[House Report 106-302]
[From the U.S. Government Publishing Office]



106th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    106-302

======================================================================



 
  CLARIFICATION OF LIMITATION ON POSSESSION TAXATION OF GOVERNMENTAL 
                             PENSION INCOME

                                _______


 September 8, 1999.--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

                        [To accompany H.R. 462]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Judiciary, to whom was referred the 
bill (H.R. 462) to clarify that governmental pension plans of 
the possessions of the United States shall be treated in the 
same manner as State pension plans for purposes of the 
limitation on the State income taxation of pension income, 
having considered the same, reports favorably thereon without 
amendment and recommends that the bill do pass.

                           TABLE OF CONTENTS

                                                                  

                                                                 Page
Purpose and Summary........................................           2
Background and Need for the Legislation....................           2
Hearings...................................................           3
Committee Consideration....................................           3
Committee Oversight Findings...............................           3
Committee on Government Reform Findings....................           3
New Budget Authority and Tax Expenditures..................           3
Congressional Budget Office Cost Estimate..................           3
Constitutional Authority Statement.........................           5
Section-by-Section Analysis................................           5
Changes in Existing Law Made by the Bill, as Reported......           5

                          Purpose and Summary

    H.R. 462 makes technical corrections to section 114 of 
title 4 of the United States Code.

                Background and Need for the Legislation

    On February 2, 1999, Representative George W. Gekas (R-PA) 
(for himself and Representatives Bill McCollum (R-FL), John 
Mica (R-FL), and Carlos Romero-Barcelo (D-RC-PR)), introduced 
H.R. 462.
    H.R. 462 makes two technical corrections to section 114 of 
title 4 of the United States Code, which was enacted in 1996 to 
restrict the ability of States to tax certain types of pension 
income received by their former residents.\1\ Section 114 is 
intended to protect income received from ``qualified'' pension 
plans (as defined in the Internal Revenue Code) as well as 
income received under certain ``non-qualified'' retirement 
plans, subject to certain specified conditions.\2\ In pertinent 
part, section 114(a) prohibits a ``State'' from taxing 
``retirement income'' of its former residents, including income 
from a ``governmental plan,'' \3\ which section 114(b)(1)(G) 
defines by reference to section 414(d) of the Internal Revenue 
Code.\4\ Section 414(d) of the Internal Revenue Code, in turn, 
defines a ``governmental plan'' as a plan established by the 
Federal government, State government or any political 
subdivision thereof.\5\
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    \1\ Pub. L. No. 104-95, 109 Stat. 979 (codified at 4 U.S.C. 
Sec. 114 (1996)).
    \2\ H.R. Rep. No. 104-389, at 2 (1995). As the Committee's report 
accompanying this legislation explained:

        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.
Id. at 2-3.
---------------------------------------------------------------------------
    \3\ 4 U.S.C. Sec. 114(b)(1)(G).
    \4\ 26 U.S.C. Sec. 414(d).
    \5\ Id.
---------------------------------------------------------------------------
    Although section 114(b)(3) specifies that ``State'' 
includes ``possessions of the United States,'' the Internal 
Revenue Code does not define ``State'' as including either 
``possessions of the United States'' or the Commonwealth of 
Puerto Rico.\6\ Instead, the Internal Revenue Code generally 
defines possessions of the United States as including the 
Commonwealth of Puerto Rico.\7\
---------------------------------------------------------------------------
    \6\ 26 U.S.C. Sec. 7701(a)(10) (``The term `State' shall be 
construed to include the District of Columbia, where such construction 
is necessary to carry out provisions of this title.'').
    \7\ 26 U.S.C. Sec. 7701(d) (``Where not otherwise distinctly 
expressed or manifestly incompatible with the intent thereof, 
references in this title to possessions of the United States shall be 
treated as also referring to the Commonwealth of Puerto Rico.'').
---------------------------------------------------------------------------
    As evidenced by its literal wording, section 114 was 
intended to apply to ``possessions of the United States.'' \8\ 
Nevertheless, the provision's incorporation of the Internal 
Revenue Code's definition of ``governmental plan'' (which 
neither includes possessions of the United States nor Puerto 
Rico) creates an anomaly that effectively excludes retirement 
plans established by possessions of the United States. As a 
result of section 114's internal inconsistency, Puerto Rico has 
taxed the retirement income derived from its former residents' 
governmental plans.\9\
---------------------------------------------------------------------------
    \8\ See 4 U.S.C. Sec. 114(b)(3).
    \9\ See Letter from Carlos S. Quiros, former Secretary of State of 
Puerto Rico, to Reps. John Mica and Bill McCollum (Jan. 14, 1998) (on 
file with the Subcommittee on Commercial and Administrative Law of the 
Committee on the Judiciary).
---------------------------------------------------------------------------
    In addition to remedying this technical error, H.R. 462 
also corrects a typographical error. It changes the erroneous 
designation of subsection 114(e) to subsection 114(c).
    In the last session, Representative Gekas introduced H.R. 
4572, which was identical to H.R. 462.\10\ Although the House, 
under suspension of the rules, passed H.R. 4572 by voice vote 
on October 15, 1998, the Senate did not consider it prior to 
the end of the 105th Congress.
---------------------------------------------------------------------------
    \10\ H.R. 4572, 105th Cong. (1998).
---------------------------------------------------------------------------

                                Hearings

    No hearings were held on H.R. 462.

                        Committee Consideration

    On March 24, 1999, the Subcommittee on Commercial and 
Administrative Law met in open session and ordered favorably 
reported the bill, H.R. 462, without amendment by voice vote, a 
quorum being present. Thereafter, the Committee met in open 
session on May 19, 1999 and ordered favorably reported the 
bill, H.R. 462, without amendment by voice vote, a quorum being 
present.

                      Committee Oversight Findings

    In compliance with clause 3(c)(1) of Rule XIII 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) of Rule X of the 
Rules of the House of Representatives, are incorporated in the 
descriptive portions of this report.

                Committee on Government Reform Findings

    No findings or recommendations of the Committee on 
Government Reform were received as referred to in clause 
3(c)(4) of Rule XIII of the Rules of the House of 
Representatives.

               New Budget Authority and Tax Expenditures

    Clause 3(c)(2) of House Rule XIII is inapplicable because 
this legislation does not provide new budgetary authority or 
increased tax expenditures.

               Congressional Budget Office Cost Estimate

    In compliance with clause 3(c)(3) of Rule XIII of the Rules 
of the House of Representatives, the Committee sets forth, with 
respect to the bill, H.R. 462, the following estimate and 
comparison prepared by the Director of the Congressional Budget 
Office under section 402 of the Congressional Budget Act of 
1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 25, 1999.
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. 462, a bill to 
clarify that governmental pension plans of the possessions of 
the United States shall be treated in the same manner as state 
pension plans for purposes of the limitation on the state 
income taxation of pension income.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts for this 
estimate are Mark Grabowicz (for federal costs), who can be 
reached at 226-2860, and Michelle Patterson or Lisa Driskill 
(for the state and local impact), who can be reached at 225-
3220.
            Sincerely,

                                            Dan L. Crippen, Director.  
H.R. 462--Clarify that governmental pension plans of the possessions of 
        the United States shall be treated in the same manner as state 
        pension plans for purposes of the limitation on the state 
        income taxation of pension income
    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. 462 contains an intergovernmental mandate, as 
defined in the Unfunded Mandates Reform Act (UMRA), that 
applies to U.S. possessions. CBO estimates, however, that the 
costs would not be significant and would not exceed the 
threshold established in that act ($50 million in 1996, 
adjusted annually for inflation). State, local, and tribal 
governments would not be significantly affected by the 
enactment of this bill. H.R. 462 contains no new private-sector 
mandates as defined in UMRA.
    H.R. 462 would prohibit a possession of the United States 
from taxing the retirement income of individuals who are no 
longer residing in that possession. The bill effectively would 
apply to certain U.S. territories the provisions of current law 
that prohibit states from taxing such pension income. Based on 
information received from the territories, CBO has determined 
that Puerto Rico would be the only territorial government 
affected by this prohibition. As of last year, Puerto Rico 
stopped taxing the pensions of new retirees who move from the 
island. Puerto Rico was unable to provide data about the amount 
of revenue currently received from the taxed pensions of those 
who retired under the old system and moved elsewhere. CBO 
estimates, however, that because the number of retirees 
affected by this bill is likely to be very small, the losses to 
Puerto Rico would not be significant.
    States that currently offer a tax credit to residents for 
taxes paid to other states or territories, particularly those 
that are popular retirement destinations, would realize an 
increase in tax revenue. Like the costs, however, CBO estimates 
that such revenue increases would not be significant.
    The CBO staff contacts for this estimate are Mark Grabowicz 
(for federal costs), who can be reached at 226-2860, and 
Michelle Patterson or Lisa Driskill (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 clause 3(d)(1) of Rule XIII 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. Clarification of Application of Limitation on 
State Income Taxation of Pension Income. Subsection 1(a) of 
H.R. 462 amends subparagraph (G) of section 114(b)(1) of title 
4 of the United States Code to clarify that governmental plans 
of possessions of the United States are to be treated as 
governmental plans of states for purposes of section 414(d) of 
the Internal Revenue Code.
    Subsection 1(b) of the bill corrects a typographical error 
by redesignating subsection (e) of section 114 as subsection 
(c).
    Subsection 1(c) specifies that H.R. 462 applies to amounts 
received after the bill's date of enactment.

H.L.C.

         Changes in Existing Law Made by the Bill, as Reported

    In compliance with clause 3(e) 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 (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italics, existing law in which no change 
is proposed is shown in roman):

               SECTION 114 OF TITLE 4, UNITED STATES CODE

Sec. 114. Limitation on State income taxation of certain pension income

    (a) * * *
    (b) For purposes of this section--
            (1) The term ``retirement income'' means any income 
        from--
                    (A) * * *

           *       *       *       *       *       *       *

                    (G) a governmental plan (as defined in 
                section 414(d) of such Code) or any plan which 
                would be a governmental plan (as so defined) if 
                possessions of the United States were treated 
                as States for purposes of such section 414(d);

           *       *       *       *       *       *       *

    [(e)] (c) 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.

                                  
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