A retired Air Force officer worked for 20 years in the Washington office of a California firm before retiring for the second time. Naturally enough (or so it seemed), he paid taxes on his annuities to the District of Columbia.
Imagine his surprise, then, when California sent him an $11,000 bill for overdue taxes, penalties, and interest. He lived in California years ago, and the source of his second pension was a company headquartered there. After six months of writing and calling, he reached an ombudsman, who has promised to help.
The plight of Gertrude Eberly, aged 72, generated speeches in Congress. Nine years after Mrs. Eberly retired and moved to Nevada, California hit her for $4,000 in delinquent taxes on her pension but allowed her to make installment payments of $50 a month on her debt. Mrs. Eberly lived on less than $13,000 a year.
The "source tax" is a new trick state legislatures have found to raise money without risking complaints from their own voters. They assess pension income derived from a source within the state, whether the taxpayer lives there or not.
It is not entirely clear which forms of income are vulnerable. Making contributions to an Individual Retirement Account while living in a state, for example, may set former residents up for a source tax later.
Incredibly, this is perfectly legal, based on a 1920 Supreme Court ruling about oil lease revenues. Thirty-two states have source tax laws on their books, but they were seldom used before computers made it easy to track down annuitants.
The implications are chilling for military retirees, who may--through no choice of their own--have lived in a dozen locations in the course of their military careers.
Various groups are circulating long lists of states said to have source taxes. Some of these lists are inaccurate, but a quick telephone survey establishes that at least half a dozen states tax nonresident pensioners.
The most aggressive is California which raises $10 million annually from nonresident pensioners and whose windfall is an inspiration for other states.The source taxers tend to nail their victims singly as they find them. Notices show up in new mailboxes daily. California hires collection agencies, files liens, and adds a 55 percent penalty and daily interest to the bills it presents after the passage of time. Many--but not all--of the targets are retirees who moved to states that have no income tax.
Concerned by the spreading trend, the Air Force Association and other organizations in the Military Coalition back legislation that would prohibit "source taxing" of pensions.
"With regard to military personnel and some federal retirees, oftentimes the only reason they were ever in the taxing state was as a result of their federal employment," the Coalition said in a recent statement.
"Additionally, these people are subjected to multiple moves during the course of their careers, often living and working in several different states. Under the source taxing authority presently extant in these states, it is entirely possible that at the end of their careers, these people could have source taxes applied on their retired incomes by each of these states simultaneously and yet not reside in any of them."
The individual who has done most to bring this outrage to light is William C. Hoffman, who heads Retirees to Eliminate State Income Source Tax (RESIST). Thirty-four organizations, including the Air Force Association, have joined Hoffman's campaign.
Strangely, the American Association for Retired Persons is not among them. MRP "discourages" source taxes at the state level but does not support a "federal remedy. " A spokesman told AIR FORCE Magazine that MRP opposes double taxation but feels that states are justified in taxing the pensions of former residents who move to states without an income tax.
It is difficult for retirees to "discourage" policies in states where they cannot vote. California demonstrated that when RESIST's Hoffman and a delegation that included an AFA representative arrived to testify on source tax to the state's Revenue and Taxation Committee.
They were told curtly that the body had no time for them. The committee had more pressing interests: a two-hour pitch on tax exemptions for businesses that grow ostriches for food, after which it adjourned for an ostrich barbecue.
Legislatures are strapped for money, but an interstate shakedown of each other's senior citizens is intolerable. This is a classic case where a "federal solution" is indicated, and the sooner Congress imposes one, the better.
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