, CBO has
included within the $70 million about $10 million in revenue
losses that would stem from not taxing this affected deferred
compensation income.
States that offer their residents credit for taxes paid to
other states on retirement income would realize an increase in
tax revenue. CBO estimates that 39 states and the District of
Columbia extend a total of at most $45 million annually in such
credit. Of these, the states that currently offer this tax
credit and that are popular retirement destinations stand to
gain the most.
The extent to which one state's revenue gain would offset
another state's revenue loss depends on whether the taxed
nonresident currently lives in a state that offers a tax
credit. Take, for example, an individual who has worked 20
years for the State of California and retires to New Mexico.
New Mexico taxes the retirement income of its residents, but,
to prevent double taxation, also offers a tax credit for such
taxes paid to other states. Under current law, the retiree
would owe California taxes on the pension income and, in
return, would be able to deduct that amount from the taxes owed
to New Mexico. Under H.R. 394, California would lose its power
to tax the nonresident retiree, and the retiree would no longer
need to claim that credit. While the individual's total tax
liability would thus remain unchanged, New Mexico would realize
an increase in tax revenue equal to the amount of the tax
credit it previously allowed.
In contrast, consider a similar California employee who
retires to Nevada. Nevada has no personal income tax, and
therefore, offers no tax credits. Under current law, the
retiree owes no income tax to Nevada but owes California taxes
on the pension income. Under H.R. 394, California would be
denied this tax revenue, but the Nevada state government would
receive no benefit. Rather, California's lost revenue would
become a dollar-for-dollar decrease in the retiree's tax
liability.
Since most affected retirees live in states that offer
credit for these types of taxes, CBO estimates that the bulk of
H.R. 394's impact would be to shift revenues among states. We
based our estimate of the magnitude of this shift on retiree
migration data from several of the most heavily affected
states. These data indicated the proportion of residents who
retire to states that offer tax credits. In our calculation we
assumed that all retirees due a credit for taxes paid to other
states currently claim that credit. To the extent that this is
not the case, the shift in revenues resulting from the bill
would be lower, and the overall net cost to states would be
higher.
The net overall cost of the bill to state governments would
stem primarily from affected retirees who live in states that
do not tax personal income or offer such tax credits. Many of
these nontaxing states tend to be popular retirement
destinations.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Karen McVey.
Sincerely,
Paul Van de Water
(For June E. O'Neill, Director).
Inflationary Impact Statement
Pursuant to clause 2(l)(4) of rule XI of the Rules of the
House of Representatives, the Committee estimates that H.R.
2064 will have no significant inflationary impact on prices and
costs in the national economy.
Section-by-Section Analysis
section 1(a) of the act
Section 1(a) of H.R. 394 amends chapter 4 of title 4,
United States Code, by adding at the end thereof a new section
114.
section 114 of title 4
The new section 114 of title 4 creates a limitation on
State income taxation of certain pension income. Section 114(a)
establishes a general rule prohibiting any State from imposing
an income tax on ``any retirement income'' of an individual who
is not a ``resident'' or ``domiciliary'' of the taxing State.
The determination of an individual's residence or domicile for
the purposes of this restriction would be made in accordance
with the laws of the taxing State.
Section 114(b) defines various terms used in subsection
(a):
Paragraph (1) defines the term ``retirement income'' as
income from any of the following:
(A) A qualified trust under section 401(a) of the Internal
Revenue Code (``the Code'') that is exempt from taxation under
section 501(a) of the Code. ``Qualified'' plans are the
traditional plans maintained by employers, including self-
employed individuals, which provide retirement income to
employees. They include both defined benefit and defined
contribution plans. They are afforded special tax treatment
under the Code in that (1) employer contributions are not
taxable to employees until benefits are actually distributed;
(2) employer and employee contributions to such plans are
deductible within certain limits; and (3) income earned by
qualified plans assets is exempt from tax while such assets are
held in trust.
A section 401(k) plan is simply one form of a qualified
defined contribution plan with certain limits on how much may
be contributed annually on a ``before tax'' basis.
(B) A simplified employee pension (``SEP'') as defined in
section 408(k) of the Code. These plans are ``super Individual
Retirement Accounts'' in which employees, including self-
employed individuals, contribute to IRAs on behalf of their
employees. A SEP is a type of plan which falls somewhere
between a qualified plan and a regular IRA. Because the
majority of a particular employer's employees must be covered
under a SEP, increased contributions (as compared to regular
IRAs) are allowed. Many smaller employers utilize SEPs because
they have lesser record keeping requirements than do qualified
plans.
(C) An annuity plan described in section 403(a) of the
Code. These plans are the functional equivalent of ``qualified
plans'' (section 401(a) of the Code; see (A) hereinabove),
except they are funded by annuity contracts.
(D) An annuity contract described in section 403(b) of the
Code. These are tax sheltered annuities which utilize insurance
contracts to fund a special type of pension arrangement
available to employees of public educational organizations and
certain other tax exempt organizations.
(E) An individual retirement plan described in section
7701(a)(37) of the Code. These are Individual Retirement
Accounts (IRAs), a personal retirement savings program which
allows eligible employees and self-employed individuals to make
annual contributions of both deductible and non-deductible
payments to a trust or other arrangement. The income on
invested accounts is tax-deferred. Distributions, to the extent
taxable, are taxed upon receipt.
(F) An eligible deferred compensation plan as defined in
section 457 of the Code. These plans are set up by State and
local governments and permit employees to contribute the lesser
of 25% of compensation or $7,500 to the plan with pre-tax
dollars. Amounts are taxed to employees when received.
(G) A governmental plan as defined in section 414(d) of the
Code. This is a plan established and maintained for its
employees by the government of the United States, a State or a
political subdivision thereof, or any agency or instrumentality
of any of the foregoing.
(H) A trust described in section 501(c)(18) of the Code.
This is a trust created before June 25, 1959, which is part of
a pension plan meeting specified requirements and funded only
by contributions of employees.
(I) Any plan, program, or arrangement described in section
3121(v)(2)(C) of the Code, provided such income is part of a
series of substantially equal periodic payments made for the
life or life expectancy of the recipient (or for the joint
lives or joint life expectancies of the recipient and the
designated beneficiary of the recipient) or for a period of not
less than 10 years. Payments under such an instrument may not
occur less frequently than annually.
The periodic payment rule established by subparagraph (I)
shall not apply to a plan, program, or arrangement which would,
but for sections 401(a)(17) and 415 of the Code, be described
in subparagraph A.
The effect of subparagraph (I) would be to exclude from
State taxation certain amounts of income paid under non-
qualified deferred compensation arrangements, that is, plans
which are not recognized as ``qualified'' under the tax code.
These are unlimited, flexible arrangements without contribution
limits, funding requirements, or limits on payout provisions.
The availability and use of such arrangements is limited to a
small proportion of the work force. Payments made by employers
to non-qualified plans are includable in the employee's income
in the year in which made, regardless of whether the employee
has a right to distribution. Employers often do not fund non-
qualified plans, therefore, until they are ready to make actual
distributions to the recipients.
Subparagraph (I) also protects from State taxation ``excess
benefit'' plans that are set up because a qualified plan in a
particular instance (1) would exceed the $150,000 ceiling in
annual employee compensation that employers may take into
account in determining contributions made to or benefits paid
from a qualified plan (section 401(a)(17)); or (2) would exceed
the present limits on the amount of allowable benefits from a
defined benefit plan or the present limits on the amount of
allowable contributions to a defined contribution plan (section
415). Defined benefit plans give employees a special benefit at
retirement, commonly based on a percentage of the employee's
compensation and number of years of service to the employer.
The employer will annually contribute an amount that is
actually required to fund the benefit at retirement. Defined
contribution plans specify the amount of contribution that is
to be made annually. This exemption applies without regard to
whether the periodic payment requirements of subparagraph (I)
are met.
Under subparagraph (I) the term ``retirement income'' is
also meant to include any retirement or retainer pay of a
member or former member of a uniformed service computed under
chapter 71 (Computation of Retired Pay) of title 10 (Armed
Forces) of the United States Code. ``Uniformed services'' means
the armed forces (the Army, Navy, Air Force, Marine Corps and
Coast Guard), the commissioned corps of the National Oceanic
and Atmospheric Administration, and the commissioned corps of
the Public Health Service.
Paragraph (2) defines the term ``income tax'' with
reference to section 110(c) of the Internal Revenue Code, that
is, any tax levied on, or with respect to, or measured by net
income, gross income or gross receipts.
Paragraph (3) defines ``State'' to include any political
subdivision of a State, the District of Columbia, and the
possessions of the United States.
The limitations set forth in section 114(a) shall not apply
to retirement income received by an individual during the
calendar year of the loss of nationality of that individual
under chapter 3 of title 3 of the Immigration and Nationality
Act, or any succeeding calendar year, if the loss of
citizenship was for the purpose of avoiding taxation by the
United States or any State. The reason for the individual's
renunciation of citizenship shall be determined by the Attorney
General. This exception will allow a State to continue to tax
the pension income of an individual who becomes an expatriate
and renounces American citizenship simply in order to avoid
taxation.
Section 114(c)(2) requires the Attorney General to publish
in the Federal Register within 30 days of the close of each
calendar quarter the names of persons who have relinquished
their citizenship in the preceding quarter under circumstances
described in paragraph (1).
Section 114(d) provides that nothing in this section shall
be construed as having any effect on the application of section
514 of the Employee Retirement Income Security Act of 1974,
which with certain exceptions supersedes State law with regard
to employment benefit plans.\12\ This would prohibit a State
from imposing any additional reporting requirements upon
employers with respect to retirement plans.
\12\ 29 U.S.C. 1144; Pub. L. No. 93-406.
---------------------------------------------------------------------------
section 1(b) of the act
Section 1(b) of H.R. 394 is a conforming amendment revising
the table of sections for chapter 4 of title 4 to reflect the
addition of new section 114.
section 1(c) of the act
Section 1(c) of H.R. 394 provides that proposed 4 U.S.C.
would apply to amounts of retirement income received after
December 31, 1995.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3 of rule XIII of the Rules of the
House of Representatives, changes in existing law made by the
bill, as reported, are shown as follows (new matter is printed
in italic, existing law in which no change is proposed is shown
in roman):
TITLE 4, UNITED STATES CODE
* * * * * * *
CHAPTER 4--THE STATES
Sec.
101. Oath by members of legisatures and officers.
* * * * * * *
114. Limitation on State income taxation of certain pension income.
* * * * * * *
Sec. 114. Limitation on State income taxation of certain pension income
(a) No State may impose an income tax on any retirement
income of an individual who is not a resident or domiciliary of
such State (as determined under the laws of such State).
(b) For purposes of this section--
(1) The term ``retirement income'' means any income
from--
(A) a qualified trust under section 401(a) of
the Internal Revenue Code that is exempt under
section 501(a) of such Code from taxation;
(B) a simplified employee pension as defined
in section 408(k) of such Code;
(C) an annuity plan described in section
403(a) of such Code;
(D) an annuity contract described in section
403(b) of such Code;
(E) an individual retirement plan described
in section 7701(a)(37) of such Code;
(F) an eligible deferred compensation plan
(as defined in section 457 of such Code);
(G) a governmental plan (as defined in
section 414(d) of such Code);
(H) a trust described in section 501(c)(18)
of such Code; or
(I) any plan, program or arrangement
described in section 3121(v)(2)(C) of such
Code, if such income is part of a series of
substantially equal periodic payments (not less
frequently than annually) made for--
(i) the life or life expectancy of
the recipient (or the joint lives or
joint life expectancies of the
recipient and the designated
beneficiary of the recipient), or
(ii) a period of not less than 10
years.
The periodic payment rule under subparagraph (I) shall
not apply to a plan, program, or arrangement which
would (but for sections 401(a)(17) and 415 of such
Code) be described in subparagraph (A). Such term
includes any retired or retainer pay of a member or
former member of a uniform service computed under
chapter 71 of title 10, United States Code.
(2) The term ``income tax'' has the meaning given
such term by section 110(c).
(3) The term ``State'' includes any political
subdivision of a State, the District of Columbia, and
the possessions of the United States.
(c)(1) Subsection (a) shall not apply to any retirement
income which is received by an individual during the calendar
year of the loss of nationality of the individual under chapter
3 of title 3 of the Immigration and Nationality Act for reasons
of avoiding taxation by the United States or any State (as
determined by the Attorney General), or during any succeeding
calendar year.
(2) Notwithstanding any other provision of law, not later
than 30 days after the close of each calendar quarter, the
Attorney General shall publish in the Federal Register the name
of each individual with respect to whom a loss of nationality
described in paragraph (1) occurs during such quarter.
(d) Nothing in this section shall be construed as having any
effect on the application of section 514 of the Employee
Retirement Income Security Act of 1974.
* * * * * * *
DISSENTING VIEWS
We oppose H.R. 394 in its present form. Although we are
sensitive to the burdens imposed on middle income retirees when
a state chooses to tax former residents on their pension
income, we favor a far more balanced approach to the problem
than is evidenced by H.R. 394.
In particular, we would note that last Congress the
Judiciary Committee developed a fair and reasonable bipartisan
response to the very difficult problem presented by state
taxation of non-resident pensions. That legislation (H.R. 546)
would have prevented states from collecting taxes on non-
resident pensions in an amount up to $30,000 per year if
derived from a ``qualified'' pension plan. H.R. 546 was
approved without any objection by the Judiciary Committee and
the full House, before dying in the Senate in the closing days
of the 103d Congress.\1\ H.R. 546 would have protected the vast
majority of retirees from any tax requirements while allowing
states to continue collecting taxes from wealthy residents who
set up elaborate tax avoidance schemes.
\1\ H.R. 546, as introduced by Rep. Unsoeld (D-WA) on January 21,
1993, exempted all periodic pension payments from state taxation while
providing a one-time exemption of $25,000 for lump sum payments. The
bill was revised at Committee pursuant to an amendment offered by Rep.
Synar (D-OK) to exempt all payments derived from ``qualified'' pension
plans below $30,000 per year. See H.R. Rep. No. 776, 103d Cong. 2d
Sess. (H.R. 546).
---------------------------------------------------------------------------
Unfortunately, the bill before us leaves out the most
important protections which would have been granted to the
states last Congress. Specifically, we would note three flaws
in the legislation before us--failure to exclude ``non-
qualified'' pension plans from the coverage of the legislation;
failure to limit the tax exemption to a specified dollar amount
of pension income; and failure to subject the legislation to
the recently adopted ``unfunded mandate'' law.
1. Failure to exclude ``non-qualified'' pension plans
Unlike H.R. 546, the legislation before us would apply to
many ``non-qualified'' as well as ``qualified'' pension
plans.\2\ Non-qualified plans are not recognized as pension
plans under federal law, and are not subject to any rules,
regulations, guidelines or limitations on their use. They are
typically used by a small number of highly compensated
executives to defer taxes on large sums of compensation. No
case has been made that taxing such non-qualified plans is in
any way inequitable or that the states are being overly-
aggressive in taxing such distributions.
\2\ Although the legislation was modified at Subcommittee so that
beneficiaries of certain non-qualified plans could not avoid state
pension tax (e.g., involving certain lump sum distributions or where
payments are not made over at least a 10-year basis), H.R. 394 would
continue to exempt many non-qualified plans from state taxation.
---------------------------------------------------------------------------
By including non-qualified plans in the legislation,
Congress will be opening broad new loopholes for lucrative
compensation arrangements, such as golden parachutes,
partnership buy-outs, and large severance packages. The State
of Illinois notes that ``the inclusion of non-qualified
deferred compensation plans in the bill allows [highly paid
individuals] to evade State income taxes by participating in
these plans during their earning years and moving to a no-tax
State upon retirement.'' \3\ University of Georgia Professor
James Smith also testified that virtually all American workers
participate in some type of qualified plan and that exempting
non-qualified plans creates a significant ``potential for tax
avoidance by highly compensated individuals who funnel amounts
into non-qualified plans in the last years before retirement.''
\4\ At the Subcommittee's hearing, Randall Johnson, Director of
Benefits Planning at Motorola, stated that all 76,000 of their
employees were in qualified pension plans, and that only 400--
or .5% of their employees--were in non-qualified plans.\5\
\3\ Letter from William T. Lundeen, Chief Counsel, Illinois
Department of Revenue to the Honorable Henry J. Hyde, August 25, 1995.
\4\ State Taxation of Nonresidents' Pension Income, Hearing before
the Subcomm. on Comm. and Admin. Law. Comm. on the Judiciary, on H.R.
371, 394, and 744, Serial No. 11, 104th Cong., 1st Sess. (1995), at 33
[hereinafter, ``Subcommittee Hearing''].
\5\ Id. at 66.
---------------------------------------------------------------------------
2. Failure to limit tax exemption to specified dollar amount
H.R. 394 also fails to specify any dollar limit on the
exemption from state income tax for pension income. Last year
the House unanimously agreed on a bill which provided for a
$30,000 cap on pension payments in a given year. The California
Franchise Board estimates that this would have protected over
90% of retirees.\6\
\6\ Letter from Janet Gregor on behalf of California Franchise Tax
Board, to House Judiciary Committee Minority Staff, October 27, 1995.
---------------------------------------------------------------------------
Yet H.R. 394, the legislation approved by the Committee
this Congress fails to include a cap of any kind or any
magnitude. The tax exemption under the bill will apply whether
one earns $10,000 per year or $3,000,000 per year. It is one
thing to protect the vast majority of our citizens from
complicated administrative burdens, but it is another to open
up massive new loopholes which benefit the wealthy, as H.R. 394
does.
3. Failure to subject the legislation to the recently adopted
``unfunded mandate'' rules
The legislation should also be rejected because it
constitutes an unnecessary and unfair unfunded mandate on the
states. (In fact, presently, 20 states tax some form of
nonresident pension tax--California, Kansas, Louisiana, Oregon,
New York, Colorado, Connecticut, Delaware, Illinois, Indiana,
Massachusetts, Michigan, Minnesota, New Mexico, Pennsylvania,
West Virginia, Wisconsin, Vermont, Iowa, and New Jersey.\7\ One
of the very first pieces of legislation taken up by the new
Congress this session was the ``Unfunded Mandates Reform Act of
1995.'' \8\ Many Members spoke with grave concern about the
Congress imposing new financial burdens on the States, and the
unfunded mandates bill responded by creating a series of
procedures and requirements designed to limit adoption of new
unfunded mandates on the states.\9\
\7\ Memorandum from Harley T. Duncan, Executive Director,
Federation of Tax Administrators to Subcomm. on Comm. and Admin. Law,
October 16, 1995.
\8\ Pub. L. No. 104-4 (1995).
\9\ Pursuant to the Unfunded Mandates Reform Act, the authorizing
committees are specifically required to include information about any
unfunded mandates in their legislative reports, the CBO is required to
estimate the costs of the new requirements, and the mandate itself is
subject to a point of order which can only be overcome if a majority of
the Members vote to override it.
---------------------------------------------------------------------------
By limiting the states' ability to raise revenues, H.R. 394
would constitute such an unfunded mandate.\10\ In order to
avoid subjecting H.R. 394 to the unfunded mandate requirements,
the sponsors of the legislation have opted to expedite
consideration so it could take effect before the January 1,
1996 effective date of the unfunded mandate law.\11\ However,
at full committee the Majority rejected an amendment which
would have subjected the legislation to the unfunded mandate
provisions.\12\ In our view, legislative machinations of this
nature only increase voter cynicism about a Congress which
appears all too willing to bend the rules when it suits their
needs.
\10\ In addition to applying to requirements that a state spend its
own funds to meet a federal goal, the term ``unfunded mandate'' can be
construed to include any requirement that a state forego revenues. For
example, under the law, ``direct costs'' are defined to include amounts
by which a state would be prohibited from raising in revenues. See Sec.
421(3)(A)(i).
\11\ When asked during the Subcommittee hearing whether the
legislation might constitute an unfunded mandate, Subcommittee Chairman
Gekas replied: ``Yes, I have that in mind, and we will consider that in
the pre-markup consideration of this legislation.'' Subcommittee
Hearing, supra note 3, at 34.
\12\ An amendment offered by Ranking Member John Conyers, Jr. (D-
MI) would have subjected H.R. 394 to the provisions of the unfunded
mandate law; but was defeated on a 12-17 party line vote.
---------------------------------------------------------------------------
CONCLUSION
We would have preferred to be able to support legislation
which responds to the legitimate concerns of middle-income
retirees without creating a new loophole for non-qualified
persons. Unfortunately, instead of bringing forth the
reasonable and balanced legislation approved by the House last
year, the Majority has brought forward legislation which
unnecessarily impedes the legitimate taxing prerogatives of the
States. By denying states the authority to tax high value, non-
qualified pensions on citizens who relocate, the legislation
will significantly limit the states' ability to raise revenue
and will subject their remaining residents to even greater
taxes.
John Conyers, Jr.
Pat Schroeder.
Howard L. Berman.
Bobby Scott.
Melvin L. Watt.
Xavier Becerra.
Jose E. Serrano.