[Congressional Record Volume 147, Number 29 (Wednesday, March 7, 2001)]
[Extensions of Remarks]
[Page E300]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                      CLARIFICATION OF THE HI TAX

                                 ______
                                 

                          HON. RICHARD E. NEAL

                            of massachusetts

                    in the house of representatives

                        Wednesday, March 7, 2001

  Mr. NEAL of Massachusetts. Mr. Speaker, today I am introducing, along 
with Messrs. Tierney, Frank, McGovern, Capuano, Olver and Markey, 
legislation to clarify that the employees of a political subdivision of 
a State shall not lose their exemption from the hospital insurance tax 
by reason of the consolidation of the subdivision with the State.
  This issue has arisen because in 1997 Massachusetts abolished county 
government in the State, assumed those few functions which counties had 
performed, and made certain county officials employees of the State. 
Specifically, the law provided that the sheriff and all his personnel 
``shall be transferred to the commonwealth with no impairment of 
employment rights held immediately before the transfer date, without 
interruption of service, without impairment of seniority, retirement or 
other rights of employees, without reduction in compensation or salary 
grade and without change in union representation.''
  However, the issue of whether or not these consolidated employees 
were required to pay the Medicare portion of the FICA tax needed to be 
clarified. Federal law creates an exemption from this tax for state and 
local employees who were employed on or before March 31, 1986 and who 
continue to be employed with that employer. The law is written so it is 
clear that consolidations between local entities, and consolidations 
between State agencies, do not in and of themselves negate the 
grandfather rule. However, the issue of a consolidation between a 
political subdivision and a State is not directly addressed and I doubt 
it was thought of during the consideration of the federal law.
  The Internal Revenue Service has taken the position that a State, and 
a political subdivision of a state, are separate employers for purposes 
of payment of the Medicare tax and therefore any grandfathered 
employees merged in a consolidation between a State and a political 
subdivision lose the benefit of the grandfather rule even if such 
employees perform substantially the same work.
  In a Sixth Circuit Court case, Board of Education of Muhlenberg Co. 
v. United States, the Court ruled on this general issue in terms of a 
consolidation of boards of education in Kentucky. The plaintiffs in 
this case argued that the consolidation of school districts did not 
create a new employer or terminate the employment of any teacher, and 
the Court agreed that Congress did not intend that exempt employees who 
have not been separated from previously excluded employment should lose 
their grandfather and be forced to pay the HI tax. While this case did 
not go to the issue of the consolidation between a State and a 
political subdivision, the logic indicates that this issue matters less 
than the overarching issue of whether the employees continue in the 
same or essentially the same positions. In Massachusetts this is 
clearly the case.
  Therefore, Mr. Speaker, I urge the Congress to enact this legislation 
to clarify that local employees do not lose the benefit of the 
grandfather rule merely because they have been consolidated with a 
State government.

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