[House Report 105-203]
[From the U.S. Government Publishing Office]



105th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 1st Session                                                    105-203
_______________________________________________________________________


 
    TO CLARIFY STATE AUTHORITY TO TAX COMPENSATION PAID TO CERTAIN 
                               EMPLOYEES



 July 25, 1997.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

 Mr. Hyde, from the Committee on the Judiciary, submitted the following

                              R E P O R T

                        [To accompany H.R. 1953]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Judiciary, to whom was referred the 
bill (H.R. 1953) to clarify State authority to tax compensation 
paid to certain employees, having considered the same, report 
favorably thereon without amendment and recommend that the bill 
do pass.

                          Purpose and Summary

    H.R. 1953 provides that the income of certain employees at 
specific federal facilities located astride three state 
boundaries is to be taxed by the State or political subdivision 
thereof of which the employee is a resident. The bill addresses 
unique situations in which residents of one state travel onto a 
federal facility for their employment which, while still within 
that federal facility, is technically across a border into 
another state. The bill applies to: employees at Fort Campbell, 
Kentucky, located astride Kentucky and Tennessee; and federal 
employees at federal hydroelectric facilities along the 
Columbia River between Washington and Oregon, as well as a 
federal hydroelectric facility along the Missouri River between 
South Dakota and Nebraska.

                Background and Need for the Legislation

    The Committee recognizes that the right of States to tax 
economic activities within their borders should be granted 
great deference and that Congress should intervene only in 
unusual circumstances such as those that were found to exist in 
the three areas addressed by H.R. 1953.
    State taxation of income derived from a federal 
governmental unit has been accepted by the courts only in 
relatively recent times. Initially, Chief Justice John Marshall 
had found in the power to tax ``the power to destroy'' \1\ and 
courts for more than a century afterwards held that the federal 
government and its properties, functions and instrumentalities 
enjoyed an implied immunity under the Constitution from state 
taxation. In Graves v. New York ex rel. O'Keefe,\2\ however, 
the Supreme Court ceased to recognize this implied immunity 
from taxation by the states of personal income merely because 
the source was the federal government, although it did not rule 
on the question of whether Congress could expressly exempt such 
income from state taxation. With respect to the related 
question of state taxation of nonresidents generally, the 
Supreme Court had earlier upheld imposition of such a tax in 
Shaffer v. Carter,\3\ although that decision obviously did not 
apply to federal employees who were at the time immune from 
state taxation.
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    \1\ McCulloch v. the State of Maryland, 17 U.S. 316 (1819).
    \2\ Graves v. New York ex rel. O'Keefe, 306 U.S. 466 (1939).
    \3\ Shaffer v. Carter, 252 U.S. 37 (1920).
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    Notwithstanding Graves, however, the Supreme Court has 
upheld the power of Congress to grant express tax immunity to 
its employees \4\ and contractors \5\ when it determines such 
immunity is necessary to carry out an enumerated constitutional 
power. Over the years, several express exemptions have been 
enacted. The Soldiers' and Sailors' Civil Relief Act of 1940 
\6\ provides that a member of the military does not lose his 
residence or domicile in any State solely by reason of his 
absence therefrom pursuant to military orders, nor is he deemed 
to have acquired a residence or domicile in any State to which 
he happens to be assigned to duty merely because of his 
presence in that State and absence from his original state of 
residence. The Act furthermore provides that the military 
compensation of such individual is immune from state 
nonresident taxation.\7\
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    \4\ Dameron v. Broadhead, Manager of Revenue & Ex-Officio Treasurer 
of the City & County of Denver, 345 U.S. 322 (1953).
    \5\ Carson, Commissioner of Finance & Taxation v. Roane-Anderson 
Co., 342 U.S. 232 (1952).
    \6\ 50 U.S.C. app. Sec. 590 et seq.
    \7\ This exemption was upheld by the Supreme Court in Dameron v. 
Broadhead, supra note 4.
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    In 1977, Congress enacted an exemption for its own members 
similar to that for military personnel.\8\ That law provides 
that no state, or political subdivision thereof, in which a 
member of Congress maintains an abode for purposes of attending 
sessions of Congress may, for purposes of any income tax, treat 
such a member as a resident or domiciliary of such State or 
treat any compensation paid by the United States to such a 
member as income for services performed within or from sources 
within such State. 9
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    \8\ 4 U.S.C. Sec. 113.
    \9\ The provision was upheld in U.S. v. Maryland, 488 F. Supp. 347 
(D. Md., 1988), affirmed 636 F. 2d 73, which concluded that Congress 
had determined that taxing members of Congress in the states they 
represent as well as the state in which they reside while serving in 
Washington, D.C. was a burden on the fulfillment of a Federal function. 
The court noted that Congress had not exempted its members from all 
state taxation, but rather had merely determined which state could tax 
their income.
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    Congress, moreover, has created express exemptions for non-
Federal employees. In 1990, Congress enacted as a part of the 
Amtrak Reauthorization and Improvement Act 10 an 
exemption for certain interstate transportation workers who 
perform regularly assigned duties in more than one state. Under 
that Act, such workers are subject to income tax only in the 
state of their residence. 11
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    \10\ Pub. L. No. 101-322.
    \11\ See, 49 U.S.C. Sec. Sec. 11504 (a)-(c).
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    During the 104th Congress, Public Law 104-95 limited states 
in taxing the pension income of their expatriate nonresidents. 
The rationale for that law was in part that the nonresident no 
longer had a contact with his state of former residence 
sufficient to justify such taxation and that the record-keeping 
required to determine what deferred income was attributable to 
which state of former residence was onerous and impractical.
    H.R. 1953 applies to unique geographical areas owned by the 
federal government sitting astride states with differing 
taxation schemes (one state with an income tax, the other 
without one). Because of the isolated nature and geographical 
idiosyncrasies of the federal facilities involved, a small 
number of workers enter the facility from their home state but, 
because these facilities are bisected by state boundaries, 
their work takes them over the state line and brings them under 
the taxing authority of the neighboring state. As a result, 
these workers must pay income taxes to that neighboring state 
even though they never actually use its roads or other 
services, nor are they entitled to avail themselves of benefits 
from that state on the same basis as residents.12 
Unlike most states, the two neighboring states lack reciprocal 
tax agreements that would credit residents for income taxed in 
the neighboring state. Perhaps because so few people are 
affected, the states in these cases have not moved to address 
these workers' problem.13
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    \12\ State Taxation of Employees at Certain Federal Facilities: 
Hearing on H.R. 865 and H.R. 874 Before the Subcomm. on Commercial and 
Administrative Law of the House Comm. on the Judiciary, 105th Cong., 
1st Sess. (1997) (statement of Edwin Wilson, an employee at Fort 
Campbell).
    \13\ The Committee notes with approval the passage by the Oregon 
legislature, after some delay, of S.B. 998 addressing the situation of 
Washington residents working at federal hydroelectric facilities on the 
Columbia River. The legislation awaits signature by the Governor.
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    In addressing the question presented by this situation, the 
Committee concluded that this legislation is justified by the 
combination of highly unusual geography, the inability of the 
states to work out an equitable reciprocity agreement, and the 
fact that these workers can be said to have ``worked'' in the 
neighboring state only in the narrowest and most technical 
sense. The Committee believes H.R. 1953 meets the elevated 
threshold which has been set by the Congress for preempting 
state taxing authority.
    H.R. 1953 applies to ``federal'' employees at the federal 
hydroelectric facilities because workers at these facilities 
are employed by the United States Army Corps of Engineers. With 
respect to Fort Campbell, the bill applies to ``employee[s]'' 
because many of those working at that federal facility are 
civilians not employed by, but rather contracted to, the 
Federal government. These contract employees perform similar 
services and, thus are similarly situated, as the federal 
employees with whom they work.
    As noted, the Committee does not intend that its action in 
these unusual circumstances be taken as a precedent for other 
areas that might arise in a dispute between various states, as 
it is primarily the duty of these states to develop among 
themselves rational procedures to insure that their respective 
citizenry are treated equitably.

                                Hearings

    The Committee's Subcommittee on Commercial and 
Administrative Law held a hearing on April 17, 1997 on two 
related bills, H.R. 865 and H.R. 874. The first panel of 
witnesses was composed of congressional members representing 
the States of Tennessee and two constituents, including: Rep. 
Ed Bryant, Sen. Fred Thompson, Mr. Worth Lovett and Mr. Edwin 
Wilson both of Clarksville, Tennessee. The second panel of 
witnesses was composed of congressional members from the State 
of Washington and their constituents, including: Rep. Doc 
Hastings, Rep. Linda Smith, Mr. Dwight Campbell of Goldendale, 
Washington, and Mr. Roger Hays of Kennewick, Washington. The 
third panel of witnesses was composed of a tax consultant, a 
union representative, a representative of state tax 
administrators and an expert on state taxation, including: Ms. 
Joy Wilen, of Vancouver, Washington; Mr. James Cunningham, 
President, The National Federation of Federal Employees; Mr. 
James C. Smith, Professor, The University of Georgia School of 
Law, Athens, Georgia and Mr. Harley T. Duncan, Executive 
Director, The Federation of Tax Administrators.

                        Committee Consideration

    On June 19, 1997, the Subcommittee on Commercial and 
Administrative Law met in open session and ordered reported the 
bill H.R. 1953, by a voice vote, a quorum being present. On 
July 16, 1997, the Committee met in open session and ordered 
reported favorably the bill H.R. 1953 without amendment by a 
voice vote, a quorum being present.

                         Vote of the Committee

    There were no recorded votes.

                      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 theCommittee, based on 
oversight activities under clause 2(b)(1) of 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 tax expenditures.

               Congressional Budget Office Cost Estimate

    In compliance with clause 2(l)(3)(C) of rule XI of the 
Rules of the House of Representatives, the Committee sets 
forth, with respect to the bill, H.R. 1953, 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, July 24, 1997.
Hon. Henry J. Hyde,
Chairman, Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 1953, a bill to 
clarify state authority to tax compensation paid to certain 
employees.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Mark 
Grabowicz (for federal costs) and Leo Lex (for the state and 
local impact).
            Sincerely,
                                         June E. O'Neill, Director.
    Enclosure.

H.R. 1953--A bill to clarify state authority to tax compensation paid 
        to certain employees

    CBO estimates that enacting this legislation would have no 
impact on the federal budget. Because the bill would not affect 
direct spending or receipts, pay-as-you-go procedures would not 
apply. H.R. 1953 would impose an intergovernmental mandate 
because it would limit the ability of certain states to collect 
income taxes from some individuals working in those states. CBO 
estimates that the costs of this mandate would total less than 
$5 million annually and thus would not exceed the threshold 
established in the Unfunded Mandates Reform Act of 1995 (UMRA). 
H.R. 1953 contains no new private-sector mandates as defined in 
UMRA.
    H.R. 1953 would allow states to tax incomes of federal 
employees working at certain federal facilities only if those 
employees are residents of the state. This legislation would 
preclude three states from collecting taxes from employees who 
work in those states but live in another. This limitation on 
taxing authority would be an intergovernmental mandate as 
defined in UMRA. About 2,350 employees at three federal 
facilities would be affected by the bill, and the relevant 
state income tax rates range from 2 percent to 9 percent. 
Assuming an average annual salary of $30,000, CBO estimates 
that the costs of this mandate would be less than $5 million 
annually.
    The CBO staff contacts for this estimate are Mark Grabowicz 
(for federal costs), who can be reached at 226-2860, and Leo 
Lex (for the state and local impact), who can be reached at 
225-3220. This estimate was approved by Robert A. Sunshine, 
Deputy Assistant Director for Budget Analysis.

                   Constitutional Authority Statement

    Pursuant to rule XI, clause 2(l)(4) of the Rules of the 
House of Representatives, the Committee finds the authority for 
this legislation in Article I, section 8 of the Constitution.

                      Section-by-Section Analysis

 section 1. limitation on state authority to tax compensation paid to 
       individuals performing services at fort campbell, kentucky

    Subsection (a) amends Title 4, United States Code, adding a 
new section 115 which provides that pay and compensation paid 
to an individual for personal services at Fort Campbell, 
Kentucky shall be taxed by the State or any political 
subdivision thereof of which that individual is a resident.
    Subsection (b) contains a conforming amendment to the table 
of sections for Chapter 4 of Title 4, United States Code.
    Subsection (c) provides that amendments made by this 
section shall apply to pay and compensation paid after the date 
of enactment.

 sec. 2. clarification of state authority to tax compensation paid to 
                       certain federal employees

    Subsection (a)(1) contains a technical amendment to Section 
111 of Title 4, United States Code.
    Subsection (a)(2) amends Section 111 of Title 4, United 
States Code (which consents generally to state taxation of 
federal employees) by adding at the end a new subsection (b): 
which provides that pay or compensation paid by the United 
States for personal services as an employee of the United 
States at a hydroelectric facility owned by the United States 
on the Columbia River, portions of which are within the states 
of Oregon and Washington, shall be subject to taxation by the 
State or political subdivision thereof of which such employee 
is a resident; and a new subsection (c): which provides that 
pay or compensation paid by the United States for personal 
services as an employee of the United States at a hydroelectric 
facility owned by the United States on the Missouri River, 
portions of which are in the states of South Dakota and 
Nebraska, shall be subject to taxation by the State or any 
political subdivision thereof of which such employee is a 
resident.
    Subsection (b) provides that amendments made by subsection 
(a) shall apply to pay and compensation paid after the date of 
enactment.

                              Agency Views

    No agency views were received on H.R. 1953.

         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 and 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 legislatures and officers.
     * * * * * * *
115. Limitation on State authority to tax compensation paid to 
          individuals performing services at Fort Campbell, Kentucky.
          * * * * * * *

Sec. 111. Same; taxation affecting Federal employees; income tax

  (a) General Rule.--The United States consents to the taxation 
of pay or compensation for personal service as an officer or 
employee of the United States, a territory or possession or 
political subdivision thereof, the government of the District 
of Columbia, or an agency or instrumentality of one or more of 
the foregoing, by a duly constituted taxing authority having 
jurisdiction, if the taxation does not discriminate against the 
officer or employee because of the source of the pay or 
compensation.
  (b) Treatment of Certain Federal Employees Employed at 
Federal Hydroelectric Facilities Located on the Columbia 
River.--Pay or compensation paid by the United States for 
personal services as an employee of the United States at a 
hydroelectric facility--
          (1) which is owned by the United States,
          (2) which is located on the Columbia River, and
          (3) portions of which are within the States of Oregon 
        and Washington,
shall be subject to taxation by the State or any political 
subdivision thereof of which such employee is a resident.
  (c) Treatment of Certain Federal Employees Employed at 
Federal Hydroelectric Facilities Located on the Missouri 
River.--Pay or compensation paid by the United States for 
personal services as an employee of the United States at a 
hydroelectric facility--
          (1) which is owned by the United States,
          (2) which is located on the Missouri River, and
          (3) portions of which are within the States of South 
        Dakota and Nebraska,
shall be subject to taxation by the State or any political 
subdivision thereof of which such employee is a resident.
          * * * * * * *

Sec. 115. Limitation on State authority to tax compensation paid to 
                    individuals performing services at Fort Campbell, 
                    Kentucky

  Pay and compensation paid to an individual for personal 
services at Fort Campbell, Kentucky, shall be subject to 
taxation by the State or any political subdivision thereof of 
which such employee is a resident.
          * * * * * * *

                                
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