[House Report 104-389]
[From the U.S. Government Publishing Office]



                                                                       
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).
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    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.
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          [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.
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    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.
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    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.
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                        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.
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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.