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STATE TAXATION OF EMPLOYEES AT CERTAIN FEDERAL FACILITIES
THURSDAY, APRIL 17, 1997
House of Representatives,
Subcommittee on Commercial and
Administrative Law,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in room 2237, Rayburn House Office Building, Hon. George W. Gekas (chairman of the subcommittee) presiding.
Present: Representatives George W. Gekas, Ed Bryant, Steve Chabot, Jerrold Nadler, Sheila Jackson Lee, and William D. Delahunt.
Also present: Raymond V. Smietanka, chief counsel; Susana Gutierrez, clerk/research assistant; and John Flannery, minority counsel.
OPENING STATEMENT OF CHAIRMAN GEKAS
Mr. GEKAS. The hour of 10 o'clock having arrived this session of the Subcommittee on Commercial and Administrative Law of the Committee on the Judiciary shall come to order.
We note the presence of a hearing quorum, consisting of the gentleman from Massachusetts and the Chair. We will proceed with an opening statement by the Chair, an opening statement by the gentleman from Massachusetts, and then proceed to hear from our distinguished panel.
It is no secret that this type of case recurs from time to time, wherein the dilemma of where citizens reside, where they work and what their tax obligations might be come into question. The status of the law delineating the relationships of these various taxing authorities with the Federal Government and their authority to tax nonresident workers has evolved considerably since Chief Justice John Marshall embarked on the question in his landmark decision of McCulloch v. The State of Maryland in 1819.
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The courts did not permit State taxation of income derived from a Federal Government unit until 1939. Since then, it has been left to Congress to determine what circumstances justify or require an exemption from State taxation for Federal workers and others.
The two localities that are the subject matter of our hearing today are the Columbia River hydroelectric facility between the States of Washington and Oregon, and Fort Campbell, which sits astride the States of Kentucky and Tennessee.
We will hear from the sponsors of the bills and from individuals who have firsthand knowledge and expertise in this area, and which will aid us in pursuing a conclusion to these bills.
[The bill, H.R. 865 and H.R. 874, follows:]
INSERT OFFSET RING FOLIOS 1 TO 4 HERE
Mr. GEKAS. The hearing will begin with the testimony from our colleague, a member of this subcommittee, the gentleman from Tennessee, Mr. Bryant.
Mr. BRYANT. Thank you.
Mr. GEKAS. Oh, I'm sorry. I wanted to defer to the gentleman from Massachusetts, first.
Mr. DELAHUNT. I am anxious to listen to the gentleman from Tennessee, for whom I have great respect.
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Mr. GEKAS. We thank you.
Mr. Bryant.
STATEMENT OF HON. ED BRYANT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TENNESSEE
Mr. BRYANT. Thank you, Mr. Chairman. I want to thank you for holding these hearings today.
What we are attempting to do is to remedy--I know in this case, the Tennessee/Kentucky situation--a unique set of circumstances, and I would not speak for the second panel; I know they have a similar problem, and I know they can certainly address that situation. But I can assure this panel that the Fort Campbell situation is truly unique and truly deserving of this tax relief.
I also want to thank this committee, not only for the hearing today, but for making it possible for my two constituents from Tennessee to make their case before Congress.
Also, I might add that this bill is cosponsored by our colleague, John Tanner, from Tennessee, who also represents many of these constituents and would be here to testify but for previous commitments. However, he does have a prepared statement that I would like to submit on behalf of Congressman Tanner.
Mr. GEKAS. Without objection, the statement will be entered into the record.
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[The prepared statement of Mr. Tanner follows:]
PREPARED STATEMENT OF HON. JOHN S. TANNER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TENNESSEE
I would like to thank Chairman Gekas and the members of the Subcommittee on Commercial and Administrative Law for holding this hearing and allowing us to explore this issue and look for a solution to the problem facing our Tennessee constituents who work at Fort Campbell. Mr. Chairman, I appreciate you providing me the opportunity to make a short statement on this issue.
Congressman Ed Bryant and I have introduced legislation to provide that the State of Kentucky may not tax compensation paid to a resident of Tennessee for services as a Federal employee at Fort Campbell, Kentucky. It is estimated that about 2000 Tennesseans who work at Fort Campbell, and pay all applicable Tennessee taxes, are being unfairly taxed by the State of Kentucky. These Tennessee citizens receive no benefits or services from Kentucky in return for the taxes they pay to the state. They don't drive on Kentucky roads and they don't use Kentucky facilities. The State of Kentucky has even denied these Tennessee citizens, who are forced to pay Kentucky taxes, the ability to receive the benefit of in-state tuition for Kentucky state colleges.
Mr. Chairman, this is a matter of simple common sense and fairness. Congressman Bryant and I are seeking fairness for the citizens we represent that happen to be federal employees at Fort Campbell. In the last Congress, we passed legislation to clarify that pensions can only be taxed by the state of residence. That was fair and needed reform. We are asking for this same fairness to protect our Tennessee citizens from double taxation.
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Mr. BRYANT. Thank you.
Admittedly, this is not a bill that's going to grab national headlines, nor is it an issue that's going to be on the front burners of my colleagues in the House very long after this hearing. However, to the 2,200 Tennesseans who are being unfairly taxed by the State of Kentucky, this is a matter of fairness and a matter of principle. I would also like to point out that the symbolism of holding these hearings just days after the April 15 Federal tax filing deadline will not be lost on my constituents. Mr. Chairman, I firmly believe that today's hearing represents a real victory for those who have worked so hard to put a stop to Kentucky's taxation of Tennessee residents. For the last 10 years, legislation to correct this inequity has been introduced in the House only to die at the end of each session of Congress due to inaction. And I might add that my predecessor used a different strategy in doing this, and we have changed and attempted to remedy this situation with a bill that's different from the one that has been introduced for the past 10 years. As I mentioned, this effort was first begun by then-Representative, and now our Governor, Don Sundquist, and I'm happy to have the opportunity to carry on this fight because I think it is an issue of fairness. When I say that this is an issue of fairness, I do not do so lightly.
Taxation, while certainly not popular, is a necessity. A government needs to collect revenue in order to provide its citizens with essential services such as fire and police protections, roads, schools, and even trash removal. And while we may debate the amount of taxation and the types of services needed, there is little argument over the fact that those who pay the taxes should receive something in return; and that's important in this case. This is the very definition of fairness, and this is the very issue that this legislation has attempted to remedy for the past 10 years.
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I think, as all of you know by now, Fort Campbell straddles the Tennessee-Kentucky border. Kentucky, under the authority of the Buck Act, United States Code Annotated----
Mr. GEKAS. Which act?
Mr. BRYANT. The Buck Act, B—U—C—K, 4 U.S.C., section 106, has imposed a tax on income earned by Tennessee residents who work on the Kentucky side of the fort. And as you can see from the map that's on display here, actually the majority of the land at Fort Campbell is located in Tennessee. But, again, a portion of the post is located in Kentucky, including the post office, which is why it carries a designation of Fort Campbell, KY. But there are schools up there and other facilities that people who are Tennessee residents who have to go to the Kentucky side, to get to work, to do their jobs.
In most States this problem would be remedied very quickly because most States would have an income tax, and they could give credits and offsets and so forth to not allow double taxation. However, Tennessee does not impose an income tax on its residents, and so a reciprocal-type agreement would not work. In fact, Tennessee has a very large sales tax to offset that. So, in effect, these people are being subject to double taxation without any type of relief by paying an income tax in Kentucky and a very high sales tax in the State of Tennessee.
Mr. Chairman, my legislation would prevent Kentucky from taxing income earned by Tennessee residents on the Kentucky side of Fort Campbell. I would not be pursuing such legislation if I thought that the 2,200 people affected by this were receiving some benefits from Kentucky. This is not the case. Tennessee residents are not receiving benefits from Kentucky, and that has been over the years the case law and the logic as to why you would allow taxation.
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If these folks had to come into Kentucky and use Kentucky roads and highways and, potentially, highway patrol, police protection, and fire protection, I understand that. And that's why this is not like all of the other cases where people work in one State and live in another State. This is a unique situation, because as you can see from the map, it's easily available for these people who are Tennessee residents to cross into Fort Campbell without ever setting foot on Kentucky soil. They receive absolutely no benefits, whatsoever, and I could tell you about more examples, but I would defer to my witnesses who have firsthand stories about this, and I'm sure they will tell you.
When the Buck Act became law in 1942, however, there were no Federal installations in existence which straddled the border between two States, such as we have here. In the specific case of Fort Campbell, the services which might be provided by the State of Kentucky are actually provided either by the State of Tennessee--water, fire protection, sewerage, power--or by the military.
For example, a person who has been assigned to work on the Kentucky side of the post does not ever have to use a Kentucky road, since these roads have been paid for by the military. The same is true in the case of fire and police protection. Furthermore, since the majority of the post actually lies on the Tennessee side, power and water are supplied by Tennessee.
As you can see, my constituents are not receiving any benefits from Kentucky, and so are being taxed in what I believe to be contrary to the spirit of the very act which gives Kentucky the right to tax the income. So while this legislation, at face value, may appear to be an unnecessary special interest carve-out, in reality, after a closer examination of the facts, this legislation simply restores a sense of fairness to an unjust system of taxation. And I thank the Chair.
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[The prepared statement of Mr. Bryant follows:]
PREPARED STATEMENT OF HON. ED BRYANT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TENNESSEE
Thank you Mr. Chairman.
Mr. Chairman I want to thank you for holding this hearing today. I also want to thank you for making it possible for my constituents to be here to make their case before the Congress. Admittedly, this is not a bill which will grab national headlines, nor is it an issue which will be on the front burners of my colleagues in the House after this hearing. However, to the 2,200 Tennesseans who are being unfairly taxed by the State of Kentucky, this is a matter of fairness, and a matter of principal. I would also like to point out that the symbolism of holding these hearings just days after the April 15th federal tax filing deadline will not be lost on my constituents.
Mr. Chairman, I firmly believe that today's hearing represents a real victory for those who have worked so hard to put a stop to Kentucky's taxation of Tennessee residents. For the last ten years, legislation to correct this inequity has been introduced in the House only to die at the end of each session of Congress due to inaction. This effort was first begun by then Representative, and now Governor, Don Sundquist, and I am happy to have the opportunity to carry on the fight.
When I say that this is an issue of fairness, I do not do so lightly. Taxation, while certainly not popular, is a necessity. A government needs to collect revenue in order to provide its citizens with essential services such as fire and police protection, roads, schools, and even trash removal. And while we may debate the amount of taxation and the types of services needed, there is little argument over that fact that those who pay the taxes should receive something in return. This is the very definition of fairness, and this is the very issue that this legislation has attempted to remedy for the past 10 years.
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As you know, because Fort Campbell straddles the Tennessee/Kentucky boarder, Kentucky under the authority of the Buck Act (U.S.C.A 4 106) has imposed a tax on income earned by Tennessee residents who work on the Kentucky side of the post. In most cases of this nature, a reciprocal agreement between the two states would exist so that the people who commute across state lines to work would be taxed in only one state. However, because Tennessee does not impose an income tax on its residences a reciprocal agreement does not exist between Tennessee and Kentucky. The result is double taxation.
Mr. Chairman, my legislation would prevent Kentucky from taxing income earned by a Tennessee resident on the Kentucky side of Fort Campbell. I would not be pursuing such legislation if I thought that the 2,200 people affected by this were receiving some benefits from Kentucky, however, this is simply not the case, and I do not believe that the Buck Act ever anticipated this type of scenario. I believe that the intent of the Buck Act was to ensure that states would be paid for the services they provided or could potentially provide to an individual while he or she was working in the neighboring state.
When the Buck Act became law in 1942, however, there were not any federal installations in existence which straddled the border between two states. In the specific case of Fort Campbell, the services which might be provided by the state of Kentucky are actually provided by either the state of Tennessee or by the military. For example, a person who has been assigned to work on the Kentucky side of the post does not ever have to use a Kentucky road since these roads have been paid for by the military. The same is true in the case of fire and police protection. Furthermore, since the majority of the post actually lies on the Tennessee side, power and water are supplied by Tennessee.
As you can see, my constituents are not receiving any benefits from Kentucky, and so are being taxed in what I believe is contrary to the spirit of the very act which gives Kentucky the right to tax their income. So while this legislation at face value may appear to be an unnecessary special interest carve out, in reality, after a closer examination of the facts, this legislation simply restores a sense of fairness to an unjust system of taxation.
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And I thank the chair.
Mr. GEKAS. We thank the gentleman. We acknowledge the presence now of the gentleman from New York, the ranking minority member of this subcommittee. We will now turn to welcome Senator Fred Thompson, who has joined our colleague, Mr. Bryant, at the witness table.
Everyone knows Senator Thompson by now; if not, you must be living in Canada, perhaps. But Senator Thompson began representing the people of Tennessee in 1994 after a distinguished career in law and in films. I don't know if he wants that on his résumé, but whether he likes it or not, it is there, and he did make an impact on the film industry. And, of course, during Watergate, he served as minority council who cross-examined Alexander Butterfield. So we will identify Senator Thompson as one of the good guys. And I don't know how he's regarded now in the Senate--[Laughter]--but over here on our side, he's a good guy to all.
We welcome you, Senator Thompson, and we grant you such time as you might consume to present your co-side of the story.
STATEMENT OF HON. FRED THOMPSON, A SENATOR IN CONGRESS FROM THE STATE OF TENNESSEE
Mr. THOMPSON. Well, thank you very much, Mr. Chairman. I appreciate the opportunity to be here, and I appreciate that little walk through history there. I feel older every day, it seems.
My most recent notable theatrical endeavor, though, certainly has been with Mr. Nadler, of your committee, in our production of ''1776,'' which we did back last year.
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Mr. NADLER. Well, let me say I was delighted to serve in the Constitutional Convention--[Laughter]--in that play, and I was delighted to serve with you when you were President of the Convention, sir.
Mr. THOMPSON. Well, thank you very much.
Gentleman--Ed Bryant has laid out the course exactly and as well as can be done. This basically is a unique situation because of two factors. One, you have some civilian employees on the military base there that covers two States. The other factor is one of those States has an income tax and the other one doesn't. So approximately 2,000 employees, because of those unique circumstances, find themselves in a situation where they're being fully taxed by each State.
Back in the forties--the Congress gave States permission to--at a time when more military personnel were being distributed around the country--tax civilians under those circumstances. But since that time, there have been some exceptions made based on equitable considerations. Members of Congress, of course, military personnel, and Amtrak employees, who cover so many States, have been exempted from those kinds of situations, and we feel like the one here today merits the same kind of treatment.
So that's why I'm pleased to join my colleagues, Bill Frist, in the Senate, and Ed Bryant, in introducing a bill to protect our constituents from this particular unfairness. And as you know, Worth Lovett and Ed Wilson will be testifying here and can tell you better than we can what their situation is. But, as Ed said, 80 percent of Fort Campbell is in the State of Tennessee, but the post office is in Kentucky; and it's usually known as Fort Campbell, KY.
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But these employees, these Tennesseans who work on the post, and are employed on the Kentucky side in the schools and at the post office and at the post exchange and the primary air field, are paying up to 6 percent Kentucky State income tax as well as the relatively high sales tax and excise taxes they pay in their home State of Tennessee. And they are in a situation where a move across the street can be a tax of 6 percent on them.
And as Ed said, all of the emergency, fire, police, medical services, roads, water, sewer--all of these are either provided by or maintained by the Federal Government, not the State of Kentucky. If these employees were laid off, they would not be eligible for Kentucky unemployment benefits.
We believe that the State has the right to raise its revenue in whatever manner its residents believe most appropriate--in the case of Tennessee, residents have chosen a sales and excise tax to fund their cost of government, only one of six States in the United States without an income tax--and Kentucky has enacted an income tax to fund their government.
But it should be noted that Kentucky has entered into reciprocal tax agreements with surrounding income tax States to ensure that Kentuckians are treated fairly, but they really refuse to negotiate any kind of reciprocal tax agreement with Tennessee because, basically, they've had Tennesseans over a barrel. So, prohibiting Kentucky from taxing the income of Tennesseans working on the Kentucky side of Fort Campbell is the best way to resolve an inequitable situation.
So with that I will cease and desist and, again, express my appreciation for being allowed to come and spend a little time with you today. And I look forward to hearing the testimony of our constituents.
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[The prepared statement of Mr. Thompson follows:]
PREPARED STATEMENT OF HON. FRED THOMPSON, A SENATOR IN CONGRESS FROM THE STATE OF TENNESSEE
Mr. Chairman, thank you for inviting me to testify before your Subcommittee today on this issue of great importance to approximately 2,000 of my constituents. These Tennesseans are civilians employed to work at Fort Campbell, and they are being unfairly taxed by the Commonwealth of Kentucky. Today I am joining Congressman Ed Bryant in introducing a bill to protect my constituents from this unfairness. My bill would prohibit Kentucky from imposing state income tax on Tennesseans who work on the Kentucky side of Fort Campbell. Shortly, you will hear testimony from two of my constituents who are directly affected by Kentucky is actions--Worth Lovett and Edwin Wilson of Clarksville, Tennessee.
As you may know, Fort Campbell is the home of the Army's famous 101st Airborne Division. It straddles the border between Tennessee and Kentucky, and, in fact, 80 percent of Fort Campbell lies in the State of Tennessee. But because the post office is located on the Kentucky side of the installation, it is known to most Americans as Fort Campbell, Kentucky.
Civilians living in Tennessee and Kentucky are employed by the federal government to perform important non-military functions at Fort Campbell. Approximately 2,000 of the Tennesseans who work on post are employed on the Kentucky side in the schools, at the post office, at the post exchange, and on the primary airfield. Unfortunately, these Tennesseans are forced to pay income tax to the Commonwealth of Kentucky of up to six percent of their wages, in addition to the sales and excise taxes they pay to their home State of Tennessee. Kentucky is permitted to impose its income tax on the Tennesseans because of a law passed by Congress in 1940 (the Buck Act).
Mr. Chairman, I believe it is unfair of Kentucky to impose an income tax on Tennesseans, because Tennesseans who work on the Kentucky side of Fort Campbell do not consume any services provided by the Commonwealth of Kentucky. Fort Campbell is a federal institution. All emergency fire, police and medical services on post are provided by the federal government, not the Commonwealth of Kentucky. All roads on Fort Campbell, both on the Kentucky and the Tennessee side, are maintained by the federal government. Water and sewer services are paid for by the federal government. If a Tennessean who worked on the Kentucky side of Fort Campbell were laid off, he or she would not be eligible to obtain unemployment benefits from Kentucky, despite the taxes paid to Kentucky. Finally, Tennesseans have no voice in the Kentucky legislature. They are being unfairly taxed without the benefit of representation. As I see it, the Commonwealth of Kentucky is receiving free money from residents of Tennessee who work on a federal installation that happens to border their state.
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And although Kentucky likes to argue that these residents of Clarksville are not forced to work on the Kentucky side of Fort Campbell, there have been many instances in the history of Fort Campbell in which Tennesseans have obtained jobs on the Tennessee side, but were later moved to the Kentucky side because their offices were relocated to another building. Moving across the border like this causes significant morale problems, because it translates into a pay cut of up to six percent for a Tennessean. Kentucky claims these employees can escape paying income tax by quitting their jobs, but I find this alternative unreasonable.
The 1940 Buck Act repealed the prior law prohibiting states from imposing income tax on individuals who lived or worked on federal property. However, Congress has granted also an exemption from state income tax to classes of federal employees based on their uncommon circumstances: military personnel and Members of Congress and their employees. In addition, Congress enacted legislation in 1990 to exempt Amtrak employees from state taxation in the states in which they do not reside. Congress intended these exemptions to provide relief from inequitable situations. I think the Tennesseans employed at Fort Campbell also merit an exemption.
Mr. Chairman, I firmly believe that a state has the right raise revenue in whatever manner its residents believe is most appropriate. In the case of Tennessee, residents have chosen sales and excise taxes to fund their cost of government--only one of six states in the U.S. without an income tax. In the Commonwealth of Kentucky, residents have enacted an income tax to fund their government. But it should be noted that Kentucky has entered into reciprocal tax agreements with surrounding income tax states to ensure that Kentuckians are treated fairly. Unfortunately, Kentucky has refused to negotiate any type of reciprocal tax agreement with Tennessee, because it knows it has Tennesseans over a barrel. Prohibiting the Commonwealth of Kentucky from taxing the income of Tennesseans working on the Kentucky side of Fort Campbell is the only way to resolve this inequitable situation.
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During this week in April Americans are reminded of their obligations to government. I believe that Americans are willing to pay their fair share of taxes, but citizens should not be expected to pay tax to a government from which they receive nothing and in which they have no voice.
I thank the chair.
Mr. GEKAS. Yes, thank you, Senator.
One question for the Senator and our colleague, Mr. Bryant. When I was in the U.S. Army, I was stationed at Fort Knox in Kentucky. On two occasions I took a weekend pass and went to Tennessee. The first time, I think, I went to Nashville to visit some relatives. The second time, I went to Fort Campbell to visit a friend who had been stationed there concurrently with my being at Fort Knox. I always thought that Fort Campbell was totally in Tennessee. Never once did I consider it to be in portions of Kentucky. Has this always been the case or was some of the Kentucky territory added to Fort Campbell? Does anybody know for historical purposes?
We will let Mr. Bryant introduce his two constituents for the purpose of the testimony and questions.
Mr. BRYANT. Well, I'm not sure I have the formal introduction. Do you have the formal----
Mr. GEKAS. Well, we'll let them introduce themselves, then. Why don't we start with Mr. Lovett, and proceed with Mr. Wilson.
Mr. LOVETT. Well, sir, good morning. I'm an employee of the Federal Government at Fort Campbell. It's the home, as you know, of the famous 101st Airborne Division.
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I work for the Department of Defense school system as a teacher. I have a doctorate in education from Vanderbilt University. I spent 20 years in the Army and retired in 1978.
Mr. GEKAS. I thank you.
Mr. Wilson.
Mr. WILSON. I'm Edwin Wilson. I'm also a Federal employee, and I work at Campbell Army Airfield on Fort Campbell. I'm retired from the Air Force; I had 21 years in the Air Force. I have a bachelor's degree in aviation and have been a Federal employee since 1991.
Mr. GEKAS. We thank you.
Mr. Lovett, why don't you proceed to present your testimony.
STATEMENT OF WORTH LOVETT, FEDERAL EMPLOYEE AT FORT CAMPBELL
Mr. LOVETT. Thank you. First of all, I wish to thank the members of this committee for hearing our views with regard to H.R. 865. I particularly wish to thank Mr. Ed Bryant, of Tennessee, and his staff for their efforts on our behalf.
As I said, I am an employee of the Federal Government at Fort Campbell. I work for the Department of Defense school system as a teacher. I also represent some 2,000 civilian employees who work on the base, live in Tennessee, and unjustly pay income taxes to the Commonwealth of Kentucky.
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As you are no doubt aware, the Buck Act was passed in 1940 to correct inequities in citizens of a State not having to pay their just share of State and local income taxes by virtue of their employment on a Federal reservation. Under this act, we are required to pay taxes to Kentucky for income earned on the military base. As residents of Tennessee, we also pay taxes to the State of Tennessee. Thus, I decided to organize a group of 2,000 similarly situated employees into a cohesive unit known as Concerned Citizens of Tennessee.
It is inequitable that we should be required to pay taxes to Kentucky on three grounds. First, it should be against public policy that we pay taxes to two different States. Tennessee has one of the highest sales tax rates in the Nation, and the Tennessee sales tax applies to services, as well as to every retail article sold, including food, clothing, and medicine.
In addition, Tennessee collects inter alia excise taxes on many large item purchases, property taxes, school taxes, business taxes, vehicle licensing taxes. We pay a proportionate share of taxes to our sovereign State.
In addition, and unlike other post employees, we pay income taxes to Kentucky. Kentucky has reciprocal income tax agreements with all surrounding States except Tennessee. Kentucky refuses to exempt us from taxes because Tennessee has no income tax. We realize that the fact that Tennessee has no income tax may have great legal significance; however, regardless of their name, the taxes we pay to Tennessee have the same effect on our net worth as an income tax, and existing law takes more from us than from other similarly situated employees.
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For example, there are seven schools in the school system at Fort Campbell. Five of the schools are located on the north side and two on the south side. Because I was involuntarily assigned to a school on the north side, I make $3,000 less per year than a teacher teaching the same subject on the south side of the post.
Second, when the rhetoric is stripped to its essentials, we have no real or meaningful choice in the matter of employment. It is said that those who work on the north side of Fort Campbell and live in Tennessee do so by choice. In fact, it has been said that we were not forced to apply for a job at Fort Campbell in the first instance.
This reasoning is unsound in two particulars. Typically, an employee applies for a job without knowledge of disparate tax treatment based on vagaries of assignment on the post. And an employee does not have a real or meaningful choice when, after working many years and becoming vested in the retirement and other job benefits, he or she gets involuntarily transferred from the south to the north side of the post. What is the employee to do? Quit the job? Throw away his or her hard-earned benefits?
The third issue is plain justice. It is a fundamental principle of our democratic way of life that those who take advantage of the protection of a sovereign State and the benefits which accrue therefrom, should bear the burden of financing that government, and we recognize and agree with the principle. However, we also recognize, as did our forefathers, that adequate representation does not consist solely of a representative in government. It is also comprised of the benefits and protections given by the sovereign.
We receive absolutely no protection or benefit from the State of Kentucky--none. We do not use Kentucky roads or highways. We do not receive Kentucky police or fire protection. We do not use electric, water, sewage, natural gas, or any other utilities from the State. We receive no governmental financial benefits from Kentucky, nor do we burden the judicial system of Kentucky. In short, we do not use anything from Kentucky which has ever been recognized as a benefit or protection of government.
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We are being asked to support two sovereign States instead of one. We are given no real or meaningful choice in the matter of where we work on Fort Campbell. We receive absolutely none of the protections or benefits which would traditionally make it just for us to share in the burden of Kentucky government.
We do not think that Members of this body, when propounding the Buck Act, envisioned this situation. Thus, on behalf of the 2,000 Concerned Citizens of Tennessee, I ask that each of you support H.R. 865. Thank you.
[The prepared statement of Mr. Lovett follows:]
PREPARED STATEMENT OF WORTH LOVETT, FEDERAL EMPLOYEE AT FORT CAMPBELL
INTRODUCTION
Good morning ladies and gentlemen. I wish to thank the members of this committee for hearing our views with regard to H.R. 865. I particularly wish to thank Mr. Ed Bryant of Tennessee and his staff for their efforts on our behalf.
I am an employee of the federal government at Fort Campbell, which is the home of the famous 1017E Airborne Division. I work for the Department of Defense School System as a teacher. I also represent some 2000 civilian employees who work on the base, live in Tennessee, and unjustly pay income taxes to the Commonwealth of Kentucky.
HISTORY AND BACKGROUND
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As you are no doubt aware, the Buck Act was passed in 1940 to correct inequities in citizens of a state not having to pay their just share of state and local income taxes by virtue of their employment on a federal reservation. Under the Buck Act, we are required to pay taxes to Kentucky for income earned on the military base.
As residents of Tennessee, we also pay taxes to the state of Tennessee. Thus, I decided to organize a group of 2000 similarly situated employees into a cohesive unit known as Concerned Citizens of Tennessee.
STATEMENT OF FACTS
It is inequitable that we should be required to pay taxes to Kentucky on three grounds. First, it should be against public policy that we pay taxes to two different states. Tennessee has one of the highest sales tax rates in the nation. And the Tennessee sales tax applies to services as well as every retail article sold, including food, clothing, and medicine. In addition, Tennessee collects inter alia: excise taxes on many large item purchases, property taxes, school taxes, business taxes and vehicle licensing taxes. We pay a proportionate share of taxes to our sovereign state. In addition, and unlike other post employees, we pay income taxes to Kentucky. Kentucky has reciprocal income tax agreements with all surrounding states except Tennessee. Kentucky refuses to exempt us from taxes because Tennessee has no income tax. We realize that the fact that Tennessee has no income tax may have great legal significance; however, regardless of their name, the taxes we pay to Tennessee have the same effect on our net worth as an income tax and existing law takes more from us than from other similarly situated employees. For example, there are seven schools in the school system at Fort Campbell. Five of the schools are located on the North side and two on the South side of post. Because I was involuntarily assigned to a school on the North side, I make $3,000.00 less per year than a teacher teaching the same subject, on the South side of post.
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Second, when the rhetoric is stripped to its essentials, we have no real or meaningful choice in the matter of employment. It is said that those who work on the North side of Fort Campbell and live in Tennessee do so by choice. In fact, it has been said that we were not forced to apply for a job at Fort Campbell in the first instance. This reasoning is unsound in two particulars. Typically, an employee applies for a job without knowledge of disparate tax treatment based on vagaries of assignment at the post. And, an employee does not have a real or meaningful choice when, after working many years and becoming vested in the retirement and other job benefits, he or she gets involuntarily transferred from the South to the North side of post. What is the employee to do--quit the job--throw away his or her hard earned benefits?
The third issue is plain justice. It is a fundamental principle of our democratic way of life that those who take advantage of the protection of a sovereign state and the benefits which accrue therefrom should bear the burden of financing that government and we recognize and agree with the principle. However, we also recognize, as did our forefathers, that adequate representation does not consist solely of a representative in government; it is also comprised of the benefits and protections given by the sovereign. We receive absolutely no benefit or protection from the state of Kentucky. None. We do not use Kentucky roads or highways. We do not receive Kentucky police or fire protection. We do not use electric, water, sewage, natural gas, or any other utilities from the state. We receive no governmental financial benefits from Kentucky. Nor do we burden the judicial system of Kentucky. In short, we do not use anything from Kentucky which has ever been recognized as a benefit or protection of government.
CONCLUSION
We are being asked to support two sovereign states instead of one. We are given no real or meaningful choice in the matter of where we work on Fort Campbell. We receive absolutely none of the protections of benefits which would traditionally make it just for us to share in the burden of Kentucky government. We do not think that members of this body, when propounding the Buck Act, envisioned this situation. Thus, on behalf of 2000 Concerned Citizens of Tennessee, I ask that each of you support H.R. 865.
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Mr. GEKAS. We thank you.
Mr. Wilson.
STATEMENT OF EDWIN WILSON, FEDERAL EMPLOYEE AT FORT CAMPBELL
Mr. WILSON. Good morning, again. I appreciate the opportunity to be here today and share my experience with you regarding this issue.
I was born in Kentucky approximately 23 miles from where I work today on Fort Campbell Army Airfield. I entered the Air Force in 1964 with Kentucky as my home of record. I voted as a Kentuckian and paid Kentucky taxes until my family purchased a home in Clarksville in 1985 after we were assigned to Fort Campbell.
Our oldest son is 29 years old, mentally retarded, and has multiple medical problems. Because of his dangerous health problems in 1985, we felt the need to be as close to Fort Campbell health care as possible. That meant living in Clarksville, TN. Our home is approximately 1.2 miles from the gate 1 entry to Fort Campbell. We changed our residency at this time from Kentucky to Tennessee.
During my active duty service in the Air Force, I maintained my Kentucky residency preference and continued to pay Kentucky taxes as a taxpayer. I felt I retained the rights and privileges of a Kentucky taxpayer even though I did not actually live within the State of Kentucky 16 of the 10 years I was in the Air Force.
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I had the ear of my representatives in government and never missed the opportunity to vote, even if done by absentee ballot during this period. I felt I was retaining my right to resident Kentucky hunting and fishing permits and the education system they offer.
After I retired from the Air Force in 1989, I held a variety of positions, and in 1991, I was employed as quality assurance officer at the Campbell Army Airfield. Because the airfield is geographically located on the north side of the Federal reservation, anyone who physically works there is subject to Kentucky taxation. When I became a Federal employee in 1991, I began to be taxed by the Commonwealth of Kentucky on income earned on the Federal salary I received from my position at the airfield, even though at this time I was a resident of Tennessee.
I questioned the legality of this taxation, but reluctantly continued to pay the Kentucky tax because my daughter, by this time, had decided to attend the University of Kentucky, and I felt if my taxes were used to indirectly subsidize her education, I would be getting something out of the approximately $55 they withheld each pay day.
In 1992, my daughter applied and was accepted to the University of Kentucky, but during the financial briefing with the University, we were confused to find her classified as an out-of-State student. The difference in the cost in one year was $3,500.
I questioned the classification and was given a residency appeals package. Those at the financial briefing felt I was justified in thinking she should be classified as an in-State student. I completed the appeals process based on the fact that I was a full-time taxpayer of the Commonwealth of Kentucky, and it being my home of record for the majority of my military service. The appeal was repeatedly denied. During the past 5 years, it has cost me an approximately an additional $18,000 to educate my daughter in the Kentucky State college that my tax dollars helped fund.
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I enter the Federal reservation of Fort Campbell well within the Tennessee border. Kentucky does not in any way contribute to my job performance, safety, or facilities in the daily performance of my job.
Taxation is interpreted my most people, myself included, as a fee charged by the government, whether it be State, local, or Federal, to cover the costs of implementing a service to the citizens in that area. Based on 4 U.S.C.A., sections 105 and 106, the Commonwealth of Kentucky has determined it has the right to tax the income of residents of the State of Tennessee who work on this Federal enclave.
Much of the installation is located on the south side of the former border of Kentucky and Tennessee. However, if your primary job location is situated across the former border that splits Fort Campbell, as included on exhibit 1 up there, your pay is subject to taxation by Kentucky. It's not unusual for an employee to actually work in both the Tennessee and Kentucky areas of Fort Campbell. I, myself, have responsibilities at both Sabre Airfield, which is located on the Tennessee area of Fort Campbell, and Campbell Army Airfield, which is on the Kentucky portion of the airfield--or the installation.
My total income is taxed by the State of Kentucky because my primary office and worksite is on the Kentucky side of the Federal installation, yet I have absolutely no privileges or benefits for my taxation. No services are provided for the fees collected by the State of Kentucky. This taxation is grossly unfair because we must relinquish part of our income to a State that is in no way accountable to us by means of services or benefits otherwise expected when fees are collected.
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Because of the injustice of this taxation, I respectfully request that you restrain Kentucky from continuing to tax those to whom they have demonstrated they have intent to serve. Our Federal Constitution provides us with protection from taxation without representation. I respectfully ask that you support H.R. 865. Thank you.
[The prepared statement of Mr. Wilson follows:]
PREPARED STATEMENT OF EDWIN WILSON, FEDERAL EMPLOYEE AT FORT CAMPBELL
I was born in Kentucky, approximately 23 miles from where I work today on Fort Campbell Army Airfield. I entered the Air Force in 1964 with Kentucky as my home of record. I voted as a Kentuckian, and paid Kentucky taxes until my family purchased a home in Clarksville Tennessee in 1985 after we were assigned to Fort Campbell. Our oldest child is 29 years old, mentally retarded and has multiple medical problems. Because of his dangerous health problems in 1985, we felt the need to be as close to Fort Campbell health care as possible. That meant living in Clarksville, TN. Our home is approximately 1.2 miles from the Gate One entry to Fort Campbell. We changed our residency at that time from Kentucky to Tennessee.
During my active duty service in the Air Force, I maintained my Kentucky residency preference and continued to be a Kentucky taxpayer. I felt I retained the rights and privileges of a Kentucky taxpayer, although I did not actually live within the state of Kentucky for 16 of the 20 years I served in the Air Force. I had the ear of my representatives in government (at the time Carroll Hubbard), and never missed the opportunity to vote even if done by absentee ballot. I felt I was retaining my right to resident Kentucky hunting and fishing permits and the educational system.
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After I retired from the Air Force in 1989, I held a variety of positions and in 1991 was employed as Quality Assurance Officer at the Campbell Army Airfield, (CAAF). Because the airfield is geographically located on the north side of the federal reservation, anyone who physically works there is subject to Kentucky taxation.
When I became a federal employee in 1991, I began to be taxed by the Commonwealth of Kentucky on income earned on the federal salary I received from my position at the airfield, even though I was then a resident of Tennessee. I questioned the legality of this taxation, I reluctantly continued to pay Kentucky taxes, because my daughter had decided to attend the University of Kentucky. I felt if my taxes were used to indirectly subsidize her education, I would be getting something out of the approximately $55 per pay period that Kentucky withheld from my check.
In 1992, my daughter applied and was accepted at the University of Kentucky. During the financial briefings with the University, we were confused to find her classified as an out of state student. The difference in cost in one year was $3500. I questioned this classification and was given a residency appeals package. Those at the financial briefing felt I was justified in thinking she should be classified as an in-state student. I completed the appeal process, based on the fact that I was a full time tax-payer of the Commonwealth of Kentucky and it being my home of record for the majority of my military service. The appeal was repeatedly denied.
During the past five years, it has cost me approximately an additional $18,000 to educate my daughter in a Kentucky state college that my tax dollars help fund.
I entered the federal reservation of Fort Campbell well within the Tennessee borders. Kentucky does not in any way contribute to my job performance, safety or facilities used in daily performance of my job.
Taxation is interpreted by most people, myself included, as a fee charged by government, (local, state or federal), to cover the cost of implementing a service to citizens in that area. Based on 4 U.S.C.A. Paragraph 105 and 106 the Commonwealth of Kentucky has determined it has the right to tax the income of residents of the State of Tennessee who work on this federal enclave. Much of the installation is located on the south side of the former border of Kentucky and Tennessee. However, if your primary job location is situated across the former border that split Fort Campbell, as included on the Exhibit One, your pay is subject to taxation by Kentucky. It is not unusual for an employee to actually work in both Tennessee and Kentucky areas of Fort Campbell. I have responsibilities at both Sabre Airfield which is located on the Tennessee area of Ft. Campbell and Campbell Army Airfield which is on the Kentucky portion of the installation. My total income is taxed by the state of Kentucky because my primary office and worksite is on the Kentucky side of the federal installation. Yet, I have absolutely no privileges or benefits for my taxation. No services are provided for the fees (taxes) collected by the state of Kentucky.
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This taxation is grossly unfair and immoral because we must relinquish part of our income to a state that is in no way accountable to us by means of service or benefits otherwise expected when fees are collected.
Because of the injustice of this taxation, I respectfully request that you restrain Kentucky from continuing to tax those to whom they have demonstrated they have no intention to serve. Our federal constitution provides us with protection from taxation without representation. I respectfully ask that you support H.R. 865.
Mr. GEKAS. We thank you, Mr. Wilson.
Mr. THOMPSON. Mr. Chairman, I have a committee meeting. If the committee would excuse me----
Mr. GEKAS. I don't know if we can excuse you, Senator----
Mr. THOMPSON. Well, I would sure appreciate it.
Mr. GEKAS [continuing]. But we will. Thank you very much.
Mr. THOMPSON. Thank you very much.
Mr. GEKAS. Of course, thank you.
The Chair will reserve its question time until after the members have had a chance to examine the witnesses. Now, I will defer to the gentleman from New York for an opening statement, following which, if he desires, he can have 5 minutes for questioning the witnesses.
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The gentleman from New York.
Mr. NADLER. Thank you, Mr. Chairman. Mr. Chairman, today we need to consider everybody's least favorite civic obligation, the payment of taxes. Certainly at this time of year, bashing the tax collector makes good copy, and highlighting what might arguably be an injustice in the collection of taxes is political nirvana.
I am concerned, however, that we are today--and I say this with all due respect to the good people who work on the Columbia River and the military installation in Kentucky and/or Tennessee--we may be about to open the proverbial floodgates. Many Americans, very many Americans, reside in one jurisdiction and work in another. They pay the requisite taxes, and I am sure don't particularly enjoy it.
But this Congress has for several years now pressed the cause of devolution of responsibilities to the States. For better or for worse, this Congress has given the States more responsibilities to care for the poor, to maintain their infrastructure, to educate the next generation, and to protect the environment and public safety.
At the same time the Federal Government has given States and localities increasingly fewer resources from Federal taxes to accomplish these responsibilities. That may be good for Members of Congress who can go home and brag about cutting taxes and the size of Government, but State and local officials who bear the responsibility to provide basic services with increasingly fewer Federal dollars and who are under no less pressure to keep the tax burden down, face an ever more difficult task.
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This may be good politics at the national level, but it has become a fairly routine form of buck-passing to State and local officials. And despite the political rhetoric, the bills must be paid, the schools must stay open, and the streets of neighborhoods must be protected. In fact, those governmental responsibilities paid for by taxes also include building and operating dams and educating the children of our men and women in uniform. The individuals who today protest taxation themselves are living off the taxes paid by themselves and other citizens.
Now comes the mother of all unfunded mandates. In addition to passing responsibilities to the local level without the necessary resources to do the job, we are now asked to begin stripping the States of some of their constitutional authority to raise revenues to pay the bills. I believe that absent some overwhelming and unique justification, that is a step too far.
The sponsors of these two bills before us today believe these are unique cases. They believe that in these particular cases there are overwhelming and unique reasons that differentiate these cases from the thousands of other cases of cross-jurisdiction taxation that might be brought to us. That is the case that they have the heavy burden of making today.
Mr. Chairman, I don't think we know how many other similar cases exist around the country. How many other workers who cross State borders to work will next petition their representatives to ask us to preempt State governments' taxing authority. We need to consider with care the precedent we may be setting with this legislation. We may very well regret it in future years.
Mr. Chairman, I served in the New York Legislature for 16 years. We had to do something every year the Federal Government sometimes finds it difficult or even impossible to do--pay the bills on time and within budget. The buck stops at the statehouse door. The members of this subcommittee should be very wary of setting precedents that may begin to strip the States of the ability to do so.
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Now I am not saying that we should not pass this legislation. I am saying that there is a very, very heavy burden of proof to show the uniqueness of these situations and the total inequity of not passing the legislation, because there are thousands, maybe hundreds of thousands or millions of people who work and cross State borders to do so. And to begin down this road of preempting State tax authority in that situation is a very, very serious step and one we should take only with the greatest of caution.
Thank you, Mr. Chairman.
Mr. GEKAS. Does the gentleman wish to exercise 5 minutes of examination of the witnesses, or does he waive that at this time?
Mr. NADLER. I'll waive that for the time being, but I will want it for this panel in a few minutes after the others go.
Mr. GEKAS. Thank you. By way of a rebuttal, partly, to the gentleman's opening statement, I want to remind him that in the last Congress, we passed a major piece of legislation in which we protected pensioners who live in one State from the taxing authority in the State where they worked and developed their pension--called the source tax legislation, which is very similar and which is precedent for the request being made in the bills that we have before us today.
Also, in several other instances where these special circumstances and unique circumstances to which the gentleman alludes have been made clear, the Congress has acted promptly and has solved those kinds of fairness situations between two taxing authorities. So we do have precedent, and we do have the unique circumstances as outlined by the witnesses, at least to a degree that convinced the Chair of the emergent nature of this legislation.
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One question that I have recurs. Was Fort Campbell always astride the two States from its origin?
Mr. LOVETT. Yes, sir, it was.
Mr. GEKAS. It was.
Mr. LOVETT. It was not exactly in its present shape, but essentially it was the same. Just a few acres were added in the rear area, but it's basically always been astride the State line.
Mr. GEKAS. Because I remember that it was referred to as Fort Campbell, TN, in my Army days; that's the way I remembered it. But we accept the map. I'm not criticizing the configuration of the map.
Mr. BRYANT. May I make a further a comment on this issue in general?
My colleague from New York is always very thoughtful on subjects, and I really couldn't agree with you more. I'm not sure I disagree with anything you said; however, I do think this is such a unique situation. When you mentioned that the States have to pay the bills, they do.
But in the case of these 2,200 Tennessee residents, frankly they aren't paying any bills for them, and it's highlighted especially by Mr. Wilson. Not only has he paid State income tax to the Commonwealth of Kentucky, when his daughter chose to go to the University of Kentucky they assessed him out-of-State tuition. So, in effect, he double-paid for his daughter to go there.
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And I've spoken to these folks. I think out of equity and fairness Kentucky is wrong, but I can't fault them. They have a gold mine here. They're getting $4 million of income from 2,200 people a year, and they're not having to spend any money; they're not having any out-go. So I certainly wouldn't expect them just to give that gold mine up. But, again, out of equity and fairness and because of the extreme uniqueness of this situation, I think this does justify a precedence in this area.
The same goes for fees--hunting fees, fishing fees, any type of licensing. These folks are treated as out-of-State residents, so they are in effect not only double-paying between Kentucky and Tennessee, but they're double-paying within Kentucky when they apply for college or these hunting fees or fishing fees.
Thank you.
Mr. GEKAS. We thank this panel.
Mr. NADLER. Could I----
Mr. GEKAS. Yes, the gentleman from New York is recognized for 5 minutes.
Mr. NADLER. Thank you, Mr. Chairman.
Let me ask--I assume it should be Mr. Bryant. I'm going to ask you a question that is taken from the testimony of someone who is going to testify in our next panel and ask you to comment on it, because I assume you won't be here after the next panel.
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It says the following--this is Professor Smith, James Charles Smith. He talks about the past precedents that are cited, and he says: ''In my opinion the analogies that may conceivably be drawn to the two precedents for congressional intervention are not persuasive. Except for military employment, Federal employment''--and we're talking now about the Washington situation because this is military employment, but--''except for military employment,'' Federal employment should be seen from the employee's perspective as a matter of personal choice, just as it is for other employees generally. In the private sector, people often find they must accept employment in another State which may impose a relatively higher tax. Whether they move to the State of their employment or remain nonresident and commute, they must pay State income tax based on source.
''In addition, employers often transfer employees from one State to another, and when this has an adverse State income tax effect the private sector employee must bear that burden or resign from the job.''
I would ask you to comment on the situation in light of that, and second of all--I can't find the quote, but I read it a few minutes ago in this testimony--he says that the two previous exemptions, the exemptions on pensions that were mentioned, were granted essentially for administrative reasons, that it would be a nightmare to try to apportion taxation of pension benefits earned over a person's lifetime in 10 different States, depending where he lives now. And, of course, this is not a question here of administrative burden, but that the reason for that legislation was because the administrative burden would have been incredible.
Mr. BRYANT. Certainly--good points. Again, the uniqueness of the situation where you have a location that is co-located in two States, one State which has an income tax and the other State which does not, I think will guarantee this is not a dangerous precedent where we'll be flooded with similar situations.
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But as Mr. Lovett mentioned in his testimony--and I think very well--these are people who have come into a system and become career employees--as teachers, at the airport--and just by the bad luck of the draw, certainly in his case--he mentioned there are five schools in the southern part, in Tennessee, and two schools in the northern part, in Kentucky, and they make those reassignments and so forth and you don't know necessarily, nor are you aware of, the taxing implications when you go into that system.
He, I think, said very well that you just don't simply drop out of a career and move out of that job because you've been reassigned, and that's exactly what they're doing here. Just, again, by the luck of the draw, he's in the wrong place.
Mr. NADLER. Well, let me, if I could----
Mr. BRYANT. And it's not a voluntary choice.
Mr. NADLER. I understand. Let me ask you two other questions.
Would it make a difference if, hypothetically, Tennessee had an income tax? Let's say Kentucky had a 6-percent income tax and Tennessee had a 4-percent income tax, or the same income tax. From the policy point of view of Congress, would that make a difference to what you're saying?
Mr. BRYANT. I think it would, and I think that's the typical case. As we pointed out, Kentucky has a reciprocal agreement with all other adjoining States who have an income tax. The problem herein lies that Tennessee does not have an income tax; that would be the difference. Even if it weren't exactly the same, you would have an agreement where there would be an offset and they would get their money back in one way or the other.
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Mr. NADLER. Why wouldn't it then be a better idea perhaps for Congress to say that there should be some sort of--to order them to have some sort of an offset on whatever other taxes they have--not an income tax, but sales or whatever?
Mr. BRYANT. Well, there again you're talking about--while it may not reach the numerical value of an unfunded mandate that we have talked about the level of dollarwise, I think it is an unfunded mandate, and I would be very uncomfortable ordering at the Federal level the State of Tennessee to reduce its income, its revenue. I don't think that would work.
Mr. NADLER. Well, but if they had an income tax, they would reduce their revenue by an offset, so why shouldn't they reduce their sales tax by an offset? What's the difference?
Mr. BRYANT. The issue never has been discussed from that angle.
Mr. NADLER. Well, let me ask you one other----
Mr. BRYANT. These folks are getting a real service from Tennessee. They're getting the roads and all the education system and all the benefits of being in Tennessee. The inequity here, and what we're before this committee about, is they're getting nothing from Kentucky, and Kentucky has a gold mine here. They're getting all of this tax revenue without having to spend a dime back for these folks' benefits.
So, I think your argument fails in terms of who's providing the benefits. Tennessee is providing these people the benefits, so they should be entitled to the full amount of revenue and not have to take a credit at that point.
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Mr. GEKAS. Maybe we ought to write a letter to Don Sundquist, our former colleague, and make your suggestions to him.
Mr. BRYANT. But, again, Tennessee is providing all the range of benefits, and they ought to have all of the income. They should not have to unilaterally give a credit or reduce their revenue just so Kentucky can continue to have a full income tax and provide nothing.
Mr. NADLER. Well, let me make just one reply to that, and I'm really not sure how I come down on this legislation at this point. It's well-settled constitutional law--and we're not dealing with constitutional law now; we're dealing with policy--but it's well-settled constitutional law that if you earn all or part of your living in State A and you live in State B, State A has the right to tax you regardless of how much, if any, services you get from that State. I mean, as a matter of constitutional law, it is well settled that Kentucky is entitled to tax them even if it provides no services at all. That's a matter of law. There's no question of that.
As a matter of policy--well, you may or you may not know this, and I don't know this at the moment, but are there other situations where States do--I mean, what I'd be concerned about is how broad a precedent we are setting. If we pass this bill, are we suddenly going to find out that billions of dollars are affected in 20 different States, or God knows what, in revenues that State A takes from business in State B where they could make a similar case that they get no benefits?
Mr. BRYANT. I think, again, the underlying logic behind why it is lawful for States to tax----
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Mr. NADLER. I'm sorry--yes.
Mr. BRYANT [continuing]. The underlying logic is based on the fact that they do receive services, even if it's no more than riding down the highway.
Mr. NADLER. No, but the underlying logic is true whether or not they receive services. That's been litigated to the Supreme Court. The State has the right--we may take it away from them as a matter of policy--but under constitutional law, the State has a right to tax them even if they don't receive any benefits. That is clear law. Now, but the question is----
Mr. BRYANT. I can't imagine a circumstance where they don't receive benefits other than this type of arrangement where you're on a border and you can go from one to the other without getting into the State highway system. I would disagree with you on the underlying premise. I think that's the logic of why one State can tax another State's income, because you're having to afford them a road, a highway, the highway patrol, and all of these services that are available to them when they come into your States.
Mr. NADLER. Congressman, I'm not arguing the logic. I'm simply stating a fact and asking a question. The fact is that the constitutional right of the State to do that is not dependent on whether it gets benefits. That's settled law. Maybe it should be, but it isn't.
Now the question is, should we, by statute, change that as a matter of equity? And my question is, if we were to do that as a matter of equity, which is essentially what you're urging us to do--as a matter of equity, we should change that for this kind of situation--are we opening up a huge floodgate? In other words, do you know? Are there a lot of other places where there are lots of taxpayers who pay taxes in one State and receive no benefit from another? So are we setting a precedent for very large things, or not?
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Mr. BRYANT. I don't think so. I know this would be one, and perhaps Washington State is another one. But they're the only two, because I think it has to result from this type of situation, where you have an installation that straddles a post, and one State has income tax and the other State doesn't have income tax. I think it's a very unique problem.
Mr. GEKAS. The time of the gentleman has expired.
Mr. NADLER. Thank you very much.
Mr. GEKAS. This subcommittee will stand in recess for a period of 15 minutes to permit a vote that is now being cast on the floor. We will resume this session at 11:05.
[Recess.]
Mr. GEKAS. The hour of 11:05 have arrived and passed, we reconvene.
We will invite the second panel to take their seats at the witness table.
The second panel consists of two of our colleagues: Congressman Doc Hastings and Congresswoman Linda Smith. Congressman Hastings was first elected to the House in 1994.
Could we have order in the subcommittee, please?
Congressman Hastings was first elected to the House in 1994 as Representative from the Fourth District of Washington. From 1979 to 1987, he served in the Washington State House of Representatives, where he served as assistant majority leader. For 27 years, he ran his own business called the Columbia Basin Paper & Supply Co. in Pasco, WA. Last term, he came before this subcommittee and made a compelling case for the very same issue which we are confronted here today. We're eager to have Doc reendorse the offering he made last term.
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STATEMENT OF HON. DOC HASTINGS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WASHINGTON
Mr. HASTINGS. Thank you very much, Mr. Chairman, and members of the committee.
I appreciate this opportunity to discuss H.R. 874, legislation that I introduced to end what I consider to be the unfair double taxation of Washington residents--and they are Washington residents--employed by the Federal Government, on dams spanning the Columbia River.
When it first came to my attention that the Oregon Department of Revenue was forcing Washington State residents who do not work in Oregon to pay Oregon income taxes, I found that rather difficult to believe. Just the notion of it defied our general sense of tax fairness, and it seemed to contradict several recent congressional directives on tax policy.
Unfortunately, this small group of workers, less than 200 seems to have been forgotten. Not only are these workers not Oregon residents, but their workplace is not in Oregon either. The Columbia River divides Oregon and Washington, and the border is legally defined as the midpoint between the two shores.
Because the dams span the river, these Federal facilities are technically split between Oregon and Washington, and workers are sometimes obligated to cross to the southern half of the dams, which would be the Oregon side. On the basis of these crossings, the State of Oregon has claimed that they are employed in Oregon and has therefore taxed their income.
To me, this is an issue of fairness. This taxation defies common sense. These Army Corps of Engineers employees do not cross into any part of Oregon which is not controlled by the Federal Government. I want to emphasize that point: They don't cross any point that is not controlled by the Federal Government. Furthermore, they use no Oregon services and receive no Oregon benefits. For instance, they can enter the dams from the Washington shore, and they need not use the Oregon bridges on the other side of the river to enter the dams.
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Workers who have been paying taxes to Oregon have been denied unemployment benefits from Oregon when they are laid off. They and their children have been denied in-State tuition from Oregon universities, and they do not qualify for in-State fees for fishing and hunting licenses--very similar to what the last panel talked about. Nor are they eligible for Oregon's comparatively inexpensive vehicle registration fees. And most importantly, they are not allowed to vote in Oregon.
In short, they never see a single benefit from the taxes they are compelled to pay to the State of Oregon. In addition to paying taxes to the State from which they receive no benefits, they must also bear the administrative burden of recording the percentage of time worked on each half of the dam, the Oregon or the Washington side. In some cases, the Oregon Department of Revenue has actually tried to force these workers to prove that they don't work entirely in Oregon.
Some have argued that Oregon workers who shop in Washington State might have to pay sales tax. Now I want to emphasize this point: that is simply not the case, because any Oregon resident who displays an Oregon driver's license is entitled to pay no sales tax on purchases in Washington State, and Washington State has no income tax so, therefore, Oregon residents pay no taxes at all in Washington even though they may work on dams which lie half in Washington. So this double taxation is, at this point, a one-way street.
Congress has already established precedents regarding this issue. H.R. 874 is a sensible solution to this unfair double taxation. This legislation is derived from the precedents set by the source tax which was alluded to in discussions in the last panel that we passed in the 104th Congress, and the Amtrak Act, from the 101st Congress, which stipulated that railway employees should only be taxed by their State of legal residence.
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Like the employees on these dams, railway employees must frequently cross State lines without using the services or infrastructure provided by those States. In both cases, Congress stepped in to right a wrong.
Last year, the bipartisan Corrections Day Task Force held two hearings on this legislation and recommended it for floor action. However, when the bill came to the House floor under a suspension of the rules on the final day of the last Congress, some Members objected to the timing of the vote and the lack of adequate hearings before this specific Judiciary Committee subcommittee.
Because of these unexpected objections, most notably from my colleague from Oregon, Mr. DeFazio, who raised the issue of States' rights, the bill was defeated. I have been working with Mr. DeFazio to address his concerns, and I am confident that we now have allayed whatever concerns he may have had in the last Congress.
In addition, the Human Resources Department of the Army's Corps of----
Mr. NADLER. Excuse me; can I just ask you--are you saying then that the State of Oregon and its Representatives here do not oppose this bill at this point?
Mr. HASTINGS. Well, I was just going to mention that here in my testimony, and if I don't say it to satisfy you, ask me again.
In addition the Human Resources Department of the Army Corps of Engineers in Portland, which, of course, is in Oregon, has informed their employees that, and I quote, ''Congressional action will be required if we are to get this situation fixed.'' These are their employees.
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So in conclusion, Mr. Chairman, these workers are being unduly penalized because their workplace straddles a State line. They pay all the applicable taxes in their State of residence, which is Washington, but are forced to pay taxes to a State from which they receive no benefits.
My informal count reveals that fewer than 200 employees would be impacted by this legislation--less than 200 employees. Citing the aggressive tactics employed by the Oregon Department of Revenue, many of these workers were unwilling to have their names disclosed for fear of retribution.
However, the fact that the Oregon Department of Revenue--and this goes to your point--the Oregon Department of Revenue declined an invitation to testify here today supports our belief that this bill would have no significant impact on Oregon's revenue stream. Although these taxes have a negligible impact on Oregon's State budget, I can tell you they are a significant burden on the families of these Federal employees. This bill is the definition of working family tax relief. These union workers deserve our attention on this issue. Once again, I want to thank this committee for considering this legislation.
And, Mr. Chairman, I am very pleased that the committee will have an opportunity to hear from some of the people that are impacted by this bill. I am proud to say that these two gentlemen to my right joining us today are constituents of mine.
Roger Hays, on the end, is from Kennewick, WA, and he works on McNary Dam, and Dwight Campbell, of Goldendale, WA, works on John Day Dam. Their hard work--and the work has been going on for some time on this legislation--and knowledge of this issue, frankly has been very invaluable to me in drafting this legislation.
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And with that, Mr. Chairman, I would yield to them for their remarks if that would be in order.
[The prepared statement of Mr. Hastings follows:]
PREPARED STATEMENT OF HON. DOC HASTINGS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WASHINGTON
INTRODUCTION
Thank you Mr. Chairman and members of the Committee. I appreciate this opportunity to discuss H.R. 874, legislation I introduced to end the unfair double taxation of Washington residents employed by the federal government on dams spanning the Columbia River.
BACKGROUND
When it first came to my attention that the Oregon Department of Revenue was forcing Washington State residents who do not work in Oregon to pay Oregon income taxes, I found it difficult to believe. Just the notion of it defied our general sense of tax fairness, and it seemed to contradict several recent Congressional directives on tax policy.
Unfortunately, this small group of workers seems to have been forgotten. Not only are these workers not Oregon residents but their workplace is not in Oregon either. The Columbia River divides Oregon and Washington, and the border is legally defined as the midpoint between the two shores. Because the dams span the river, these federal facilities are technically split between Oregon and Washington and workers are sometimes obligated to cross to the southern half of the dams. On the basis of these crossings, the State of Oregon has claimed that they are employed in Oregon and has taxed their income.
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AN ISSUE OF FAIRNESS
This taxation defies common-sense. These Army Corps of Engineers employees do not cross into any part of Oregon which is not controlled by the federal government. Furthermore, they use no Oregon services and receive no Oregon benefits. For instance:
They can enter the dams from the Washington shore, and need not use Oregon bridges or roads.
Workers who have been paying taxes to Oregon have been denied unemployment benefits from Oregon when they are laid off.
They and their children have been denied in-state tuition at Oregon universities.
They do not qualify for in-state fees for fishing and hunting licenses. Nor are they eligible for Oregon's comparatively inexpensive vehicle registration fees.
Most importantly, they are not allowed to vote in Oregon.
In short, they never see a single benefit from the taxes they are compelled to pay to the State of Oregon.
In addition to paying taxes to a state from which they receive no benefits, these workers must also bear the administrative burden of recording the percentage of time worked on each half of the dam. In some cases the Oregon Department of Revenue has actually tried to force these workers to prove that they don't work entirely in Oregon.
Some have argued that Oregon workers who shop in Washington State might have to pay sales tax. But that's not the case. Any Oregon resident who displays an Oregon driver's license is entitled to pay no sales tax on purchases in Washington. So this double taxation is, at this point, a one way street.
CONGRESS HAS ALREADY ESTABLISHED THE PRECEDENT
H.R. 874 is a sensible solution to this unfair double taxation. This legislation is derived from the precedents set by the ''Source Tax'' bill passed in the 104th Congress and the ''Amtrak Act of 1990.''
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In the Source Tax bill, Congress determined that pension benefits should be taxed only in the pensioner's state of legal residence. regardless of where the pension was earned and the state from which the payment originates.
In the Amtrak Act, the 101st Congress stipulated that railway employees should only be taxed by their state of legal residence. Like the employees on these dams, railway employees must frequently cross state lines without using the services or infrastructure provided by those states.
In both cases, Congress stepped in to right a wrong.
Last year, the bi-partisan Corrections Day Task Force held two hearings on this legislation and recommended it for floor action. However, when the bill came to the House floor under a suspension of the rules on the final day of the 104th Congress, some Members objected to the timing of the vote and the lack of hearings by the Judiciary Committee. Because of these unexpected objections, most notably from Mr. DeFazio of Oregon who raised the issue of states' rights, the bill was narrowly defeated. I have been working with Mr. DeFazio to address his concerns, and I am confident that we have no allayed his concerns.
In addition, the Human Resources Department of the Army Corps of Engineers in Portland has informed their employees that ''Congressional action will be required if we are to get this situation fixed.''
CONCLUSION
Mr. Chairman, these workers are being unduly penalized because their workplace straddles a state line. They pay all applicable taxes in their state of residence, but are also forced to pay taxes to a state from which they receive no benefits or representation.
Our own informal count reveals that fewer than 100 workers would be impacted by this legislation. Citing the aggressive tactics employed by the Oregon Department of Revenue, many of these workers were unwilling to have their names disclosed for fear of retribution. However, the fact that the Oregon Department of Revenue declined an invitation to testify supports our belief that this bill would not have a significant impact on Oregon's revenue stream.
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Although these taxes have a negligible impact on the State of Oregon's budget, they are a significant burden on the families of these federal employees. This bill is the definition of working family tax relief. These union workers deserve our attention to this issue. Once again, I want to thank the committee for considering this legislation.
INSERT OFFSET RING FOLIO 5 HERE
Mr. GEKAS. We thank the gentleman. We now recognize first, Mr. Hays, and allot him the customary 5 minutes to state his case.
STATEMENT OF ROGER HAYS, CHAIRMAN, TAX EQUITY COMMITTEE, UNITED POWER TRADES ORGANIZATION
Mr. HAYS. Thank you, Mr. Chairman, and members of the committee. I appreciate the opportunity to come here to testify on H.R. 874.
H.R. 874 is narrowly defined to affect only workers at Federal hydroelectric projects on the Columbia River. It has no effect on other Washington residents who work in Oregon. At issue here is Washington residents that are Federal employees at these projects, do not use Oregon goods or services, and they receive no benefits from the State of Oregon for their tax dollars. The projects themselves are outside the taxing jurisdiction of Oregon and Washington. They do not pay sales, income, fuel, or property taxes.
I would like to contrast the differences between Washington residents who are Federal employees working at Federal projects on the Columbia River versus Washington residents that work for Intel or Tektronix inside of Oregon.
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A Washington resident working for a company in the State of Oregon is covered by Oregon industrial accident insurance. The State of Oregon also administers their unemployment benefits. They use Oregon goods and services. Their employers use Oregon utilities, water, sewer, and power. Oregon-based companies pay income, fuel, and property taxes. The Federal Government at these projects pays none of these things.
Unemployment benefits for Federal employees are administered from a Federal fund by their State of residence. Accident insurance for corps employees in Washington and Oregon is paid from a Federal fund administered from Seattle, Washington. Federal employees at Federal projects on the Columbia are working on self-contained, stand-alone entities. At the Bonneville project alone, 85 people arrive at work every day without ever driving on an Oregon road. These projects physically straddle the Oregon/Washington border and are completely self-sufficient and self-contained. They do not use Oregon infrastructure.
The Code that gives the State of Oregon the right to tax Federal employees working on Federal projects is a result of the Buck Act, 4 U.S.C., section 106. In section 105, part 3, taxation affecting Federal areas, the purpose, it states: ''The purpose of sections 105 to 110 of this title was to provide federal employees pay the same taxes in the area in which they live or work as all other employees, so long as no discrimination of federal employees results.''
It seems discriminatory that two people from two States can stand side-by-side on a Federal project, making multiple border crossings between the two States during the course of a single day, with only one being subject to double taxation and held to a different standard by having to keep special records to track their time. Only Washington employees are required to track their time in log books so they can submit their Washington and Oregon hours to a clerk at year's end.
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I can literally walk back and forth across the State line in the middle of the Columbia River, playing ''tax me, don't tax me.''
With the Amtrak Act, Congress has exempted interstate motor carriers who make multiple border crossings from taxes, except by their State of residence. It's hard for me to believe that the lawmakers who forged the original legislation ever meant for anything so absurd as our present tax situation to go on as long as it has.
I have a letter from a mechanic at the McNary project, a Mr. Ken Taylor, whose son was invited as a walk-on to try out for the Oregon State football program. He wound up not going to OSU because his family could not afford out-of—State tuition, although Mr. Taylor has paid Oregon income taxes for nearly 15 years. I have that letter with me, and I would like to have that submitted for the record.
Mr. GEKAS. Without objection, it will be included in the record.
[The information follows:]
APRIL 9, 1997.
Hon. GEORGE W. GEKAS,
Rayburn House Office Building,
Washington, DC
DEAR MR. GEKAS, I am writing this letter in support of H.R. 874, ''Hydroelectric Worker Equity Act''.
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I reside in Washington and am employed at a federal hydroelectric project which is located both in Washington and Oregon States. Income Tax from Oregon State is deducted from my wages which I receive no benefit for whatsoever.
In 1992, my son was contacted by Oregon State University to see if he was interested in obtaining an education and playing football as a ''non-scholarship'' player for their institution. After lengthy discussions with both the coaching Staff and the Dean of Admissions Office it was decided my son would have to pay out of state tuition although I pay Oregon State Income Taxes. I could not afford these expensive tuition charges. He missed football and most importantly missed his opportunity to pursue his education at a major institution.
I'm sure you'll agree this tax is a very unfair tax and will support H.R. 874.
Sincerely,
KENNETH L. TAYLOR.
Mr. HAYS. Thank you.
Last year, when H.R. 3163, the predecessor to H.R. 874, was in committee, the Oregon residents who are Federal workers at the McNary project signed a petition in favor of that bill. A new petition has not been circulated, but I have with me 45 letters from these same people in favor of H.R. 874. Oregonians who see the inequity that exists support the bill.
Mr. GEKAS. Without objection.
[The letters are in the subcommittee files.]
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Mr. HAYS. I have had phone conversations with people at the Oregon Department of Revenue over the years. When I ask them how and why the State of Oregon justifies taxing my income, they start running down the list of benefits Oregon residents receive, and I just keep saying, ''No, I don't get Oregon unemployment; no, my kids can't attend your schools without paying out-of-State tuition; no, I can't get Oregon accident insurance.'' I have to pay out-of-State fees at parks and for my fishing and hunting license.
Finally, after running through the list, they tell me the State of Oregon can tax my income because the law says they can. That is the same kind of mentality the bully on the school ground uses to take a little kid's lunch money. Every time my wife looks at my check stub, she shakes her head and says, ''How can they do this?'' My answer is, the law lets them get away with it. We have to change the law.
We, the Washingtonians in the work force on the Columbia River dams, members of the United Power Trades Organization and National Federation of Federal Employees, urge you to pass H.R. 874. Thank you.
[The prepared statement of Mr. Hays follows:]
PREPARED STATEMENT OF ROGER HAYS, CHAIRMAN, TAX EQUITY COMMITTEE, UNITED POWER TRADES ORGANIZATION
Mr. Chairman, Members of the Committee, thank you for inviting me to testify concerning H.R. 874. I am a resident of the State of Washington and employed as an Electronic Systems Control Repairman at McNary Dam for the U.S. Army Corps of Engineers. McNary Dam is a multi-purpose hydro-electric facility that straddles the border of Washington and Oregon. I am also the Chairman of the United Power Trades Organizations Committee on Tax Equity. The United Power Trades Organization is a federal labor organization, chartered in the State of Oregon, representing federal power plant employees at multi purpose hydro-electric facilities in Oregon, Washington, Idaho, and Montana. The United Power Trades Organization fully supports H.R. 874.
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I have taken annual leave to testify here today. Although I am a resident of Washington State and in a leave status over 2000 miles from home, the pay I receive today will be subject to Oregon State Income tax.
SCOPE OF H.R. 874
H.R. 874 is narrowly defined to affect only workers at federal hydroelectric projects on the Columbia River. It has no effect on other Washington residents that work in Oregon. At issue here is Washington residents that are federal employees at these projects do not use Oregon goods or services and they receive no benefits from the State of Oregon for their tax dollars. The projects themselves are outside the taxing authority (or jurisdiction) of Oregon and Washington. They do not pay sales, income, fuel, or property taxes.
Difference Between a Washingtonian who Commutes to work ''in'' Oregon and a Washingtonian who works at Federal Project on the Columbia River. I have heard it argued that amending the Buck Act to exclude Washington federal employees who work at Columbia River hydro-facilities from Oregon Income Tax is an attack on Commuter Taxes. Well, everyday I work, I commute 25 miles in Washington to McNary Dam, park my car in Washington and walk out on a structure in the middle of a river and go to work. After I cross what is thought to be the state line, it takes me under three minutes to ''commute'' to my shop. Rarely do I step foot on the wholly owned ''federal property'' on the south side of the structure.
I would like to contrast the differences between Washington residents who are federal employees working at federal projects on the Columbia River vs. Washington residents that work for Intel or Tektronix and drive for 30 minutes from Vancouver into Oregon to go to work (or the person who travels into New York City for that matter). A Washington resident working for an Oregon based company, in the State of Oregon, is covered by an Oregon industrial accident insurance fund if injured on the job. If they become unemployed, the State of Oregon administers their unemployment benefits. They use Oregon goods and services. Their employers use Oregon municipal utilities; water, sewer, and power. Oregon based companies pay, income, fuel, and property taxes.
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Unemployment benefits for federal employees are administered from a federal fund by their state of residence. Accident insurance for Corps employees in Washington and Oregon, is paid from a federal fund (OWCF) administered from Seattle, Washington. At the Bonneville project alone, 85 people arrive at work every day without ever driving on Oregon roads. They come and go to and from Washington, not Oregon. Federal employees at federal projects on the Columbia are working at self contained ''stand alone'' entities. These projects physically straddle the Oregon/Washington border and are completely self sufficient/contained. They do not use Oregon's infrastructure. If life ceased to exist outside the confines of the project boundaries in Oregon, the Columbia river projects would keep right on running.
DISCRIMINATION
The wording of the Code that gives the state of Oregon the right to tax federal employees working on federal projects is a result of the Buck Act, 4 U.S.C., Sec. 106. In the preceding section, 105 part 3, taxation affecting federal areas, Purpose, it states:
''Purpose of sections 105 to 110 of this title was to provide federal employees pay the same taxes in the area in which live or work as all other employees, so long as no discrimination of federal employees results.''
It seems discriminatory in nature, that two people, from two States, can work side by side on a federal project, making multiple border crossings between the two states during the course of a single day, with only one being subject to double taxation and held to a different standard by having to keep ''special records'' to track their time. The reason for the special records is that Oregon taxes the portion of Income earned on the ''Oregon'' side of the project. However, it withholds taxes on the full amount of the employees pay. At the McNary project, only Washington employees are required to track their time in log books so they can submit their Washington and Oregon hours to a clerk at years end. The clerk produces a letter figuring the hours (with pay increases) and a percentage, and has the project manager sign a letter of ''estimated'' verification of work actually performed in Oregon.
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With H.R. 5075 (the Amtrak Act, 1990) Congress has already seen fit to exempt interstate motor carriers who make multiple border crossings from confiscatory taxes except by their state of residence. I can literally walk back and forth across the ''state line'' in the middle of the Columbia River playing ''tax me don't tax me''. It is hard for me to believe that the law makers who forged the original legislation ever meant for anything so absurd to go on as long as it has.
BUCK ACT
What got all this started was the Buck Act. The Buck Act was designed as a tool to provide Oregon and other states the means to tax federal employees and contractors living and working on federal project sites within their borders. Prior to 1940, Bonneville Dam employees living and working on the Oregon side of the Bonneville project site were not paying Oregon income tax. Also, contractors working on the construction of the dam were trying to get out of paying taxes to Oregon. One comment included in the 1937 Atkinson v. (Oregon) State Tax Commission was:
''The residents at the project would be without school facilities, police protection, and the right to vote, the workmen would be deprived of the benefit of industrial insurance, and the rules for sanitation would be suspended; for, if the state be wholly without jurisdiction, then it must follow that the state may not extend its privileges to the residents of the project nor expend money on its behalf.''
Residents of Washington that work at Columbia River Dams do not have the right to vote, or receive accident insurance from the State of Oregon. They cannot send their children to Oregon schools without paying out-of-state tuition. Federal projects use their own federal inspectors for construction work done on federal projects. All states that border federal property are required to extend police and fire protection to anyone within their borders because they receive special federal funds. I understand the McNary project actually pays in the neighborhood of $20,000 for extra fire and police protection for their parks. The point is that federal money is being paid for any services being provided by state or local government. This applies to both Washington and Oregon.
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There is a lot more that could be discussed. Ask the people at Bonneville Dam about the recent bomb scare and how many hours it took to get police protection. The problem was one of jurisdiction. Who had it? The FBI did. How many Oregonians spent most of this last month working in Washington on the navigation locks of McNary and John Day Dams? Did they pay taxes to Washington? No. Would they pay even if Washington had an income tax? No. Because they are considered ''Oregon Projects'', the accounting system would withhold income taxes only for Oregon. Washington wouldn't have a clue.
INCONSISTENCIES
Prior to moving to Washington I lived in The Dalles Oregon for twenty five years. Although both Washingtonians and Oregonians think in terms of the dams belonging to ''their'' state, The Dalles Dam is almost entirely on the Washington side of the river. As far back as I can remember the address was a P.O. Box in Dallesport, Washington. Somehow the address for The Dalles Dam has been switched to a The Dalles, Oregon P.O. Box. After thirty five years, new workers who hire on, or those who change their withholding, are paying Oregon State Income tax. Last Thursday, April, 10, 1977 I spoke with David Burke at The Dalles. Mr. Burke has worked at The Dalles Dam for over three years and performs all of his duties on the ''Washington side'' of the River. In the last month the State of Oregon has started to withhold income taxes from his paychecks. He said he will have to wait until the end of the year to get his money back from the State of Oregon. He has written letters to the committee stating this. Oregon's rationalization for taxing these people who work solely in the State of Washington is that the ''hiring authority'' for The Dalles Dam is the district office in Portland Oregon. I like that logic. Using the same logic I should not have to pay Oregon income taxes because the hiring authority for the McNary Project is in Walla Walla, Washington.
I brought a letter from a mechanic at the McNary Project, a Mr. Ken Taylor. His son was invited as a ''walk-on'' to try out for the Oregon State football program. The boy wasn't real academically inclined but he loved to play football. He wound up not going to O.S.U. because his family could not afford out of state tuition, although Mr. Taylor has paid Oregon income taxes for nearly 15 years.
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Last year when H.R. 3163 (the predecessor to H.R. 874) was in committee, the Oregon residents who are federal workers at the McNary Project signed a petition in favor of that bill. A new petition has not been circulated but I have with me about 30 letters from these same people in favor of H.R. 874. The point is the Oregonians, who work at these projects and are close to the issue, can see the inequity that exists. They support the bill. Why would the people who represent them vote against the wishes of their constituents?
I have had several phone conversations with people at the Oregon Department of Revenue over the years where I have asked them how and why the State of Oregon justifies taxing my income. They start running down the list of benefits that Oregon residents receive and I just keep saying ''no I don't get Oregon unemployment,'' ''no my kids can't attend your schools without paying out of state tuition'' ''our accident insurance is handled out of Seattle,'' ''I have to pay out-of-state fees at parks and for my fishing and hunting license.'' Finally after running through the list they tell me the State of Oregon can tax my income because the law says they can. That is the same kind of mentality the bully on the school ground uses to take little kids lunch money. The Oregon Department of Revenue should be ashamed.
CONCLUSION
Every time my wife looks at my check stub she shakes her head and says ''how can they do this?'' My answer is always the same ''the law lets them get away with it''. We have to change the law.
We, the Washingtonians in the workforce on the Columbia River Dams, many who are members of the United Power Trades Organization, and the National Federation of Federal Employees, urge you to pass H.R. 874.
Mr. GEKAS. We thank the gentleman, and we will proceed with Mr. Campbell's testimony.
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We will excuse the gentleman from New York. Would he have any objection on continuation of the testimony of this panel?
Mr. NADLER. No, but I'm going to want to ask some questions, when I come back, of this panel.
Mr. GEKAS. All right. We will proceed with Mr. Campbell's testimony for the time being.
STATEMENT OF DWIGHT CAMPBELL, A RESIDENT OF GOLDENDALE, WA, AND U.S. ARMY CORPS OF ENGINEERS EMPLOYEE
Mr. CAMPBELL. Thank you, Mr. Chairman, and thank you, members of the committee.
As you know, my name is Dwight Campbell, and I work at John Day Dam. I live wholly in Washington State and I am employed by the Corps of Engineers. I'm an instrumentation and electronic control systems technician.
The Columbia River forms a border of Oregon and Washington, as I'm sure you are aware by now. John Day Dam spans the river, and this is also the case with three other dams on the Columbia: Bonneville Dam, The Dalles Dam, and McNary Dam. These dams are Federal facilities over which the States of Oregon and Washington have no legal jurisdiction.
Oregon residents pay Oregon income and property taxes. They also enjoy the benefits of residency, such as low hunting and fishing license fees, low vehicle registration fees, voting rights, unemployment benefits, and low university tuition fees, to name a few. Oregon residents working on the dams are not required to pay any Washington State tax whatsoever.
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Washington residents pay Washington sales tax, property tax, and high licensing and vehicle registration fees, which are the basis of Washington State revenue. Washington residents working on the dams are also forced to pay Oregon income tax, but receive no benefits at all from Oregon.
We are subjected to audits, threatened with fines for estimated tax shortage, and required to provide proof for time not worked on the Oregon portion of the Federal dams. We are required to file detailed, complex income tax returns each year and have to go through a time-consuming and biased hearings process in the case of a dispute.
At Bonneville and McNary Dams, Washington residents have to keep detailed logs of their time worked on the Oregon or Washington side of the imaginary border. At The Dalles and John Day Dams, a letter from the project manager declaring a percentage estimate of the time worked on each side is used to determine what tax is owed.
Meanwhile, Oregon taxes each individual the full amount of 9 percent throughout the year, and the individual has to try and get refunded for the balance estimated not worked in Oregon. This puts an unfair burden on workers and their families to keep records, file returns, and fight the Oregon Department of Taxation in the case of a dispute for refund.
Along with other Americans, I was raised with the belief of paying a fair share of tax to support a Government which represented me, and for which I have a say through my vote and my representatives. In this case of Oregon taxation, I have neither.
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I would like to present a couple of examples of Oregon tax practices. During my search for a means to stop Oregon taxation, I was reading the Oregon Administrative Rules and noted OAR, Oregon Administrative Rules 150.316.127(A)(3)(C)(c) clearly stated, ''Sick leave days, holidays, and vacation days are not considered actual working days in or out of this State and are to be excluded from the calculation of the portion of total compensation for personal services taxable to this State.''
Based on this very clear statement, my C.P.A. calculated the amount of wages I received during the year for holidays, sick, and annual leave, took the result off the total of annual gross wages, therefore removing that portion from Oregon taxation, then calculated the remaining that was subject to tax. My C.P.A. also----
Mr. GEKAS. Would the gentleman suspend for a moment?
Representative Hastings, you ought to leave to go vote. I'll hang on here to hear the testimony.
Mr. HASTINGS. OK.
Mr. GEKAS. You're excused for the time being.
Mr. HASTINGS. Thank you.
Mr. GEKAS. You may proceed, Mr. Campbell. We have a vote pending, and I don't want Representative Hastings to lose the opportunity to vote.
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Mr. CAMPBELL. Thank you.
My C.P.A. also amended the previous tax returns for 1991, 1992, and 1993 to reflect this method. The Oregon Tax Department paid a portion of the refund, then denied the rest and sent a demand for return of the refund I had received and a threat of penalties if I didn't. If I didn't agree, then I could appeal. I then submitted my grounds for appeal on May 19, 1995, and requested a hearing. I received no response other than more demands for the return of the money I had already received.
Then on August 27 I received a letter and a form, taxpayers response to appeal summary, which demanded another letter of appeal, and if not in the time specified, I would be denied a hearing. At the same time the letter said their caseload was very large, and it would be many months before mine would be considered.
On January 22, 1996, a telephone conference hearing was finally held between a hearings officer, who was an employee of the Oregon Taxation Department, the auditor, who had denied by claim for refund and method of calculating the tax return, and myself. The hearings officer understood my method of calculation and seemed to agree, but the opinion and order I received on February 9, 1996, agreed with the auditor, and the hearings officer's decision was subject to signature by his supervisor, the director of the department. It was clear to me then, it is not possible to get an unbiased interpretation and decision, which I believe is the intent of the Oregon tax hearing process.
The next step would be Oregon State tax court, for which most people such as I don't have the resources; therefore, Oregon wins. I would like to submit the paperwork for the hearings process I underwent on that.
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Mr. GEKAS. Without objection, it will be admitted into the record.
[The information follows:]
OREGON DEPARTMENT OF REVENUE,
Salem, OR, August 3, 1994.
DWIGHT E. AND CARMEL M. CAMPBELL,
Goldendale, WA.
Tax Year 1992--Return Number N35070.
I have examined your refund claim for $178. Under Oregon law, it must be denied.
To calculate which portion of your income from U.S. Corps. of Engineers is taxable to Oregon, you must multiply your entire compensation by a percentage of days worked in Oregon divided by total days worked. Your employer has stated that 50% of your worktime is spent in Oregon. Therefore, half of your salary is taxable to Oregon.
On your original return, you claimed $26,028 as Oregon wages. This is 50% of your U.S. Corps of Engineers wages of $52,057 and, based on the information provided, is taxable to Oregon per ORS 316.127 and OAR 150.316.127(A)(3).
BARBARA STOENNER, Auditor.
INSERT OFFSET RING FOLIO 6 HERE
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OREGON DEPARTMENT OF REVENUE,
Salem, OR, March 31, 1995.
DWIGHT E. CAMPBELL,
CARMEL M. CAMPBELL,
Goldendale, WA.
Tax Year 1993—DCN 06014366. 1992—DCN N35070, 1991—DCN N42028
This letter is to inform you of the decision from the telephone conference held on March 20, 1995 with Dwight. The issue in dispute is the method for the nonresident taxation of your wages earned in Oregon.
FACTS
You work at the John Day Dam, which is located on the Columbia River. Your employer has allocated 50% of your wages as being earned in Oregon and 50% being earned in Washington. Your employer stated that 65% of the dam is in Washington and 35% in Oregon, however, additional maintenance is performed on the Oregon portion, which works out to a 50% split. You filed amended returns for the 1991 and 1992 tax years further reducing the 50% split by your vacation, holiday and sick leave used during the year. For 1993, you included the reduction in wages attributed to Oregon on the original return filed. The reduction in your wages was not allowed and you are appealing that determination.
You are paid hourly and you accrue six hours of vacation and four hours of sick leave every two weeks. Your vacation and sick leave accrual is based on hours that you work in Oregon and hours that are worked in Washington, yet your position is that none on the vacation or sick leave is taxable by Oregon.
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DISCUSSION
You cite Oregon Administrative Rule 150—316.127—(A)(3)(C)(c). This rule does state that sick days, vacation days and holidays are excluded from the calculation of the portion of total compensation for personal service. This rule is referring to the calculation based on days or hours actually worked in Oregon compared to days or hours actually worked during the year. These days are eliminated from both the numerator and denominator when apportioning the income. OAR 150—316.127(A)(3)(a) states ''Where compensation is received for personal services rendered partly within and partly without this state, that part of the income allocable to this state is included in gross income.'' OAR 150—316.127—(A)(3)(a)(A) states ''If nonresident employees are employed in this state at intervals throughout the year...., and are paid on a daily, weekly, or monthly basis, the gross income from sources within this state includes that portion of the total compensation for personal services which the total number of actual working days are employed within the state bears to the total number of working days both within and without the states''.
Your employer has stated that 50% of your time at work is worked in Oregon. Based on the formula as provided in OAR 150—316.127(3)(a)(A), the percentage of actual working days in Oregon compared to actual working days for the entire year is 50%. If you prefer to keep a log of the hours actually worked on the Oregon side of the dam and the hours actually worked on the Washington side of the dam you may do so. Your employer would need to certify that the log is accurate.
There is no provision in Oregon law to reduce your total compensation received during the year by the amount of compensation received for vacation, sick leave and holidays, and then apply the formula, which is what you are doing. The formula is applied to 100% of the compensation received as provided for by administrative rule.
DECISION
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It is my decision that the adjustments made by the department are correct. The 1993 liability was assessed prematurely. Enclosed is a replacement Notice of Assessment issued without penalty. Enclosed is also a Notice of Assessment for the 1991 liability issued without penalty. The refund requested for 1992 was denied and I am upholding the denial. Enclosed is information on how to appeal the refund denial. Your appeal rights are explained on the assessment notices. If you disagree with this decision, you must appeal in writing within 90 days from the date of this letter. If you do not pay or appeal, a 5% penalty will be added to the liability and collection action will be taken.
THERESA SCHUH, Conference Officer.
INSERT OFFSET RING FOLIO 7 HERE
OREGON DEPARTMENT OF REVENUE,
Salem, OR.
JUNE 11, 1995.
Tax Year 1993—DCN 06014366, 1992—DCN N35070, 1991—DCN N42028
[Re: Appeal of Conference and Decision by Oregon Department of Revenue representative, Theresa Schuh; March 31, 1995.]
As according to the appeal process I sent in the request for hearing but to date have not received confirmation.
Please find attached copy of letter of request.
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DWIGHT CAMPBELL, Goldendale, WA.
------
OREGON DEPARTMENT OF REVENUE,
Salem, OR.
APRIL 28, 1995.
Tax Year 1993—DCN 06014366, 1992—DCN N35070, 1991—DCN N42028
[Re: Conference and Decision by Oregon Department of Revenue representative, Theresa Schuh; March 31, 1995.]
As according to the appeal process.
I wish to appeal the decision to deny exclusion of compensation received for vacation, holiday and sick days from the tax calculation of my wages as non-resident.
OAR 150—316.127—(A)(3)(C)(c) provides for that exclusion but the officers of the Oregon Department of Revenue have decided to ignore the rule by including that compensation received for vacation, holiday and sick days in the calculation of taxable gross income.
Rationale of Oregon Tax representative is that I earn the benefit of vacation, holiday and sick leave while partly working in Oregon, however the OARs do not state the benefits of working, whether medical insurance, vacation, holiday, sick, technical schooling or whatever, are subject to taxing. The only reference is to compensation and in this case it is compensation received under the specified circumstances. This compensation is not received, as stated clearly by OAR 150—316.127—(A)(3)(C)(c), while providing services partly within or partly without of Oregon but is received while not providing services neither in nor out of Oregon and therefore not subject to Oregon taxation.
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The taxing of compensation received while providing service. in Oregon is not disputed, however in this situation Oregon Tax Representatives are trying to blend one OAR with another to obscure OAR 150—316.127—(A)(3)(C)(c) and therefore justify the denial.
Please schedule me for a hearing in accordance to Level 2 Option 1 of the appeal process. In writing, please acknowledge receipt of this request for appeal and attach this request to the file regarding this dispute so it may be read in the hearing process.
DWIGHT CAMPBELL, Goldendale, WA.
------
OREGON DEPARTMENT OF REVENUE,
Salem, OR, June 20, 1995.
DWIGHT E. AND CARMEL M. CAMPBELL,
Goldendale, WA.
Tax Year--Return No. 1991—N42028; 1992—N35070; 1993—014366
Your letter of appeal has been received. Please check and make sure we have used your correct mailing address. Also, if you did not furnish us with a day time phone number, return it to my attention at the above address.
We will call or write you concerning this matter as soon as your case can be addressed.
Thank you for your patience.
Call or write if you have any questions. (503) 945—8663.
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MARY LOU HITTNER,
Conference & Staff Section,
Audit Division.
OREGON DEPARTMENT OF REVENUE,
Salem, OR, August 3, 1994.
DWIGHT E. AND CARMEL M. CAMPBELL,
Goldendale, WA.
Appeal of: Campbell, Dwight E. & Carmel M., Case No.: 95—3536; Type of Tax: Personal Inc., Tax Year(s): 1991—1993
We have received your appeal. However, we need more information from you. The department auditor has prepared the enclosed summary which tells the facts, issues, and law supporting the department's action. Please read the auditor's summary, then complete the enclosed response form to tell us your position. Also, please write your current phone number on the response form. You must complete and return the form to the Appeals Section within 45 days of the date of this letter. If you do not return the form, your appeal may be dismissed or a decision may be made based on the information on file.
We will review your response. We will then send you a notice of hearing. The notice will tell you the date, time, and location of your hearing. Hearings are held in Portland, Salem, Eugene, Medford and Bend, or by telephone.
The enclosed information explains the appeals process and your rights and responsibilities. If you move or change your phone number, please let us know. This will ensure that you receive all the important information concerning your appeal so that you can avoid missing important deadlines or appearances.
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We will make every attempt to resolve your appeal correctly and as quickly as possible. However, because of the large caseload of appeals, it may take six months to a year to get a final decision. Complicated cases and cases involving income-related tax issues may take even longer. If you have not heard anything about your appeal in awhile, it does not mean that it has been canceled or dropped by the department.
APPELLATE CASE REVIEWER,
Appeals Section,
Administrative Services Division.
Enclosures.
INSERT OFFSET RING FOLIOS 8 TO 10 HERE
Mr. GEKAS. The gentleman's time has expired, but we'll indulge him another minute or so.
Mr. CAMPBELL. Thank you; thank you.
During my efforts to get documentation for the examples, I wanted to give, I kept running into resistance from the people subject to the Oregon tax abuses. There are more examples that I know of personally, but I am unable to obtain the documents from the individuals. The reason for this reluctance was a fear of retribution from the Oregon Department of Taxation, should their names become known to the Department. This is not an unreasonable fear, given some of Oregon's aggressive tax practices.
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Thank you for listening to my statement.
[The prepared statement of Mr. Campbell follows:]
PREPARED STATEMENT OF DWIGHT CAMPBELL, A RESIDENT OF GOLDENDALE, WA, AND U.S. ARMY CORPS OF ENGINEERS EMPLOYEE
Mr. Chairman, Members of the Committee on the Judiciary, my name is Dwight Campbell. I am a Washington state resident employed as an Instrumentation and Electronic Control Systems Technician with the U.S. Army Corps of Engineers at John Day Dam on the Columbia River,.
The Columbia River forms the border between Oregon and Washington, John Day Dam spans the river. This is also the case with three other dams on the Columbia; Bonneville Dam, The Dalles Dam, and McNary Dam. These dams are federal facilities over which the states of Oregon and Washington have no legal jurisdiction.
RESIDENTS OF EACH STATE WORK AT THESE DAMS
Oregon residents pay Oregon income and property taxes. They also enjoy the benefits of residency such as low hunting and fishing license fees, low vehicle registration fees, voting rights, unemployment benefits, low university tuition fees to name a few. Oregon residents working on the dams are not required to pay Washington state any tax what so ever.
Washington residents pay Washington sales tax, property tax and high licensing and vehicle registration fees which is the basis of Washington state revenue. Washington residents working on the dams are also forced pay Oregon income tax but receive no benefits at all from Oregon. We are subjected to audits, threatened with fines for estimated tax shortage and required to provide proof for time not worked on the Oregon portion of the federal dams. We are required to file detailed, complex income tax returns each year and have to go through a time consuming and biased hearings process in the case of a dispute.
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At Bonneville and McNary dams, Washington residents have to keep detailed logs of their time worked on the Oregon or Washington side of the imaginary border. At The Dalles and John Day dams a letter from the project manager declaring a percentage estimate of time worked on each side is used to determine what tax is owed. Meanwhile, Oregon taxes each individual the full amount of 9% throughout the year and the individual has to try and get refunded for the balance estimated not worked in Oregon. This puts an unfair burden on workers and their families to keep records, file returns and fight Oregon Department of Taxation in cases of a dispute for refund.
Along with other Americans, I was raised with the belief of paying a fair share of tax to support a government which represented me, and for which I have a say through my vote and my representatives. In this case of Oregon taxation I have neither.
I would like to present just a couple of examples of Oregon tax practices.
1. During my search for a means to stop Oregon taxation I was reading the Oregon Administrative Rules and noted OAR 150.316.127(A)(3)(C)(c) clearly stated ''Sick leave days, holidays and vacation days are not considered actual working days in or out of this state and are to be excluded from the calculation of the portion of total compensation for personal services taxable to this state.''
Based on this very clear statement, my CPA calculated the amount of wages I received during the year for holidays, sick and annual leave, took this result off the total of annual gross wages, therefore removing that portion from Oregon taxation, then calculated the remaining that was subject to tax. My CPA also amended the previous returns for 1991, 1992, and 1993 to reflect this method.
Oregon Taxation Department paid a portion of the refund then denied the rest and sent a demand for return of the refund I had received and a threat of penalties if I didn't. If I didn't agree then I could appeal. I then submitted my grounds for appeal May 19th 1995 and requested a hearing. I received no response other than more demands for the return of the money I had received. Then on August 27, 1995 I received a letter and a form; Taxpayers Response to Appeal Summary, which demanded another letter of appeal and if not in the time specified I would be denied a hearing. At the same time the letter said their case load was very large and it would be many months before mine would be considered.
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January 22nd 1996 a telephone conference hearing was finally held between a hearings officer who was an employee of the Oregon Taxation Department, the auditor who had denied my claim of refund and method of calculating the tax return, and myself. The hearings officer understood my method of calculation and seemed to agree but the Opinion and Order I received February 9th 1996 agreed with the auditor and the hearings officers decision was subject to signature by the Director of the Department. It was clear to me then, it is not possible to get an unbiased interpretation and decision which is the intent of the Oregon tax hearing process.
The next step would be Oregon State tax court for which most people such as I, don't have the resources, therefore Oregon wins.
2. Mr. Daniel Hopkins, resident of Goldendale Washington and a temporary employee at John Day Dam, filed for unemployment benefits with Oregon when he was laid off work September 1995. Mr. Hopkins was denied unemployment and it was stated his claim wasn't valid because according to records his duty station wasn't in Oregon therefore his federal wages couldn't be assigned to Oregon.
Mr. Hopkins then amended his tax returns for refund of the three previous years he'd paid based on this denial of unemployment compensation, being, according to Oregon, he never worked in that state. This too was denied and he was informed if he didn't agree he could go to Oregon Tax court, for which Mr. Hopkins didn't have the resources.
Once again Oregon wins.
During my efforts to get documentation for the examples I wanted to give, I kept running into resistance from the people subject to Oregon's tax abuses. There are more examples I know of personally but I am unable to obtain the documents from the individuals. The reason for this reluctance was a fear of retribution from the Oregon Department of Taxation should their names become known to the Department. This is not an unreasonable fear given Oregon's aggressive tax practices as testimony will show during this hearing.
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Thank you for considering this brief statement and I look forward to further testimony.
Mr. GEKAS. We thank the gentleman. The Chair yields itself the customary 5 minutes to offer some questions to the witnesses.
Mr. Campbell, or Mr. Hays--or both of you--which individual withholds the tax from your paycheck? Is it a Federal employee who does that?
Mr. CAMPBELL. The Corps of Engineers withholds the money from us and gives it to Oregon.
Mr. HAYS. We have a payroll at each project that withholds, and it goes to our respective districts.
Mr. GEKAS. Yes, and they feel constrained that they must follow Oregon law to withhold those taxes. Is that correct?
Mr. HAYS. Oregon's policy is to comply with the Oregon State----
Mr. GEKAS. No, I understand Oregon, but I'm saying the----
Mr. HAYS. The corps policy is----
Mr. GEKAS. The corps policy is to follow the Oregon law for the purpose of withholding. Is that correct?
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Mr. CAMPBELL. That's correct, and it's up to the individual to deal with the State.
Mr. GEKAS. It would be interesting to learn whether or not they have the discretion not to follow the Oregon law since their resources come from the U.S. Treasury, do they not?
Mr. CAMPBELL. That's correct.
Mr. GEKAS. That's an interesting question that we'll have to pursue.
Mr. HAYS. Well, what----
Mr. GEKAS. But I would like to see the bills passed, so all of these other questions would be moot. It's just a question that is posed for the purposes of the record.
Mr. HAYS. May I comment?
Mr. GEKAS. Mr. Hays.
Mr. HAYS. The corps goes by the closest P.O. Box, normally, to whatever town is the closest to wherever the head gate is of any project, so that becomes the duty station. At The Dalles Dam the actual duty station used to be a P.O. Box in Dallesport, WA, and just recently they changed that to a P.O. Box in Dalles, OR, even though that project is about 90 percent in the State of Washington. And those people there that work 100 percent of the time in the State of Washington are now being taxed by the State of Oregon.
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As a matter of fact, we have three letters that we brought with us from people that are now being subject to Oregon State income tax, that worked 100 percent of the time in the State of Washington and will have to file at the end of the year in order to get that money back. And we would like to have those letters submitted if we may.
Mr. GEKAS. Without objection.
[The letters follows:]
DALLESPPORT, WA, April 9, 1997.
Hon. GEORGE W. GEKAS,
Rayburn House Office Building,
Washington, DC
[Re: Support of H.R. 874.]
HON. GEORGE W. GEKAS: I support passage of H.R. 874. I currently reside in the state of Washington, I work one hundred percent of my time in the State of Washington the city of Dallesport, I also live in the same city, yet at the end of the tax year I will be forced to file an income tax return with the state of Oregon to receive the monies withheld for income tax purposes from a state that I do not work in or live or hold any real estate or any assets. I receive no benefits from the state of Oregon for this taxation, just the burden of filing taxes for the return.
Sincerely yours,
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STEVE DODSON.
------
DALLESPPORT, WA, April 9, 1997.
Hon. GEORGE W. GEKAS,
Rayburn House Office Building,
Washington, DC
[Re: Support of H.R. 874.]
HON. GEORGE W. GEKAS: I support passage of H.R. 874. I currently reside in the state of Washington, I work one hundred percent of my time in the State of Washington the city of Dallesport, I also live in the same city, yet at the end of the tax year I will be forced to file an income tax return with the state of Oregon to receive the monies withheld for income tax purposes from a state that I do not work in or live or hold any real estate or any assets. I receive no benefits from the state of Oregon for this taxation, just the burden of filing taxes for the return.
Sincerely yours,
DAVID G. BURKE.
CENTERVILLE, WA, April 9, 1997.
Hon. GEORGE W. GEKAS,
Rayburn House Office Building,
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Washington, DC
[Re: Support of H.R. 874.]
HON. GEORGE W. GEKAS: I support passage of H.R. 874. I currently reside in the state of Washington, I work one hundred percent of my time in the State of Washington the city of Centerville, I also live in the same city, yet at the end of the tax year I will be forced to file an income tax return with the state of Oregon to receive the monies withheld for income tax purposes from a state that I do not work in or live or hold any real estate or any assets. I receive no benefits from the state of Oregon for this taxation, just the burden of filing taxes for the return.
Sincerely yours,
MIKE CHURCH.
Mr. GEKAS. It does help us make the record complete, going to the issue of fairness. We still have other obstacles to overcome for final passage of this bill to the full committee and then to the floor of the House, but you have made an excellent case, specifically on the issue of fairness. When we talk about fairness, the burden of having to apply for refunds and all of the examinations and the paperwork that you have to undergo is mind boggling for such a needless issue.
Mr. HAYS. May I make another comment?
Mr. GEKAS. Yes.
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Mr. HAYS. Mr. Nadler brought up an idea where it might be possible to get a credit from the State of Oregon for taxes paid in the State of Washington, similar to two States with an income tax, which would be even a bigger nightmare than you can even imagine because--one thing that I was thinking of was my wife; just the tags on her car alone are like somewhere between 15 and 20 times more than what a person in Oregon pays. And then having to keep track of the sales tax receipts and things like that would just be mind-boggling.
Mr. GEKAS. We'll give you the opportunity to answer Congressman Nadler directly when he returns, because he indicated that he wants to ask further questions.
Mr. HAYS. Certainly.
Mr. GEKAS. We're awaiting the arrival of Congresswoman Smith, who is interested in this issue also and was one of the proponents.
The subcommittee hearing will recess until the return of a subcommittee member. And we'll ask the witnesses to remain at the call of the Chair.
This hearing is recessed at the call of the Chair.
[Recess.]
Mr. GEKAS. Mr. Cunningham, why don't you identify yourself, and pending any objection by the gentleman from New York, we will listen to your testimony. Do you have a written statement?
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Mr. CUNNINGHAM. Yes, I do.
Mr. GEKAS. You may be subject to further inquiry by members of the subcommittee after you leave.
Mr. CUNNINGHAM. That's fine.
Mr. GEKAS. All right. You may proceed.
STATEMENT OF JAMES D. CUNNINGHAM, SR., NATIONAL PRESIDENT, NATIONAL FEDERATION OF FEDERAL EMPLOYEES
Mr. CUNNINGHAM. OK, thank you very much. Good morning, Mr. Chairman. I am Jim Cunningham, president of the National Federation of Federal Employees, and on behalf of the 150,000 Federal employees represented by NFFE, I am pleased to be here this morning to present our views on the double taxation of Federal employees employed at Columbia River dams.
NFFE maintains that this situation is intolerable and must be rectified. Therefore, we strongly support H.R. 874, the Hydroelectric Workers Tax Equity Act, and urge its prompt adoption.
Before I continue, Mr. Chairman, I would like to note that NFFE does not represent the employees at Fort Campbell, and therefore we are not familiar with all the facts of their situation. However, based on the testimony that I've heard here this morning, it appears that these employees are faced with a situation similar, if not identical, to the one faced by the employees at Columbia River's dam. That being the case, NFFE has no problem supporting H.R. 865. However, I will confine the remainder of my remarks to the situation facing the employees at the Columbia River's dam.
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Currently, Washington State residents who are Federal workers at the Columbia River dams are taxed both by the State of Oregon and by the State of Washington. Oregon bases its right to tax these employees on its claim that they perform work in Oregon. While it is true that some of the work performed by these employees takes place on the Oregon side of the river, it's also true that all of their work is performed on Federal property which straddles the Washington/Oregon State line.
This legislation is necessary because it protects the rights of Washington residents to be free from taxation without representation. Obviously, as residents of Washington State, these employees cannot vote in Oregon elections and, therefore, have no representation in the State.
In addition, Washington residents working at Federal projects on the Columbia River receive no benefits for the tax dollars they pay to Oregon. They are required to pay regular out-of-State rates for education, hunting and fishing licenses, or the use of parks and recreation facilities. Additionally, Washingtonians who work at Federal projects on the Columbia River do not strain Oregon resources. They do not need Oregon roads, infrastructure, or State services in order to access their worksite or perform work.
Additionally, the legislation addresses the inequitable treatment of Oregon's residents and Washington employees. It is significant to note that Oregon residents who work on the Washington side of the Columbia River projects do not have to pay taxes to the State of Washington. Washington has no income tax, and Oregon residents do not have to pay Washington sales tax when they purchase goods within the State. This disparity between workers is deeply troubling to NFFE. We have long-argued that Federal employees who perform the same work at the same location should be treated in an identical fashion.
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Further, this legislation will not have a significant impact on the Oregon treasury. It is narrowly defined to affect only approximately 100 workers at Federal hydroelectric projects on the Columbia River. It has no effect on the tax status of other Washington residents that work in Oregon. Federal employees at the Columbia River projects are distinct from other commuter employees because they receive no benefits or services from the State of Oregon for their tax dollars.
Unlike private sector businesses in Oregon, these Federal projects straddle the Oregon/Washington border and are self-sufficient, providing their own power supply and water and waste treatment facilities.
The situation facing Washington State residents at Columbia River dams is not unique. Several years ago, as mentioned here earlier, Congress addressed a similar problem for employees who worked for Amtrak. These employees were frequently traveling into other States, and those States attempted to impose their State tax in addition to the State tax already paid by the employees in their State of residence.
Congress recognized the inherent unfairness of these efforts and corrected the problem in the Amtrak Improvement Act of 1990. NFFE urges this subcommittee to recognize that the same justifications that prompted Congress to act in 1990 exist here. Federal workers are being forced to pay taxes in a State where they do not live and from which they receive no benefits. These employees should not suffer the burden of double taxation because they have chosen to serve their fellow citizens.
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In conclusion, I would just like to say that the issue before the subcommittee boils down to one simple question: Should Congress allow discrimination against Federal workers to continue? NFFE responds with a resounding no. It is a question of fairness and a question of equity. These employees and their families should no longer have to suffer the hardship of double taxation. NFFE urges this subcommittee and the Congress to put an end to tax policies which unfairly and unjustly discriminate against Federal workers.
Thank you very much.
[The prepared statement of Mr. Cunningham follows:]
PREPARED STATEMENT OF JAMES D. CUNNINGHAM, SR., NATIONAL PRESIDENT, NATIONAL FEDERATION OF FEDERAL EMPLOYEES
Good Morning Mr. Chairman and Members of the Subcommittee, I am James Cunningham, National President of the National Federation of Federal Employees.
On behalf of the 150,000 Federal employees represented by NFFE, I am pleased to be here this morning to present our views on the double taxation of federal employees employed at Columbia River Dams. NFFE maintains that this situations are intolerable and must be rectified. Therefore, we strongly support both H.R. 865 and H.R. 874, the Hydroelectric Workers Tax Equity Act and urge their prompt adoption.
Currently, Washington State residents who are Federal workers at the Columbia River Dams are taxed both by the State of Oregon and by the State of Washington. Oregon bases its right to tax these employees on its claim that they perform work in Oregon. While it is true that some of the work performed by these employees takes place on the Oregon side of the river, it is also true that all of their work is performed on federal property which straddles the Washington/Oregon border.
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This legislation is necessary because it protects the right of Washington residents to be free from taxation without representation. Obviously, as residents of Washington State, these employees cannot vote in Oregon elections and therefore have no representation in the State. In addition, Washington residents working at federal projects on the Columbia River receive no benefits for the tax dollars they pay to Oregon. They are required to pay regular out-of-state rates for education, hunting and fishing licenses or the use of parks and recreation facilities. Additionally, Washingtonians who work at federal projects on the Columbia River do not strain Oregon resources. They do not need Oregon roads, infrastructure or state services in order to access their work site or perform work.
Additionally, the legislation addresses the inequitable treatment of Oregonians and Washington employees. It is significant to note that Oregonians who work on the Washington Side of the Columbia River projects do not have to pay taxes to the State of Washington. Washington has no income tax and Oregon residents do not have to pay the Washington sales tax when they purchase goods within the State. This disparity between workers is deeply troubling to NFFE. We have long argued that Federal employees who perform the same work at the same location should be treated in an identical fashion.
Further, this legislation will not have a significant impact on the Oregon Treasury. It is narrowly defined to affect only approximately 80 workers at federal hydroelectric projects on the Columbia River. It has no effect on the tax status of other Washington residents that work in Oregon. Federal employees at the Columbia River projects are distinct from other commuter employees because they receive no benefits or services from the State of Oregon for their tax dollars. Unlike private sector business in Oregon, these federal projects straddle the Oregon/Washington border and are self-sufficient, providing their own power supply and water treatment/waste facilities.
The situation facing Washington State residents at the Columbia River Dams is not unique. Several years ago, Congress addressed a similar problem for federal employees who worked for Amtrak. These employees would frequently travel into other states, and those states attempted to impose their State tax, in addition to the State tax already paid by the employees in their state of residence. Congress recognized the inherent unfairness of these efforts and corrected the problem in the Amtrak Improvement Act of 1990. NFFE urges the Subcommittee to recognize that the same justifications that prompted Congress to act in 1990 exist here. Federal workers are being forced to pay taxes in a state where they do not live and from which they receive no benefits. These employees should not suffer the burden of double taxation because the have chosen to serve their fellow citizens.
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In conclusion, I would just like to say that the issue before the Subcommittee boils down to one simple question. Should Congress allow discrimination against federal workers to continue? NFFE responds with a resounding no. It a question of fairness and a question of equity. These employees and their families should no longer have to suffer the hardship of double taxation. NFFE urges this Subcommittee and the Congress to put an end to tax policies which unfairly and unjustly discriminate against federal workers.
This concludes my testimony, I would pleased to answer any questions you have.
Mr. GEKAS. The time of the gentleman has expired.
For the edification of Congressman Hastings, Mr. Cunningham, a member of the third panel, is the president of the National Federation of Federal Employees. We have taken his testimony out of order to accommodate his schedule.
Does counsel for the minority wish to examine Mr. Cunningham?
Mr. FLANNERY. No, I found his statement quite satisfactory. Thank you very much.
Mr. CUNNINGHAM. I thank you very much, Mr. Chairman. I'll tell you--I thank you very much, and NFFE thanks you very much for this opportunity--but I have to get to my daughter's wedding in St. Louis, and I appreciate you letting me come on out of order. But once I saw this issue, I had to be here today.
Mr. GEKAS. Well, send us a picture of the bride. [Laughter.]
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Mr. CUNNINGHAM. I'll do that. Thank you very much.
Mr. GEKAS. Thank you very much.
We now recognize the lady from Washington, Mrs. Smith, who has represented her area for three terms now? Is this the third term?
Mrs. SMITH. Second term.
Mr. GEKAS. Second term--and who appeared before this very subcommittee last term to present the views of her constituents and those of Congressman Hastings, and whose testimony we will hear now with the caveat that we have the acquiescence, we believe, of the gentleman from New York, Mr. Nadler, the ranking member of the minority, to proceed with the understanding that the total testimony, both written and oral, will be made available to them for further questioning beyond this hearing if specific questions do arise.
So with that, we recognize the lady from Washington.
STATEMENT OF HON. LINDA SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WASHINGTON
Mrs. SMITH. Thank you, Mr. Chairman. I'm going to make this brief because I know the panel coming after me sheds more light on this.
This particular committee is very important in airing this issue because so often the minority, the small numbers of people that experience tax discrimination along borders, don't have much of a voice. They're not big enough. And so hearing them is really American, and I want to thank you for that.
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What I want to summarize is a little bit of my background to tell you that I've lived this for years. In my other life, I was a tax professional licensed in the State of Oregon, the State that is now taxing Washington State residents who live in Washington but happen to work on a Federal dam. So every day they go for maintenance or restructuring or whatever on the dam, and Oregon has decided that down the middle of the Columbia River is a line and that they will tax them any time during the day they go across. So on some of the dams they make them keep records, hour-by-hour; on some of the dams they let them go 50—50, and they never even go into Oregon.
Now I used to sit just like this and testify before the Revenue Committee in the State of Oregon when I was both a professional tax preparer and a Washington State senator, explaining the law, because my license is in the State of Oregon. I also taught that law to preparers, C.P.A.'s, consultants, et cetera, as we changed the law and as Oregon changed the law.
Quite frequently we had to go and rectify problems, and you rectified a problem under the Amtrak reauthorization bill in 1990 dealing with interstate transit--truckdrivers, airline pilots. In my case, my husband is a railroad engineer and Congress took care of that. As of 1990, one would pay tax in the State in that you originate or that you live in, and just because you're going State-to-State does not mean that a State should tax you.
Now, we didn't probably ever think of somebody being on the river being excluded, but Oregon has decided that they will go ahead and make these people pay tax on 50 percent of their income or make them document hourly when they cross that magical line.
This is not only just double taxation; it's very unfair, because what happens is they spend a whole lot of their work day keeping track. And these are Federal employees spending a whole lot of our tax dollars: in this case bookkeeping for something that makes no sense.
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So what we ask you to do is to hear the next testimony, and the ones preceding, and consider that; not that it's just probably very unfair, but it actually doesn't make any sense.
With that, I will answer any questions, but, also, appreciate again your consideration.
[The prepared statement of Mrs. Smith follows:]
PREPARED STATEMENT OF HON. LINDA SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WASHINGTON
Mr. Chairman, Members of the Commercial and Administrative Law Subcommittee. I would like to first take this opportunity to thank the Chairman for holding this hearing. While the matter we are discussing today affects a little less than 100 individuals and their families who reside in Washington State, the opportunity to discuss the matter of taxation without representation is always important. As a former manager of several tax preparation offices, I find it fitting that we are holding this hearing during the same week that millions of American families hurry to file their annual tax returns.
What we wish to rectify just makes common sense. Everyday, dozens of Washington state residents who are employed by the Army Corps of Engineers work on the Columbia River. To assert that they are working in Oregon is a real stretch of the imagination. Having lived within close proximity to the Columbia River for most of my adult life, I can tell you that we look at this area as sort of a ''no man's land.'' When one is working at the Bonneville, John Day, McNary, or Dalles projects, one does not differentiate between Washington or Oregon. And yet, we expect people to keep track of the hours that they spend on the Oregon ''side'' of the Columbia River and they in return do not receive any services from the State of Oregon. This is not only taxation without representation, it is silly.
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In 1990, Congress reauthorized the Amtrak legislation and included a provision that ended the practice of individuals who worked for the railroads, like my husband, from keeping track of their hours when crossing through various states. However, we left some people behind, a group of men and women who work on the federal projects along the Columbia River. Every morning, they get up, pick up their lunch pail, go out to the river for the day, and return to Washington state in the evening. If you ask any of these men and women where they work, they will undoubtedly say that they work on the Columbia River, not Oregon, not Washington.
It's also important to emphasize that the state of Washington does not have an income tax, we have a sales tax. Washington state does not impose any type of tax on the Oregon residents who work alongside their Washington state colleagues every day, either at the dams or elsewhere in the state. We do not devise a special tax for these individuals who work at the federal projects. In fact, any Oregon resident who purchases an item in Washington state has only to present his or her Oregon state driver's license to be exempted from Washington state's sales tax.
H.R. 874, the Hydroelectric Workers Equity Act, allows the federal employees working on the Columbia River to take home more of their paycheck and end the painstaking process of keeping a log of their hours. Let's allow these hard working men and women to focus on the real work at hand and not be troubled with the hours and minutes of when they cross over to the Oregon side of the river.
Again, I thank the Committee for its time and attention to this matter. It is just good old fashioned common sense to end this practice of taxation without representation.
Mr. GEKAS. We thank the lady.
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The testimony that has been offered both by the employees and by the two Members of Congress on this question has been, in my judgment, very, very complete. And judging from the comments of counsel from the minority, there's an agreement that at least we have a full record. But we still want to wait for the arrival of the gentleman from New York, who has indicated interest in posing some questions to this panel.
We'll recess for the time being at the call of the Chair until Mr. Nadler should appear. I would ask the indulgence of the Members of Congress. If they have other duties, they are dismissed, and we'll get back to them later if further questions arise, if they wish to leave.
Mrs. SMITH. Thank you, Mr. Chairman.
Mr. GEKAS. We now recess at the call of the Chair.
[Recess.]
Mr. GEKAS. The Chair reconvenes this session of the Commercial and Administrative Law Subcommittee and notes the presence of Congressman Hastings at the witness table and two employees who previously testified, Mr. Campbell and Mr. Hays. We recognize the gentleman from New York for a period of 5 minutes for purposes of examination of the witnesses. The gentleman from New York.
Mr. NADLER. Thank you.
Congressman Hastings, I have a letter here dated April 16, which was delivered yesterday, to the chairman, to Mr. Gekas, and cc'd to the other members of the subcommittee from Jim Brown, acting director of the Department of Revenue of the State of Oregon, opposing this legislation. I want to read you some things and ask you to comment on some statements he makes in the letter. I don't know if you've seen this.
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Mr. HASTINGS. I have not seen it, but go ahead.
Mr. NADLER. OK. Well, I have a couple of questions, but let me do this in pieces: ''As you know, Oregon has the authority to tax most residents of other States to the extent the nonresident performs personal services in this State. For those nonresidents who receive compensation for personal services rendered partly within and partly without Oregon, we have developed an allocation method to ensure that only that portion of the compensation directly related to work performed in this State is taxed by Oregon.'' And there's a reference.
''We believe this administrative rule addressing allocation of compensation for personal services is adequate to ensure that all nonresidents will be treated alike and will not be taxed on income earned outside of the State of Oregon.'' Now why is that not a sufficient answer so that we shouldn't----
Mr. HASTINGS. Well, I would acknowledge that the Oregon Department of Revenue has the right to tax people that come into Oregon for commercial ventures or other ventures, as they pointed out. For example, if a resident in Washington State has business in Oregon and travels down to Bend, or travels to Portland, or Hermiston, or wherever to engage in that, and some income is derived because of that activity, I think the State of Oregon certainly has the right to tax if they wish. And I think that is what the letter alludes to.
This is a very unique situation in that these are--in every one of these cases--Federal facilities that happen to span the river. And the workers in question here are not engaging in any activities other than crossing an imaginary line.
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Mr. NADLER. What he's saying here--and I gather that Mr. Hays testified somewhat to this point while I was absent, while I was out voting on the floor; I was just handed a note that says that--what he's saying here in effect--of course, no one questions their authority to levy the tax under the law. The question is the equity of whether we should change that authority somewhat. What he says is that people, if they work 50 percent of the time in Oregon, they'll be taxed at 50 percent of the normal rate, and if they work 5 percent, at 5 percent.
And my question was, if that is true, if most of their work is in Washington and the workers work 5 percent of the time in Oregon on that side of the dam, why is the Oregon allocation policy--that is, that they be taxed at 5 percent--why is that not an adequate solution to the problem? Why should we be passing this legislation? And I'm told that Mr. Hays said it has been impossible to pro rate the time for tax purposes, and maybe Mr. Campbell wants to comment on that because he obviously wants to speak to this.
Mr. CAMPBELL. The statement you have isn't entirely true in Oregon's tax policies, particularly this year.
Mr. NADLER. Could you speak a little louder, please? It's not entirely true--go ahead.
Mr. CAMPBELL. It's not entirely true because recently, this year, the Oregon State Tax Department has determined that the hiring authority for the corps is in Portland, so, therefore, all employees are going to be subject to the tax of 9 percent even though they work entirely in the State of Washington and never cross into Oregon.
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Mr. NADLER. So they don't do an allocation at all?
Mr. CAMPBELL. They don't do an allocation at all. And there are three letters from constituents who testify to the fact that they are now being forced to pay their wages to Oregon State, though they don't work in Oregon State at all.
Mr. NADLER. And they don't get a refund at the end?
Mr. CAMPBELL. They have to apply for a refund at the end of the year, yes.
Mr. NADLER. And they would get it?
Mr. CAMPBELL. At this stage? Well, we don't know yet because it hasn't reached the end of the year.
Mr. NADLER. Because this is a new policy.
Mr. CAMPBELL. But people have had--I've had trouble getting refunds at times because we have to prove that we don't work in Oregon State, not the other way around.
Mr. NADLER. And it's very difficult to prove that?
Mr. CAMPBELL. Yes, sir. In the log books that are kept in Mr. Hays' dam, one gentleman was subject to an audit, and Oregon State would not recognize his log book. And he had to get a statement from the project manager saying that what he said was true, and the project manager was very reluctant to do that.
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Mr. NADLER. OK, so they're being unreasonable in that?
Mr. CAMPBELL. Yes, sir.
Mr. NADLER. All right. Let me ask you a different question about the next part of this letter, because he makes, really, three points and I want to ask you each of them: ''The State of Oregon protects its own residents from paying income tax on the same income to more than one State. This is done by allowing a credit against the tax otherwise due to Oregon for taxes paid to the other State on mutually-taxed income. A credit for taxes paid to other States is common to States which impose an income tax on income earned by their residents within another State's jurisdiction. The situation which is addressed by H.R. 874 becomes an issue to Washington residents who work in Oregon only because the State of Washington has chosen not to impose an income tax.''
In other words, if they had an income tax you would get a credit against the two of them, one against the other.
''It does not seem reasonable to require the State of Oregon''--and this is the key--''it does not seem reasonable to require the State of Oregon to bear the burden of compensating Washington residents, as well as Oregon residents, for taxes on income which both States have a legitimate right to tax.''
Now why is that statement--he says, ''It does not seem reasonable''--why is it reasonable?
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Mr. HASTINGS. Well, in that letter they didn't tell you the whole story, because Oregon residents don't have to pay Washington sales tax. When they go across the border into Washington, any place in Washington----
Mr. NADLER. They don't pay the Washington sales tax.
Mr. HASTINGS. All they have to do is show their Oregon driver's license and they are exempt from the Washington sales tax. So, this is a one-way street. As I pointed out in my testimony----
Mr. NADLER. Well, let me ask you a different point. If that's the case, that's because Washington tries to do so. Why doesn't Washington simply say, ''Well, we're not going to give you that exemption anymore,'' and deal with this on that basis.
Mr. HASTINGS. Well, those determinations were made by the legislature, and I have to be honest; I thought because the Washington Legislature gave that exemption to Oregon residents that this--in fact, Dwight and I had this conversation when I first met Mr. Campbell. I said I think this is a State issue and should be handled in Oregon and Washington.
Mr. NADLER. Yes.
Mr. HASTINGS. The fact of the matter is, as I say in my testimony, the Army Corps of Engineers said very specifically, ''This has to be handled by Congress.''
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Mr. NADLER. Now I'm really wondering because if Washington State--and maybe the legislature has been neglectful of what it should do here. I mean that's their decision, from the Governor or whoever in Washington, but if Washington State chooses not to exercise its--well, if they wanted to, they could remove the exemption from Oregon. Presumably, Oregon people who work in Washington would put pressure on the State of Oregon, and they would say, ''My God, this whole thing is over 100 workers? For Christ's sake, take care of it.'' And you would get the exemption back for everybody over there.
So in other words, this could be handled politically on a State level. Why should Congress, because Washington--because what you're really saying is that the Washington Legislature is ignoring the problem of a very small group of Washington residents, and therefore we've got to get Congress to intervene.
Mr. HASTINGS. Let me yield to the gentlemen, because they have done the research on this and as I said, my initial instinct when I first heard about this was that it should be handled by the States. It simply wasn't done that way, and it can't be done that way. And I yield.
Mr. HAYS. I don't know if you've seen these pictures down here.
Mr. NADLER. I've seen them.
Mr. HAYS. The one on the left is John Day Dam, and the one on the right is The Dalles Dam. The Dalles Dam is almost wholly in the State of Washington. It's always had a P.O. Box of Dallesport, WA. I had lived in The Dalles for 25 years as an Oregon resident, so I'm real familiar with that project. But recently they changed the P.O. Box to The Dalles, instead of Dallesport.
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Now, understand that Washington has never had an income tax, so they really don't get into income tax situations. It just isn't in their mentality, OK? So they didn't even flinch when the P.O. Box got changed, and that's how these people, that work 100 percent of their time in the State of Washington, are now going to be subject to Oregon State income tax.
The other thing I want to say here is that when they built these projects they got the property from the States of Oregon and the States of Washington, and they became Federal jurisdiction because they had to be able to control the navigable waters, the generation, et cetera, et cetera. And they had a real problem in Bonneville because they had people on that Federal project living in Oregon, and they couldn't tax them. And I understand that. I sympathize with Oregon on that.
But they went just a little too far, because what happens here is you have a P.O. Box assigned to each project, usually the closest town. In my case it's Umatilla, which is right next door on the Oregon side. At Bonneville, it was Cascade Locks. OK, now with the addition of the new power house at Bonneville, the closest P.O. Box is actually North Bonneville, WA. Now they didn't change the P.O. of the dam; they didn't change the taxing authority at the dam.
I don't know if you're following me--I'm kind of----
Mr. NADLER. I'm following you.
Mr. HAYS. OK. Without Washington having an income tax, if Washington ever got an income tax and without changing those P.O. Boxes, WA, would never tax the employees at these projects, because the taxing--not authority, but--the project office--I can't remember how the corps puts it--wherever the assignment of duty is still on the Oregon side, except for The Dalles.
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Now, if they would have left the assignment of duty on the Washington side, see, then Washington would be taxing Oregon State residents and Oregon wouldn't be coming after anybody that was working on the Oregon side.
Mr. NADLER. Let me just say that my conclusion from reading what I just read and then from what you've just said is that, frankly, that the Washington State government could and should handle this on the State level, but--and that that would be the preferable way to handle it, that Washington should----
Mr. HAYS. No.
Mr. NADLER. I think--don't argue with me for the moment; just wait until I finish--is that Washington could handle this on the State level, deal with Oregon, and could solve the problem, but for a very small group of people, politically it hasn't happened. And I wouldn't feel right in hanging up 100 or 200 people because the Washington government didn't do it. So I'm not going to oppose the bill on that ground, though I do think that Washington should handle it.
But that's academic, because I'm not going to oppose the bill on that ground. I think the State government could and should handle it, but it hasn't and I wouldn't feel right in saying, therefore, ''So the heck with the problems that you people have,'' because the State government should handle it.
But let me ask the final question of the Congressman, because I'd like your comment on the third point that the Oregon director of revenue makes, and that's the following. He says: ''A primary value of this agency is that we support consistent, equitable treatment of all taxpayers. Oregon's current method of taxation ensures consistency and equity only in as much as all individuals are subject to the same rules.
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''I am concerned that the proposed exemption for Washington residents who are Federal employees working on hydroelectric facilities located on the Columbia River will grant a special advantage to a select few. This proposal would give a benefit to a specific class of taxpayer''--that is, these 100 or 200 people--''that is not available to others who perform''--he says ''that''--''who perform personal services in more than one State; i.e., riverboat pilots, traveling salespeople, et cetera.''
How would you answer that?
Mr. HASTINGS. Well, I think I addressed that in my first remarks, where I think they are certainly within their rights to tax when somebody does earn an income in any place in Oregon. I would simply modify that because of the uniqueness of this situation, in that the line happens to be a river, and this is a Federal facility on the river, which makes this very, very unique. I don't think there is any precedent setting that would damage Oregon from taxing salespeople, for example, that come into the State of Oregon.
Mr. NADLER. No, but from an equity point of view, how is their situation different from that of riverboat pilots or traveling salespeople?
Mr. HASTINGS. Well, from an equity standpoint, it is that these gentlemen here, two people that work on the dams, receive absolutely no benefits from the Oregon State taxes that they pay. Indeed, they are even denied, as Mr. Hays----
Mr. NADLER. OK, so this is the benefit principle, whereas the traveling salesmen use Oregon roads, bridges, et cetera, et cetera.
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Mr. HASTINGS. Right, exactly.
Mr. NADLER. OK, I have no further questions. Thank you, Mr. Chairman.
Mr. CAMPBELL. I just have one answer for you--I'm sorry.
Mr. GEKAS. Proceed.
Mr. CAMPBELL. I just have one answer for your question about the sales tax exemption. That was created to help the businesses along the border for Oregon residents who came over to buy goods from small businesses. They wouldn't otherwise do that, because they would just go back to Oregon and buy the goods there. So that was to help out. This was explained to me by Jim Honeyford, State representative, and he has been trying to get something resolved at the State level, but Oregon has just not been responsive at all.
Mr. NADLER. Mr. Chairman, if I may, I want to thank Congressman Hastings for his detailed answers to my somewhat technical and complicated questions and for his excellent representation of what is, after all, a very small group of constituents, and it's good to see that.
And I want to thank you, Mr. Chairman, for being indulgent with me in the allocation of time for questions.
Mr. GEKAS. I thank the gentleman. The gentleman's time has expired.
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This panel is excused with the thanks of the Chair and the entire subcommittee.
Mr. HASTINGS. Thank you.
Mr. GEKAS. We now invite Joy Wilen, Professor Smith, and Harley Duncan to the witness table. This third panel consists of representatives of a wide cross-section of views of the issue we are discussing.
Joy Wilen has owned and operated her own tax consulting business for the past 15 years. Prior to 1983, she was employed by H&R Block as assistant district manager and has 21 years of experience in tax preparation. Her experience is particularly useful to the subcommittee today since she is also licensed as a tax consultant in Oregon and has taught numerous classes pertaining to taxation of Washington residents who work in the State of Oregon.
Professor Smith is a professor of law at the University of Georgia and has, among many other things, written on the issue of State taxation of nonresidents. He graduated from St. Olaf's College in Minnesota and from the University of Texas Law School and taught at Ohio State University before coming to Georgia. He was in private practice from 1978 through 1982 with the firm of Baker & Botts in Houston, TX.
Our subcommittee is appreciative of Professor Smith for being here again, in recognition of valuable testimony he presented to us during the previous Congress on legislation that was later enacted into law prohibiting States from taxing the pension income of nonresidents.
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Harley Duncan is the executive director of the Federation of Tax Administrators, which represents the principal tax administration agencies in each of the 50 States, the District of Columbia, and New York City. Before coming here to Washington to work for FTA, he served as secretary of revenue for the Kansas Department of Revenue from 1983 through 1988. Among the positions he held in the years before holding that job, Mr. Duncan worked as a senior staff associate with the National Governors Association and the Advisory Commission on Intergovernmental Relations. He received a bachelor of arts degree with high honors from South Dakota State and a master of public affairs degree from the Lyndon Johnson School of Public Affairs at the University of Texas.
We will begin with Joy Wilen.
STATEMENT OF JOY E. WILEN, OWNER, JOY WILEN & ASSOCIATES, VANCOUVER, WA
Ms. WILEN. Thank you. Mr. Chairman, members of this committee, I want to especially thank you for inviting me, a tax professional, to testify here April 17. It was nice to get out of town.
I think what I see--I do hundreds and hundreds of tax returns for Washingtonians working in the State of Oregon, and I hear daily complaints about the paying of Oregon tax and the double taxation and no benefit. And I believe, truly, that Oregon has the right. For example, when I conduct my business--I am a Washingtonian--in the State of Oregon, I feel I should pay Oregon income tax because I am earning a living there.
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What really especially makes this group unique is that the Federal Government is funding the time and the burdensome recordkeeping requirements that these people must meet to arrive at an accurate tax liability at the end of the year. Federal supervisors spend hours of their time for each and every one of these employees. I know it doesn't sound like a lot of people, but they are spending time and salary recordkeeping to keep track so that a State taxing authority can collect its tax.
Now, a business, myself, for example, that sends an employee to the State of Oregon to work, then that's part of my cost of doing business in Oregon. The Federal Government is not doing business in the State of Oregon; they are providing Oregon a benefit of Federal service. And I think that is what especially makes this group unique.
As far as having dealt in the past routinely with both the State of Oregon and the State of Washington and their taxing authorities, these two States are not going to remedy this condition. They're not going to do it. And because Oregon is not going to help this little bit, it costs the Federal Government budget and money. It may seem de minimus, but actually it's the--whatever the word is--OK. That never happens to you?
Mr. NADLER. It's not de minimus, you mean?
Ms. WILEN. Yes, right--de minimus--that's my mother's favorite word.
What I would like to tie in, the last little bit--we have the Amtrak Reauthorization Act that gave relief to the interstate transportation workers. Before we had that act, I could spend up to 5 hours of my time in preparing a tax return going through log books to determine how many hours--not ''Were you in the State of Oregon a day?'' or ''Were you in there for a week?''--''How many hours during the day, each and every day, were you in the State of Oregon?''
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So I can understand where a truckdriver who crosses a line in the road--and these workers in an average work day cross the State line numerous times, dozens of times--is frustrated to try to accurately keep track of this time. Again, in trying to keep track of that, they are salaried, Federal employees, and their salary is being paid by the Federal Government to do recordkeeping for the State of Oregon.
Furthermore, in audit, I've been on numerous audits on this issue with Washingtonians. The audit procedure for the State of Oregon is not consistent. They are asked for different kinds of records in different audits; therefore, supervisors and workers on these dams are totally bewildered, confused, and perplexed in what to keep track of, which costs more time and Federal work dollars for Federal employees on a Federal project.
Again, I work closely with the taxing authorities of the State of Oregon, and I believe anybody working in the State of Oregon and making a living in the State of Oregon should pay their due tax to the State of Oregon, but not at the cost to the Federal Government.
Thank you very much.
[The prepared statement of Ms. Wilen follows:]
PREPARED STATEMENT OF JOY E. WILEN, OWNER, JOY WILEN & Associates, Vancouver, WA
Mr. Chairman, distinguished members of the Commercial and Administrative Law Subcommittee, thank you for affording me the opportunity to address you concerning H.R. 874, which concerns the taxation by Oregon State of certain Federal workers on The Dalles, Bonneville, McNary, and John Day dams.
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My name is Joy Wilen. I am a practicing Enrolled Agent (specializing in federal and Oregon State income tax preparation) in Vancouver, Washington.
I understand first-hand the dilemma these workers face in dealing with the taxation of their salary by the State of Oregon. In preparing an Oregon tax return for a Nonresident taxpayer (resident of Washington) my normal fee for someone who works strictly in Oregon the entire year is approximately $50. In the case of taxpayers who must prorate their income between the State of Oregon and the State of Washington my fees run between $150 and $200 depending upon the complexity of calculations which must be made. Many of my clients who must make this proration at year end are confused and perplexed by the amount of information they must provide to me in order to arrive at an accurate Oregon tax liability. I currently have several clients who would be capable of preparing their own Federal and Oregon tax returns without incurring a preparation fee if it weren't for the complexity in prorating their wages at year-end.
The following is an example of the information I require of a client in this situation:
1. The number of work hours spent physically in the State of Oregon.
a. This is very difficult for workers on these dams as they have to deal with an ''imaginary'' state line.
b. This is also difficult for a worker who is salaried and not paid an hourly wage.
c. I have represented several clients before the Oregon Department of Revenue on this issue. It has been my experience that auditors are not consistent in their recordkeeping requirements of the taxpayer. Some auditors insist on taxpayer records proving the number of work hours in Washington and some auditors insist on records proving the number of work hours in the State of Oregon. Because of this inconsistency, I recommend to taxpayers that they keep records of both, which actually doubles their recordkeeping requirement.
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2. The rate of pay for the number of hours spent in Oregon. This can be complicated if they receive a different rate of pay for different jobs.
3. The amount of their gross income which represents pay for holiday or sick pay. Oregon taxes a percentage of holiday and sick pay based on the following formula: Total Work Days Within the State of Oregon--Total of all Work days (excluding vacation and sick pay days).
One inequity that occurs in this situation is these workers are subjected to Oregon income tax withholding on their entire pay throughout the year even though only part of their income is earned in the State of Oregon. They must seek a refund (many times sizable) at year end. In these cases, the taxpayer is deprived of disposable income that would have been available throughout the year.
Existing Federal law prohibits any state from taxing a nonresident on retirement income earned in that state. This is fairly recent legislation and is a prime example of relieving taxpayers of impossible recordkeeping requirements. In dealing with taxpayers in this situation in the past, I found it virtually impossible to comply with the requirements of Oregon state law in determining how much of a taxpayers retirement income was earned in each state. I equate the recordkeeping requirement that these Federal workers must meet to that of the retirees for which relief has been given.
Another example of necessary legislation to relieve taxpayers of unreasonable recordkeeping requirements is the Amtrak Reauthorization Act. This act prohibits states from taxing the income of nonresident interstate transportation workers. Having spent hours of my time reviewing truck driver log books to arrive at income taxable to the state of Oregon, I can personally attest to the frustration of trying to meet unrealistic recordkeeping requirements. Again, I equate the recordkeeping requirements imposed upon these Federal workers to that of interstate transportation workers for which relief has been given.
My firm prepares hundreds of Oregon tax returns for taxpayers who live in the State of Washington, but work within the state of Oregon. One concern I'm sure many will have about passage of this bill is preserving the right of Oregon State to tax income earned within that state by nonresident taxpayers. Nonresidents routinely complain about paying tax to another state, I hear it daily. I would like to point out however, that I feel this group of workers is unique in that they are Federal employees, working on a federally funded project which provides service to both the states of Oregon and Washington. The burden of substantial (vs de minimus) recordkeeping by federal employees (workers and their supervisors) to meet requirements imposed by the taxing authorities of Oregon State is costly (in time and salaries paid) to the federal government. The additional cost in federal funds to accommodate the burdensome recordkeeping required of these federal workers should be taken into consideration in making a decision on this bill. When the loss of Oregon revenue is compared to the savings in federal funds, the bottom line seems to be more savings to the federal government, than loss of revenue to the state of Oregon.
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In closing, I would like to note that the nonresident workers affected in this situation are also unique because of the fact they reside in the state of Washington. Washington does not impose a state income tax, but relies heavily on a state sales tax. The state of Washington has exempted Oregon residents from the paying of sales tax when they shop in our state. If these workers resided in a state which imposed a state income tax (instead of a sales tax), they would receive a tax credit in either the calculation of their Oregon tax liability or that of their home state. Because of their unique situation, no relief is given them for paying taxes in both states.
Again, thank you for the opportunity to address this issue.
Mr. GEKAS. We thank the lady, and we now turn to Professor Smith.
STATEMENT OF JAMES CHARLES SMITH, PROFESSOR OF LAW, UNIVERSITY OF GEORGIA
Mr. SMITH. Thank you, Mr. Chairman.
Mr. GEKAS. I should have said at the beginning of the testimony that your written statements will be entered into the record. You have 5 minutes to summarize or to extract from your written statement.
Mr. SMITH. Thank you.
Mr. GEKAS. Proceed.
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Mr. SMITH. Due process under the Constitution means that the State must have a nexus with any income it seeks to tax. Either residence of the taxpayer or source of the income is a sufficient nexus. Both principles, taxing residents based on their status and taxing nonresidents based on source, are firmly grounded in Supreme Court cases.
The source theory of income taxation stems from the general dominion that the States have over all persons, property, and business transactions within their borders. The State, in addition to asserting dominion, protects the persons who earn income, their property, and the activities they pursue within the jurisdiction.
For these reasons, I conclude that Oregon and Kentucky are presently acting properly when they tax the income of all Federal employees, both residents and nonresidents, who work at Federal facilities in their States.
Mr. NADLER. Excuse me; by ''properly'' you mean within their constitutional authority. You're not at this point making a judgment on policy?
Mr. SMITH. Yes.
Mr. NADLER. Thank you.
Mr. SMITH. What I mean is that one reason Congress should not use for intervention is to stop the States from violating present due process rights of Washington residents or Tennessee residents. Even though the States are exercising their tax powers properly, Congress may legitimately elect to restrict the States by granting tax immunity to certain Federal employees. Congress plainly has the authority to enact the bills we are discussing today.
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The power exists under the commerce clause because the movement of employees across State lines for employment purposes is within the stream of interstate commerce. Power can also be found under the necessary and proper clause of the Constitution on the ground that the grant of tax immunity will support the Federal objectives served by the two facilities.
The important question raised by the bills is whether it is desirable for Congress to extend tax immunity to the employees to be covered by the bills. This means we're talking about tax policy. There are three areas of concern: equity, efficiency, and administration of the tax laws.
First, under equity one possible concern is double taxation, a term mentioned frequently in earlier testimony today. We presently don't have that problem in this context in my opinion. With respect to income taxation, the problem of double taxation arises when more than one sovereign has jurisdiction to tax the same income. The employees are not subject to double taxation because they are not presently paying income tax in their States of residence.
Second, in many cases there are no unusual administrative burdens connected with the filing of their State tax returns or the calculation and collection of the proper tax. That would be true, I believe, based upon the testimony that we've heard today where we have a worker who spends all or virtually all of her time in the State of Kentucky or in the State of Oregon.
There have been, from the testimony mentioned earlier today, difficulties with respect to recordkeeping for many employees. I am not persuaded presently that the U.S. Government must grant tax immunity to aid in the solution of the problem.
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It strikes me that another solution is that the Federal Government, through administration of the withholding tax, might properly estimate based upon job classification how much time is spent in each State and remit only that part for withholding tax purposes. Conceivably, I suppose, that might engender some sort of dispute between the State tax administration and the Federal Government. But it strikes me that this is one less drastic approach to solving the particular problem of recordkeeping than granting tax immunity.
Efficiency is the third tax policy concern. From the standpoint of efficiency or tax neutrality, it is desirable that employees who work at the facilities bear the same income tax burden, regardless of which State they choose to live in.
From the standpoint of policy and federalism, it is questionable whether Congress should immunize the nonresident employees at the two facilities from State income taxation. If Congress decides to grant tax immunity, the only rationale that I find coherent is the absence of benefits for nonresident workers provided by the taxing States. Congress should grant tax immunity only if it finds that unique circumstances involving the facilities demonstrate the absence of benefits provided by the taxing State.
There should be a strong presumption that the State provide substantial benefits with respect to all income earned within its borders. If there is a general principle that authorizes the bills, it is this: no benefit, no tax. A State shall not tax a nonresident on source income if no benefits are extended to the nonresident.
As a general rule, I fear that this will be hard to apply. It's a line-drawing problem. Won't other Federal employees who commute across State lines want the same advantage? If these bills pass, isn't it likely that Congress will see similar bills introduced in the future?
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Thank you. I will be very happy to answer any questions.
[The prepared statement of Mr. Smith follows:]
PREPARED STATEMENT OF JAMES CHARLES SMITH, PROFESSOR OF LAW, UNIVERSITY OF GEORGIA
I am James Charles Smith, Professor of Law at the University of Georgia, where I have taught for the past thirteen years. I am honored by the invitation to appear before this Subcommittee to testify. I am not appearing on behalf of any client, public or private, but solely to present my own professional views on the subject. At the end of this statement, I have included my curriculum vitae and a disclosure statement referencing a grant.
While I teach and write in several different areas, I have written one book dealing with income taxation. Samansky & Smith, Federal Taxation of Real Estate (1997). In addition, I have written two articles, with Professor Walter Hellerstein as co-author, that deal specifically with a number of interstate problems raised by state income taxation. Hellerstein & Smith, State Taxation of Nonresidents' Pension Income, Tax Notes, July 13, 1992; Smith & Hellerstein, State Taxation of Federally Deferred Income: The Interstate Dimension, 44 Tax L. Rev. 349 (1989).
CONSTITUTIONAL POWER OF STATES TO TAX NONRESIDENTS' INCOME
The due process clause requires that the state have some connection with the income it seeks to tax. This is in essence a nexus requirement; the state must establish a nexus with any income that it seeks to tax. Obviously, a state cannot tax an individual who has never resided in or earned income in the state. A line of Supreme Court cases describe two fundamental but alternative predicates for state power to tax income: residence and source. Receipt of income by a resident is universally recognized as a proper basis for taxation. When a state taxes the income of its resident, the theory is that the rights and privileges of residence justify taxing all of the resident's income, even if some or all of it is earned from out-of-state sources.
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The source theory of income taxation stems from the general dominion that the states have over all persons, property, and business transactions within their borders. The state, in addition to asserting dominion, protects the persons who earn income, their property, and the activities they pursue within the jurisdiction. See Shaffer v. Carter, 252 U.S. 37, 50—51 (1920) (state may constitutionally tax nonresident who conducts business or carries on occupation within state).
From these two theories of taxing jurisdiction emerge the settled constitutional principles that a state may tax residents on their income from all sources and nonresidents on their income from sources within the state. These constitutional principles are reflected in the state statutes that generally tax residents on all of their income wherever earned while taxing nonresidents on their income derived from sources within the state.
Historically the source rationale was limited by the doctrine of governmental tax immunity, but this is no longer true. In McCulloch v. Maryland, 4 Wheat. 316 (1919), Chief Justice Marshall announced the doctrine of federal immunity from state taxation, derived from the supremacy clause of the Federal Constitution. Subsequent decisions interpreted federal immunity broadly, and in Dobbins v. Commissioners of Erie County, 16 Pet. 435 (1842), the Court invalidated a state tax on the income of federal employees. Under the principle of intergovernmental immunity, state employees were similarly immunized from federal taxation. This century the Court has substantially narrowed the scope of federal tax immunity as implied under the Constitution. In 1939, Congress enacted the Public Salary Tax Act to impose federal income tax on the wages of state employees, at the same time consenting to state income taxation of federal employees. 4 U.S.C. 111. The Supreme Court promptly upheld the Congressional decision, overruling Dobbins to permit state income taxation of federal employees provided that the tax does not discriminate against the government or its employees. Graves v. New York ex rel. O'Keefe, 306 U.S. 466 (1939).
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Thus, the modern federal immunity doctrine does not circumscribe the source theory of state income taxation. The state has the power to tax all income earned by persons within the state. The source of the income does not matter. With respect to employment income, this means that the type of employment and the identity of the employer is not material. Since 1939 states have generally treated nonresidents who work in-state the same, whether they are private-sector employees, state employees, or federal employees. When states have on occasion discriminated against federal employees in their tax regime, those employees have received protection on both federal statutory and federal constitutional grounds. E.g., Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989) (invalidating state income tax on federal pensions when state did not tax pensions of state workers).
Applying these principles to H.R. 865 and H.R. 874, this means that neither Oregon nor Kentucky is acting improperly when it taxes the income of federal nonresident employees who work at in-state facilities. The states are only following well-established principles that have been in place and non-controversial for many decades. Nonresidents are properly taxable on the basis of source. Indeed, no principle is more firmly established, both internationally and domestically, than the power of a taxing sovereign to tax income on the basis of source, regardless of the political relationship of the income earner to the taxing jurisdiction. The well recognized power that the United States and the states assert over nonresidents and foreign corporations reflects this deeply rooted rule of international and domestic law and practice. Thus, if Congress chooses to enact H.R. 865 and H.R. 874 or a similar measure, the reason or justification is not to restrain the states from engaging in practices that exceed the proper scope of their tax jurisdiction.
POWER OF CONGRESS TO RESTRICT STATE TAXATION
Congress has the authority under the Commerce Clause to prohibit state taxation of nonresidents' income in appropriate cases. The transactions at issue are within interstate commerce. Long ago a person's decision to live in one state while working in another state may have been viewed as personal in nature and not as ''commerce,'' but modern Supreme Court cases define commerce expansively. See City of Philadelphia v. New Jersey, 437 U.S. 617, 622 (1978) (''commerce'' includes all objects of interstate trade; movement of solid or liquid waste is commerce); United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533 (1944) (''commerce'' includes fire insurance contract).
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Commerce clause jurisprudence is divisible into two main bodies of doctrine. First, there is a series of cases involving persons or things that travel, in a physical sense, from one state to another. Here, the subject matter is often said to be in the ''stream of interstate commerce.'' Second, there are the cases involving a local activity, occurring with a single state, that is said to affect interstate commerce. In the local activity area, the Supreme Court held in 1995 Congress cannot prohibit a person from possessing a gun in a school zone. United States v. Lopez, 115 S.Ct. 1624 (1995) (federal criminal statute (the Gun—Free School Zones Act) regulated an intrastate activity that did not have a substantial effect on interstate commerce). Lopez does not in any way address the parameters of the stream of interstate commerce, and there is no reason to believe the Court will depart from a broad interpretation of which interstate transactions are said to involve ''commerce.''
Under H.R. 865 and H.R. 874, Congress would regulate the economic relationship between a state and a nonresident who is employed by the Federal Government in that state. The movement of employees across state boundaries for employment purposes clearly is within the stream of interstate commerce. The power of Congress to preempt state taxation of interstate commerce is well-established. E.g., Aloha Airlines v. Director of Taxation of Hawaii, 464 U.S. 7 (1983) (sustaining federal preemption of state tax on gross receipts from sale of air transportation); Arizona Public Service Co. v. Snead, 441 U.S. 141 (1979) (sustaining federal preemption of state tax on generating electricity sold out of state, where tax discriminates against out-of-state market).
Apart from the Commerce Clause, it appears that Congress has authority to grant tax immunity under the ''Necessary and Proper'' clause of the Constitution. See Dameron v. Brodhead, 345 U.S. 322 (1953) (tax immunity conferred by Soldiers' and Sailors' Civil Relief Act is ''necessary and proper'' to power of Congress to raise and support armies). The theory is that granting tax immunity for nonresident employees at the two facilities supports the purposes for which the facilities are operated.
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CONSIDERATIONS OF TAX POLICY
Congress plainly has the power to immunize specified federal employees from state income taxation. The important question is whether from the standpoint of tax policy Congress should do so. The standard tools of tax policy analysis address the equity, efficiency, and administrability of the tax laws.
A. Equity
1. Voluntary Choice of Residence and Employment Location. One argument that might be made on behalf of the proposed legislation is that the Federal Government has assigned its employees to work at the out-of-state facility and these employees would work within their state of residence but for the government's decision. The employees have no control over where the federal facility is situated. In essence, this argument seeks to extend a key part of the Soldiers' and Sailors' Civil Relief Act of 1940, 50 U.S.C. App. 574, to other employees. Section 574 of that act prevents states from taxing the compensation of nonresident military personnel who are stationed in state. The purpose of the Act is to protect servicemen from negative state tax impacts that could follow from compliance with base assignment orders when, obviously, they have little or no control over where they must go. The Act also recognizes the high degree of public service and sacrifice involved in military service. The Supreme Court upheld the Soldiers' and Sailors' Civil Relief Act from constitutional attack in Dameron v. Brodhead, 345 U.S. 322 (1953).
For reasons analogous to those underlying the Soldiers' and Sailors' Civil Relief Act, in 1977 Congress deprived the states of power to tax compensation earned by Members of Congress. 4 U.S.C. 113. A Member of Congress who maintains a residence for the purpose of attending sessions of Congress may not be taxed on his or her federal salary by the state where the residence is located.
Congress thus has intervened twice in the past to deprive the states of their source-based jurisdiction to tax nonresident federal employees. Are the federal employees who work at the facilities specified in H.R. 865 and H.R. 874 similarly situated? Are the bills desirable for analogous policy reasons? In my opinion, the analogies that may conceivably be drawn to the two precedents for Congressional intervention are not persuasive. Except for military employment, federal employment should be seen from the employee's perspective as a matter of personal choice, just as it is for other employees generally. In the private sector, persons often find they must accept employment in another state which may impose a relatively high state income tax. Whether they move to the state of their employment or remain nonresident and commute across a state border, they must pay state income tax based on source. In addition, employers often transfer employees to new job locations, and when this has an adverse state income tax effect the private sector employee must bear that burden or resign from the job.
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Similarly, it strikes me that the immunity granted to Members of Congress is not analogous to the proposed grant in H.R. 865 and H.R. 874. A person who serves as a Member of Congress must attend sessions in Washington D.C., and Members of Congress must come from all 50 states. This unique circumstance distinguishes it from the general context of federal employees who commute across state lines to work. Moreover, this legislation serves the salutary purpose of putting all Members of Congress on an equal footing, bearing in mind that most but not all Members represent states that are distant from Washington D.C. and thus generally must acquire a second personal residence.
2. Scope of the Benefit Principle. As discussed above, state taxation of nonresidents' income based on source is justified by the principle that the state provides the nonresident with ample benefits while the income is earned in the state. Those benefits include use of the roads, police and fire protection for person and property, and the availability of the judicial system to protect contract rights and property rights. This benefit principle explains why it is equitable for a government to tax nonresidents. Because the government incurs costs to protect the nonresidents' income producing activities, it is just and proper that the nonresidents pay taxes to defray those costs.
In our tax system, both at the state and federal level, it is important to recognize that the benefit principle has functioned as an underlying assumption, not as a working limitation with teeth. In other words, it is presumed that the state has provided substantial benefits with respect to all income derived from in-state sources. Individual taxpayers cannot avoid taxation by showing they have in fact received no benefits from the state. There is no matching of benefits and tax burdens on a case by case basis. A person who pays taxes in an amount greatly in excess of government benefits he receives or is entitled to receive is not entitled to a refund or other tax relief. Part of the explanation for this ''loose fit'' between burden and benefit is administration. It would be a nightmare if a multitude of taxpayers could claim tax relief based on a showing that their tax bill substantially exceeded their consumption of government services or benefits. The other part of the explanation has to do with redistribution of wealth. The income tax system has redistributional effects. This is inevitable in our income tax system, both at the state and federal level, given that tax payments are channeled into the general budget of the government. While the extent and direction of redistribution may at times be controversial and is a legitimate subject for political examination, redistribution of some sort is inevitable in our income tax system.
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In support of H.R. 865 and H.R. 874, a potential justification is that the employees at the two federal facilities receive few or no benefits from the States of Kentucky and Oregon, respectively. I am not presently familiar with the characteristics of the two federal facilities so I am not able to evaluate the factual predicate for this justification. I do not know whether any of the nonresident employees travel on state roads to commute to work; whether some of the employees engage in other in-state activities off the federal facility (such as shopping) before or after work; whether the state provides fire or police services or any other services with respect to the federal facility; or whether nonresident employees are entitled to resort to state courts to protect their income, property, or person with respect to their employment or events occurring at the federal facility.
Answering the question of state-provided benefits may turn in part on how the federal facilities are classified. With respect to most federal lands, the federal government and the state both have jurisdiction. Properties known as ''federal enclaves'' are those acquired pursuant to the Jurisdiction Clause of the Constitution, art. I, 8, cl. 17, which grants Congress ''the power to exercise exclusive Legislation in all cases whatsoever'' over properties purchased from states with their consent. In the Buck Act of 1940, Congress made the decision to waive immunity for federal enclaves, permitting state taxation of the income of workers at federal enclaves on the same basis as workers at other federal properties. See Hellerstein & Hellerstein's Cases and Materials on State and Local Taxation 972—974 (6th ed. 1997). In the Buck Act, the decision was made that state taxation should not depend on how the federal government acquired the property, and that states should not be penalized in the taxing jurisdiction by having consented to the sale of state lands to the federal government. This policy decision appears sound, and there is the risk that a close examination of the benefit principle as applied to federal facilities may serve to undermine this decision.
My position is that the presumption that the state provides substantial benefits with respect to all income earned within its borders should be a very strong one. Federal immunity should not be granted merely based on a showing that most nonresident employees at the two facilities do not appear to benefit very much from the presence of state government or proximity to areas of the state adjoining the facility. Congress should intervene based on the lack of benefit only if clear and uncontradicted evidence is presented that the federal nonresident employees do not receive and are not entitled to receive meaningful benefits.
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In terms of equity, the key question for these bills is one of line drawing. Are the federal employees at the two facilities addressed by the bills in a unique situation, or are there many other nonresident employees, either public sector or private sector, who are similarly situated? I see potential difficulties here. With respect to federal employees, consider the following: Is it relevant that state lines bisect the two facilities specified in H.R. 865 and H.R. 874, or is a nonresident employee who crosses a state boundary that adjoins a federal facility in the same position in terms of proper tax treatment? What about the nonresident who crosses the state line, drives a very short distance on a state road and then enters a federal facility? Is the benefit of very little use of one state road de minimis or significant? What if the commute to the facility is on a federal highway, not a state road? Does it matter that states finance road building and repair with a gasoline sales tax, not with the state income tax?
3. Double Taxation and Credits. There is no problem of ''double taxation'' with respect to the status quo, with Oregon and Kentucky taxing the income of nonresident federal workers who work in those states. With respect to income taxation, the problem of double taxation arises when more than one sovereign has jurisdiction to tax the same income. The widespread availability of a tax credit substantially solves the problem of an unfairly high tax burden stemming from two states taxing the same pension income. All states with income taxes presently provide credits for residents who earn income from sources in other states. Different states use different formulas for calculating the credit, and sometimes the credit will be less than the tax paid to the source state. While the granting of credits is not mandatory under the due process clause, it seems likely to continue for the foreseeable future. Moreover, an argument can be made that the dormant commerce clause requires the granting of tax credits for residents' source income from other states. If the receipt of earned income from work in another state is within the scope of interstate commerce, the Supreme Court cases that apply the ''internal consistency'' doctrine suggest that a credit is necessary in order to avoid an undue burden on interstate commerce. See Hellerstein, Is ''Internal Consistency'' Foolish?: Reflections on an Emerging Commerce Clause Restraint on State Taxation, 87 Mich. L. Rev. 138 (1988).
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Forty states impose broadly based income taxes. Therefore, most federal employees who commute across state lines to work file two state income tax returns and receive a credit from their state of residence. Washington imposes no income tax, and Tennessee does not tax employment income. Thus, the nonresident employees covered by H.R. 865 and H.R. 874 do not file resident tax returns and for this reason do not receive tax credits. While it may be true that residents of Washington and Tennessee, because they have chosen not to tax income, must impose other taxes, this is not a problem of ''double taxation.'' If, however, those states are persuaded that their residents who pay income tax to another state should receive a tax credit, they could devise one. For example, the state could grant a homeowner a property tax credit based on proof of payment of an out-of-state income tax. Looking at aggregate state tax burdens, this could serve to put the resident living in a no-income-tax state on an equal footing with one who lives and works in states with income taxes.
B. Efficiency
Efficiency is offended if the tax system provides incentives for employees to engage in behavior that they would not have engaged in but for the tax system rules or characteristics. The concern is one of tax neutrality. Ideally, the tax system (here, how the tax systems of two neighboring states mesh) should not cause employees to alter their behavior with respect to their decision where to live. In the context of the bills, the issue is what effect the measures will have on the workforce at the two specified federal facilities. I have no data as to the residence classifications of the employees at the two facilities. Obviously, both Oregon and Washington residents work at the Columbia River facility, and both Kentucky and Tennessee residents work at Fort Campbell. My prediction is that, if Congress enacts the legislation, over time this will affect the proportions of in-state and out-of-state employees. Oregon workers at the Columbia River facility will be tempted to move to Washington; Kentuckians who work at Fort Campbell will consider a move to Tennessee. By moving, they in effect receive a pay increase equal to their present state income tax burden. I cannot say whether many or few workers will move. Obviously many factors other than income tax burdens heavily influence a family's decision of where to live, and there are transactions costs (such as selling a home) that are deter moves designed primarily to avoid state taxes.
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For the same reason, passage of the bills should inhibit the rate at which Washington residents who work at the Columbia River choose to relocate to Oregon. As it stands now, a Washington resident who works at the facility and who for some reason would prefer to live in Oregon can move, knowing it will not increase his tax burden. With the legislation, that Washington resident would have to trade off his preference to live in Oregon against the income tax cost.
C. Administrability of the tax laws
In 1995, Congress enacted legislation to restrict state income taxation of nonresidents' pension income. State Taxation of Pension Income Act of 1995, 4 U.S.C. 114. The principal justification for this measure was that the states, in taxing retirement income of nonresidents, were not able to overcome substantial practical problems of calculation, allocation, and monitoring. As a consequence, enforcement was haphazard. Most states did not attempt to collect tax from nonresident retirees, and in the states that did attempt enforcement, equity concerns were raised because enforcement tended to concentrate more on state and federal employees more than on private-sector employees. Congress thus intervened to restrain the states from trying to solve administrative problems that appeared to be intractable.
For similar reasons, in 1990 Congress granted tax immunity to employees of interstate railroads and motor carriers. Amtrak Reauthorization and Improvement Act, Pub. L. No. 101—322, codified at 49 U.S.C. 11502, 14503. Here the concern was with transportation workers who regularly spend time in many states being confronted with the duty of filing multiple state income tax returns. An Amtrak worker assigned to the Washington D.C.--Atlanta route might conceivably have to file returns in all states where the rails run. Congress decided that, were states to pursue their jurisdiction in cases such as this, it would be an undue burden for such employees.
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These types of concerns of administrability are not present here. For each employee who would be affected by H.R. 865 and H.R. 874, only two states are involved: the state of residence and the state where the federal facility is located. Presently the nonresident employees must file only one state income tax form; unlike the pension context, there is no burden of taxpayers having to report income and file in several states.
In the pension context, another administrative concern was that to compute the tax properly when more than one state was involved, it was necessary to analyze the retiree's pay history for his entire career, and these records were sometimes not available or readily accessible. Here, where the issue is taxation of current earned income, not retirement pay, there are no similar problems related to recordkeeping or computation of the tax.
Mr. GEKAS. We thank the gentleman, and we now turn to Mr. Duncan for 5 minutes.
STATEMENT OF HARLEY T. DUNCAN, EXECUTIVE DIRECTOR, FEDERATION OF TAX ADMINISTRATORS
Mr. DUNCAN. Thank you very much, Mr. Chairman. It's a pleasure to be here representing the Federation of Tax Administrators, as well as at the specific request of the committee staff, instead of representatives of the Oregon Department of Revenue or the Kentucky Revenue Cabinet.
As a general matter, the federation opposes Federal preemption of legitimate State taxing powers without a showing of some compelling policy rationale that would involve the interests of the Federal Government itself as an employer, or a compliance burden imposed on individuals. We do not find that rationale to be present here and would urge you to take no action on these measures.
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Today I would like to make five points for you. First, there should be no implication in the record or in the minds of the Members that Kentucky or Oregon are in any way overreaching or acting out of the ordinary in the manner in which they have imposed their tax on nonresident individuals who are performing services in the State.
As Professor Smith has pointed out, what Oregon and Kentucky have done here is very much the same as is done in other States, and it meets the requirements of the Constitution. Most importantly, there is no double taxation of the income, and there is no discrimination against Federal employees.
Second, we would urge you to refrain from action here in respecting the sovereignty of the States. The ability to define one's tax system is a core element of sovereignty for the States, provided that that system is defined within the boundaries and constraints of the U.S. Constitution regarding due process, fairness, and unreasonable burden.
Oregon and Kentucky have met that obligation, and we urge you to refrain from preempting them in the interest of their needs to play the role that has been appointed to the States in our Federal system and the increasing responsibilities that are being imposed on them.
The third point I would like to make is that intervention by this committee in the form of passing these measures will by definition create a preferred class of taxpayer in these two States. At the present time all workers, whether they're public or private, are treated the same in these States.
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If Congress becomes the maker of the rules for one set of employees, I think we can be guaranteed that there will be perceived inequities and perceived unfairness that will bring pleas from other groups of employees, whether they be public or private. The rationale, if you are to proceed, must be clear; it must be narrow, and it must be precise, if you are to avoid future claims for preferential treatment.
The fourth point is that Congress, throughout its history, has shown great reluctance to preempt legitimate State taxing authority, particularly in the individual income tax area.
If you look through the Federal Code, you basically come down to only several instances of preemption, such as where the interests of the Federal Government in performing a Federal function were at stake, such as with the Soldiers and Sailors Civil Relief Act of 1940. Or where there was an undue administrative burden imposed on individuals, such as with the interstate commerce workers, with truckers, motor carrier employees, railway employees, and airline workers, or in the pension issue that this subcommittee dealt with last Congress, where the inability of the employer to provide information to individuals and the multiple returns of individuals were taken into account.
The interests of the Federal Government in performing its functions and the administrative burdens argument, we don't think apply here, and do not produce the compelling rationale that Congress should have in overcoming what has been its historical reluctance to preempt the States.
Finally, we would ask this committee to view the issue here from the perspective of the Unfunded Mandates Act that was passed to much acclaim in the last Congress. The preemption of State taxing authority is specifically envisioned within that bill as an unfunded mandate and is the type of cost that should be evaluated in that bill.
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The issue here does not reach the $50 million threshold required in that legislation, but I think the principle is the same, and the principle is an important one. The manner in which we would encourage you to view it as an unfunded mandate is essentially that Kentucky and Oregon have done nothing wrong and nothing out of the ordinary.
The only thing that sets them apart from the other 40 States with income taxes is that in this case they happen to be bordered by a State that doesn't have an income tax, and, therefore, there is a perceived unfairness to certain Federal workers.
If the Congress considers that the equities for those Federal workers should overcome the ability of the States to tax activity within their borders that's afforded to it under the Constitution, then our position would be that it's incumbent upon the Congress to finance those equities, and we would encourage you to either reimburse the States, instead of taking a penalty against them in the form of the preemption where they've done nothing wrong, or to do what would happen in many private sector situations, and to offset the advantage to the individual workers by grossing up their wages to offset the tax disadvantage.
The key point is that Kentucky and Oregon have not acted out of the ordinary, and if Congress believes there is an inequitable situation, it's one that they should finance.
Thank you.
[The prepared statement of Mr. Duncan follows:]
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PREPARED STATEMENT OF HARLEY T. DUNCAN, EXECUTIVE DIRECTOR, FEDERATION OF TAX ADMINISTRATORS
Mr. Chairman and Members of the Committee, thank you for inviting me to testify before you today on H.R. 865 and H.R. 874, each of which would preempt the imposition of state income taxes on compensation earned by certain categories of federal workers. H.R. 865 would prevent the State of Kentucky from imposing tax on compensation paid federal employees working in Kentucky at Ft. Campbell unless they are residents of Kentucky. H.R. 874 would prevent the State of Oregon from imposing tax on compensation paid federal employees working in Oregon on federal dams on the Columbia River unless they are residents of Oregon.
I am today representing the Federation of Tax Administrators, as well as (at the request of Committee staff) the state tax administration agencies of Oregon and Kentucky.
The Federation of Tax Administrators (FTA) is a nonprofit corporation comprised of the principal tax administration agencies in each of the fifty states, the District of Columbia, and New York City. The Federation is governed by a 15 member Board of Trustees elected by the 52 member agencies. The policy of the Federation with respect to this issue was embodied Resolution Twelve adopted unanimously by the membership at its June 1996 Annual Meeting in Baltimore, Maryland. In accordance with House Rule XI, clause 2(g)(4), my résumé and a statement of the federal grants received by our organization are attached.
INTRODUCTION
As a general matter, the Federation opposes the preemption of legitimate, lawfully imposed state taxes by the federal government. The power to define their tax systems is one of the core elements of sovereignty reserved to the states under the U.S. Constitution and is a vital aspect of our federal system of government. The substantive constraints imposed on states by the U.S. Constitution insure that state tax systems afford a fundamental fairness to all citizens, regardless of their state of residency. They also prevent unlawful discrimination toward any category of individuals and protect against undue burdens on interstate commerce or the federal government. Given the protections accorded by the Constitution, we would encourage the Subcommittee to take no action on these measures.
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In addition, it is important to note at the outset that the Congress has throughout the history of the country refrained to a very considerable degree from preempting the states in matters of individual income taxation. It has, to this point, intervened only where it felt the interests of the federal government were directly at stake or where the administrative and compliance issues posed for individual taxpayers overwhelmed the states' interests in defining their tax policies. We would urge the Subcommittee to continue this admirable pattern of restraint.
STATE TAXATION OF NONRESIDENT INCOME
There should be no question regarding the legal authority of states to tax the income of nonresidents employed in the state and no intimation that Kentucky and Oregon are in any sense overreaching their legal bounds in the manner in which they are imposing tax on the workers in question.(see footnote 1) Under current law, states may impose income tax(see footnote 2) two alternative basis. First, states may lawfully impose tax on income that is derived from ''sources'' within the state, regardless of whether it is earned by a resident of the state or a nonresident engaging in income-producing activities within the state.(see footnote 3) In-state sources are defined generally to include the performance of personal services in the state, the conduct of a trade, business or occupation in the state, or the receipt of income from property owned within the state.
Second, states impose their tax on a residency basis, i.e., they may impose tax on all income received by a resident, regardless of the source of that income.(see footnote 4) The states must, however, harmonize their systems such that the income of an individual is not subject to taxation by multiple states. To avoid double taxation, the states of residence must ''give way,'' i.e. take steps to avoid double taxation of income legitimately taxed in another jurisdiction. States use two methods to achieve this harmonization.
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They provide a credit for taxes paid to another state on income which is also included in the tax base of the state of residence. This system of reciprocal credits prevents income from being taxed in both the state in which it is earned and in the state of residence; or
Certain groups of states do not use such a system of credits. Instead, they have reciprocal agreements under which all income is taxed by the state of residence rather than the state in which it is earned. These agreements are most prevalent in the Ohio—Indiana-Illinois-Kentucky-West Virginia; Virginia-D.C.-Maryland; and Pennsylvania-New Jersey areas.
State authority to tax nonresident income from in-state sources was validated by the U.S. Supreme Court over 70 years ago in Shaffer v. Carter 252 U.S. 37 (1920) when it wrote:
... we 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 ..., it may, as a necessary consequence, levy a duty of like character, and not more onerous in its effect, upon incomes accruing to non-residents from their property or business within the state, or their occupations carried on therein....
As has been developed in subsequent cases, the U.S. Constitution imposes four essential constraints on state taxation of nonresident income:(see footnote 5) (1) There must be sufficient contact between the state and the individual to justify the imposition of the tax; (2) Double taxation of income is to be avoided; (3) The nonresident may not be discriminated against by virtue of the nonresident status; and (4) The tax must be limited to the activities carried on (i.e., the income earned) by the nonresident in the state.
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These tests are satisfied in the cases presented to this Subcommittee in the form of these bills.
The individuals affected by the bills regularly work and perform personal services in the states of Kentucky and Oregon on a daily basis, thus satisfying the ''sufficient contact'' requirement.
Kentucky and Oregon have in place mechanisms to avoid double taxation. Kentucky has a series of reciprocal agreements in place with its neighboring states which levy an income tax, and Oregon provides its residents a credit for tax paid to other states;
The tax imposed in each state is a ''mirror image'' of the state income tax levied on resident individuals (i.e. the rates, exemptions, credits) are the same, thus satisfying the non-discrimination requirements of the Constitution.
The tax is limited to the income these individuals earn in Kentucky and Oregon. Neither state imposes tax on income earned in the state of residence, and no tax is imposed on income from savings or investment by these individuals. Further, in each case, provisions are in place to provide for an apportionment of income to Oregon or Kentucky based only on the proportion of the work-day spent on each side of the border.
In short, it is clear that the U.S. Constitution authorizes states to impose an income tax on nonresidents regularly working and performing services in the state. It is likewise clear that the Constitution imposes substantive constraints on the states in this regard to insure that the tax imposed meets basic tests of ''fairness'' and does not discriminate against the nonresident. The taxes imposed by Kentucky and Oregon on the categories of federal workers covered in these two measures meet the requirements of the U.S. Constitution.
REASONS CONGRESS SHOULD NOT INTERVENE AND PREEMPT THE STATES
Given the foregoing, the Federation submits that the Subcommittee should take no action with respect to H.R. 865 and H.R. 874. There are several reasons supporting this recommendation.
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Sovereignty of the States. The ability to define their tax systems within the bounds of the U.S. Constitution is one of the core elements of sovereignty reserved to the states in our federal system of government. It is a power which should not be preempted by the Congress except in rare instances where there is a compelling policy rationale. A central element of this sovereignty is the ability to impose taxes on economic activity occurring and income earned within the borders of the state. Without such an ability, states are necessarily constrained in meeting their public service obligations, and the tax burden will fall to an ever-increasing degree on residents of the state and businesses operating wholly within that state. States must be able to tax income earned within their borders if they are to preserve their sovereignty within our federal system and to handle their responsibilities--responsibilities, I might add, that Congress is rapidly increasing.
Preferred Class of Taxpayer. To the extent that Congress intervenes to preempt legitimate state taxes of general application (as is proposed in these measures), it will by definition create a preferred class of taxpayer that benefits at the expense of all other taxpayers--both resident and nonresident--in these two states. That is, Congress would create a small group of taxpayers (certain federal employees) for whom the State Legislature no longer defines the tax rules, but for whom Congress has become the ''Maker of the Rules.'' This will necessarily create situations in which other groups of taxpayers find themselves aggrieved and feel they are the victims of ''unfairness'' that should be the recipient of preferential congressional intervention as are the federal employees who are the subject of these measures. While these measures are confined to federal employees in these two locations, what basis is used to distinguish them from all other employees in these and other states. The point is that under the current situation, all workers--public and private in Oregon and Kentucky are subject to the same set of nondiscriminatory taxes. Without a compelling rationale for distinguishing those individuals who would benefit under H.R. 865 and H.R. 874, Congress should not intervene to preempt legitimate state tax authority.
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Congressional Reluctance to Preempt. While it is clear that Congress has authority to preempt state taxation in these cases, it is likewise clear that Congress has been extremely reluctant to do so over time. To its credit, the Congress has recognized the importance of states in our federal system and the importance of tax sovereignty to the vitality of the states and our system as a whole.
As a consequence, Congress has only rarely preempted state income taxation of individuals, and then only when there was a substantive policy rationale for the preemption. Generally, the preemptions have occurred when the interests of the federal government itself or as an employer were at issue or when the administrative burdens faced by the individuals in complying with otherwise lawful taxes were so great that they outweighed the interests of the states. Most relevant to the discussion here are the following preemptions:
In the Soldiers and Sailors Civil Relief Act of 1940,(see footnote 6) Congress provided that members of the U.S. Armed Forces would not be considered a resident of a state by virtue of being assigned to a facility in the state and further provided that income of the individual would be subject to tax only in the state of residence. This measure recognizes the federal interest in providing for the national defense and in according certain protections to military personnel whose term of employment and place of employment are not voluntarily chosen.(see footnote 7)
For certain workers in interstate commerce (e.g., employees of interstate railroads, airlines and motor carriers), Congress has established somewhat differing rules that effectively provide that such workers will be subject to taxation only in the state of residence because of the potential administrative and compliance burden these workers would face given that they may well work in a large number of states each year and be subject to filing returns in each state each year.(see footnote 8) Note that even here, however, Congress has recognized that the state in which an individual regularly works and performs a majority of his/her services has a legitimate interest in taxation of the income earned in the state. Airline workers who work more than 50 percent of their time in a single state in which they are a nonresident are still subject to tax in that state.
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In the 104th Congress, this Subcommittee considered and approved a measure(see footnote 9) to limit state taxation of pension and retirement income paid to nonresidents because of the compliance and administrative burdens such taxation potentially imposed on individuals who moved during or after their working years and their employers.
In short, Congress has moved to preempt state authority to tax income earned by nonresidents within the borders of the state only where there is a direct federal interest served by the preemption or where the administrative and compliance burdens potentially imposed on the individuals outweighs the interests of the state in imposing the tax. The Federation submits that these criteria are not met in situations covered by H.R. 864 and H.R. 875.
Instead, we have simply a category of federal workers who are employed on a federal installation which crosses the boundary of two states--one of which employs a personal income tax and one of which does not. Those federal employees are subject to the same tax laws as all other public and private employees working in those states. The burden of those taxes does not fall differentially on the federal workers, and those laws do not curtail the ability of the federal government to meet its obligations. Neither does the administration of those laws impose an undue administrative or compliance burden on the affected individuals.(see footnote 10) We submit that there is no sound policy rationale for the proposed preemptions. We would urge, therefore, that Congress continue its long-held posture of supporting the role of the states in our federal system and refrain from preempting the states in the areas of taxation covered by these bills.
Unfunded Mandate on the States. As a final matter, we would urge the Subcommittee consider this measure in light of The Unfunded Mandates Act of 1995,(see footnote 11) passed to much acclaim in the 104th Congress. This is an opportunity to show good faith to the principle that Congress should resist placing additional mandates on state governments without funding them. While these measures do not reach the $50 million threshold established in the Unfunded Mandates Act to require a fiscal analysis and subject the measures to a potential point of order, they are clearly unfunded mandates in that they require that states refrain from taxing income which they could otherwise lawfully tax. As such, they impose constraints on the
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choice of policy priorities as the state might establish them and substitute the judgment of the Congress instead.
Further in this vein, to the extent that the preemptions contained in H.R. 865 and H.R. 874 are being taken to serve the needs of the federal government as an employer and to offset a perceived disadvantage faced by certain federal workers, we would urge the Subcommittee to take steps necessary to secure appropriations to Reimburse the States of Oregon and Kentucky for the revenue they will be foregoing. That is to say, there is nothing improper in the manner in which Kentucky and Oregon have structured their tax systems. The fact there is no offsetting credit is as much a feature of the tax structure that Washington and Tennessee have chosen as it is that of Oregon and Kentucky. Thus, if Congress feels that the effects of these state choices should be offset for federal employees working on federal installations crossing the borders of these states, it should assume responsibility for offsetting the costs imposed on Kentucky and Oregon.
CONCLUSION
The Federation of Tax Administrators urges the Subcommittee to take no action on H.R. 865 and H.R. 874. There exists no compelling policy rationale to support the preemptions. As a consequence, the Congress should continue the long-held practice of refraining from intrusions on state tax sovereignty and not proceed with these bills.
Thank you for the opportunity to appear. I will be happy to answer any questions. We are also willing to work with the Subcommittee and its staff as these proposals are considered.
Mr. GEKAS. We thank the gentleman. The Chair will allow itself 5 minutes, as is customary, for the purposes of examination of the witnesses.
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Mr. Duncan, you opposed the source tax which we passed last Congress, as I recall. Is that correct?
Mr. DUNCAN. When we appeared before this committee, we outlined several principles that we felt should be met in the measure that would preempt the States on source taxation, and I think as we worked this through we came quite close to those principles.
The main issue before this group last time was only on nonqualified, deferred comp. plans. I think we had said that there were considerations of administrative burden with respect to qualified plans and many other variations on pensions that made it not improper for the Congress to preempt.
Mr. GEKAS. And you now quoted in your rationale, as one of the perhaps unique situations, where the Federal Government could preempt without fierce objection from your organization.
Mr. DUNCAN. It's one of those considerations that needs to be made by the Congress; yes, sir.
Mr. GEKAS. It isn't clear to me and I wanted to ask, and I think I did ask, the two workers, the two members of the union who testified before, and maybe Ms. Wilen or Mr. Smith know something about it--there's nothing to compel the Federal supervisory staff on site at these dams to withhold these taxes from the paychecks of their employees. In other words, Oregon can't mandate to the Federal Government that they withhold these taxes. Is that correct? Is that your understanding?
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Ms. WILEN. Basically, as far as Oregon's statute, Federal law takes precedent. I realize under Oregon's statute any employer of Oregon employees is required to withhold Oregon income tax----
Mr. GEKAS. Yes, I understand that.
Ms. WILEN [continuing]. If they're going to earn 50 percent or more of their income there.
Mr. GEKAS. I understand that, but what I'm saying is, does that, in your judgment, cover the Federal employer? Can they compel the Federal Government to withhold monies from the Federal employees working in Oregon? I think not, but do you know something that I don't know?
Ms. WILEN. I don't know the answer to that.
Mr. SMITH. I'm quite----
Mr. GEKAS. Professor Smith opines that perhaps the solution would be for the Federal Government here to properly allocate and to try to proportionate the income, et cetera, that that could be a solution; yet, that would be a gratuitous act on the part of the Federal Government, in my judgment----
Ms. WILEN. Yes, and very costly.
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Mr. GEKAS [continuing]. And willing to save the problem or serve the problem, but we must agree, do we not, that they can't be compelled to do so? And if they choose not to do so, to withhold the taxes, does Oregon now sue these taxpayers? How do they assert their power?
Mr. NADLER. Estimated taxes?
Mr. SMITH. I am not certain whether authority for the Federal Government's withholding of State of income tax is somewhere in the U.S. Code or is in the CFR or is handled in other ways, but, clearly, you are right that whatever the Government decides to do through its lawmaking has precedence over the State's desire that the Federal Government withhold taxes. The thought that I mentioned was based upon this Federal supremacy.
There is an argument with some credibility here that the Federal Government is spending time and money that it should not be spending going over log books, certifying log books, having employees fill out these log books, and I think that is a proper concern.
I don't see why it would be unfair to the States if, for instance, at the Columbia River the Federal Government decides a mechanic-level 4, if there is a particular designation like this, is deemed to spend 60 percent of his time in the State of Washington, 40 percent of his time in the State of Oregon, and that's it. And the Federal Government will withhold on that basis certified to the State in order to solve the problem of what may be going on now with employees keeping time records in as great detail as lawyers who bill $250 an hour.
Mr. BRYANT [presiding]. I will be assuming the Chair, and I will have some questions for you in just a minute, but at this point I would yield 5 minutes to Mr. Chabot.
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The gentleman from Ohio.
Mr. CHABOT. I thank the chairman, and also Mr. Bryant for introducing these particular bills. I look forward to hearing the debate. I apologize for being a little bit late for the hearing itself, but, unfortunately, it was necessary for us to be over on the floor. So I will read all the statements and review this with my staff before we take action. I want to thank all the witnesses for coming today, and I yield back the balance of my time.
Mr. BRYANT. At this time, the Chair recognizes the gentleman from New York, Mr. Nadler.
Mr. NADLER. Thank you, Mr. Chairman.
I want to read two portions of your written testimony which I think are somewhat in contradiction, Professor Smith, and ask if you would comment.
Mr. SMITH. I apologize for that.
Mr. NADLER. Well, they may not be in contradiction; I said they ''seem.''
Mr. SMITH. Oh, all right.
Mr. NADLER. That may be my limited understanding.
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On page 7 you say the following: ''In our tax system...it is important to recognize the benefit principle,'' that is, Oregon can tax you if you have benefits from Oregon, ''has functioned as an underlying assumption, not as a working limitation with teeth. In other words, it is presumed that the State has provided substantial benefits with respect to all income derived in that State. Individual taxpayers cannot avoid taxation by showing they have in fact received no benefits from the State. There is not matching of benefits and tax burdens on a case by case basis. A person who pays taxes in an amount greatly in excess of Government benefits he receives or is entitled to receive is not entitled to a refund or other tax relief.
''Part of the explanation for this 'loose fit' between burden and benefit is administration. It would be a nightmare if a multitude of taxpayers could claim tax relief based on a showing that their tax bill substantially exceeded their consumption of Government services or benefits.'' And you say the other reason is that the income tax of necessity and by purpose ''has redistributional effects,'' and you don't want to fool with that.
On the other hand, a few pages later you say, on page 9, ''Congress should intervene based on the lack of benefit only if clear and uncontradicted evidence is presented that the Federal nonresident employees do not receive and are not entitled to receive meaningful benefits.'' Now forget about meaningful benefits. Let's assume the showing is that there's no benefits. You seem to say a few pages earlier that that's irrelevant, and here you say we might want to intervene if they can show they don't receive any real benefits. Would you comment on this, please?
Mr. SMITH. Yes, there is some tension there, definitely. In my mind it comes from the term ''presumption.'' We say, and clearly the courts have said, that the benefit principle is a strong presumption. We're really asking, is it so much of a strong presumption that it can never be rebutted or overcome by other evidence?
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If it's a so-called, to use a legal term, irrebuttable presumption, most lawyers would say it really isn't a presumption at all. It's a per se rule which may or may not be a fiction, but it's the way we think of justifying a particular result.
In preparing for today, in thinking about this, I would hope that Congress would not want to upset the benefit principle to the extent of thinking there needs to be fine tuning done for many categories of Federal employees. I think everyone who has testified today has said, ''No, that is not a course that we ought to head toward.''
Now if it is shown to the satisfaction of Congress that these workers at the Columbia River facility and at Fort Campbell who cross the State lines receive no benefit, are entitled to receive no benefit whatsoever, what should be done?
To give you some of the analogies out there, corporations, for instance, are fully responsible to pay school taxes, whether it's a property tax or income tax that funds a school, notwithstanding the impossibility of a corporation having children to go to school, just as other taxpayers who don't have, haven't had, and won't have children are responsible for school taxes.
Mr. NADLER. Excuse me. Although the location of a corporate facility--even though the corporation has no children, the Supreme Court is saying that a corporation is a person, notwithstanding, and that the location of a corporate facility would, of course, bring workers who would have children who would go to school.
Mr. SMITH. That could be another explanation for why the corporation should not be able to claim no benefit for a particular tax in that instance.
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The other thought that occurs to me on the possible adoption of a ''no benefit, no tax'' rule is that it runs counter to the Buck Act. This act passed in 1940, was at that time a congressional decision that, in terms of Federal employees, the lack of benefit really didn't matter.
Under the Buck Act, tax jurisdiction was extended to what are called Federal enclaves under the jurisdiction clause of the Constitution. Not all Federal properties are Federal enclaves. Only those which were purchased from the State legislature with the consent of the State are Federal enclaves, and the significance is that the State has no concurrent criminal law jurisdiction or other jurisdiction over those Federal properties. And that, I think, almost by definition, would greatly strengthen the argument, if it's a Federal enclave, that there can't be a State benefit.
If it's a regular property, a Federal employee perhaps might have some benefit of State criminal law enforcement for mishaps that occur on the Federal property.
Mr. NADLER. Let me, if I may, in listening to this testimony all day--I mean I don't know if you've been here the whole day. I have a very strong concern, clearly, that the Federal Government should not be compromising the taxing powers of the States. It's clear, I think, that Oregon and Kentucky have no constitutional problems with exercising tax jurisdiction here, and the question is, Is there an equity problem? And is that problem so unique that Congress should step in and do something about it?
And, clearly, there are millions of people who work in one State and reside in another, and we don't want to do anything that would set a precedent for setting problems with the State taxing powers for those millions of people, and God knows how many billions of dollars.
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On the other hand, the contention is made that the situation in these two instances is so unique because there is no benefit at all; not a reasonable benefit, but no benefit at all that the workers here could receive. And I think you say in your testimony, and I would certainly agree, that our decision shouldn't turn on whether it's a Federal enclave or not and how the Federal Government came to acquire the property. That would seem irrelevant from an equitable point of view.
So the real question comes down to, I think, are we--if the case is proven to our satisfaction that they are not, that the people here in these two situations are and can receive no benefit, and as a practical matter, given the fact that they cross the State line numerous times during the day, it imposes a burden on the Federal Government, either on their time as Federal employees and the supervisory time on somebody to try to keep logs to do an allocation, and that's really impractical--if we were to pass these bills based on the finding that there is no benefit, could we draft it narrowly enough, and put it in the record narrowly enough, so that you would be satisfied that this doesn't set any precedent of any wider exemptions?
Mr. SMITH. Well, what is the narrowest general principle that's coherent? I mean, one that occurs----
Mr. NADLER. No benefit possible.
Mr. SMITH. Yes, but when will we find that? And one possible situation would be for all Federal properties that are bisected by State lines, where the nonresident enters from his side and uses no State roads. And I have no idea, not being that keen in my study of U.S. geography, how many other Federal facilities are bisected by State lines.
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I don't view as particularly persuasive the situation here that we have, one State with an income tax bordering another State without an income tax. I think many Federal employees who now cross a State line, if it is into a bisected facility, and have to file two tax returns and use a credit mechanism would prefer filing only one return.
And sometimes, because the tax rates are differential, they would have, in addition to less of a hassle in filing two returns, a little extra money because their tax to the other State may exceed their credit from the home State.
So the narrowest general principle I could think of where the no-benefit rule might apply is to all Federal facilities bisected by State lines. I would then ask----
Mr. NADLER. Where there is no entrance for a facility?
Mr. SMITH. Right. I would then ask, is there a principal difference where the facility is not bisected, but it's precisely at the State border? You cross the river, and the instant you cross the river you're into a Federal facility, so that, true, none of the facility is in your State of residence, but you've gotten right across the river or the dry land and you haven't spent a second in the taxing State on non—Federal property.
These are sort of the line-drawing, slippery slope concerns that I would have in the short term. I suppose in the longer term I could see, if we're on the slope, suppose I have a friend in Augusta, GA, who commutes to the Savannah River Plant in South Carolina and presently must file a South Carolina tax return. This friend spends a few miles on a highway going through South Carolina to get to the plant. How significant is that? Does it matter whether it's a State highway or a federally-financed highway, such as an interstate, or a regular Federal route where the State provides very little benefit in terms of its own revenues or the route on which the commuter drives?
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So these are the things to consider that in trying to explain why we might act to solve a problem where there does seem to be some fairly persuasive examples of why people are feeling aggrieved and think they're entitled to relief. What is the general principle? Maybe it's just the bisected Federal facility rule.
Mr. NADLER. Thank you, Mr. Smith.
Let me just observe to Mr. Duncan, then I'll yield back the time. I am very sensitive to the States not wishing to be dictated to by the Federal Government in terms of limitation of their taxpaying authority. I would observe that it seems that in this instance the State of Washington and the State of Oregon have had ample opportunity to correct the problem on their own and have shown an unwillingness to do, and that somewhat lessens my concern in that area.
It's sort of hard to say to people who have a real grievance that you should take it up with your State representatives, even though they should take it up with their State representatives if their State representatives have ignored them for 20 years. It's sort of hard to say to them, ''Well, we're going to ignore you, too, because it's too bad; the State capital should really handle it.'' I don't see that as a very equitable position. That's simply my observation. Do you have a comment on that?
Mr. DUNCAN. I might make two observations. One is that I think the issue of Washington not imposing a sales tax on Oregon residents was done precisely for the reason the gentleman outlined earlier. It was not out of concern for the Oregon residents and reciprocity and equity of interstate individuals, but rather out of concern for the retailers along the border in trying to offset the situation they face, where Oregon has no sales income tax.
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On the other hand, I think that some of the conversation today--and I think Professor Smith hit on it, and it's been implied by the chairman and you--is that it appears that the Corps of Engineers as an employer and the Oregon Department of Revenue, I would add, as a tax administration agency, have some responsibilities here and really ought to take a look at situations of--if they just changed the name of the duty station, and the person never goes into Oregon, that there shouldn't be a withholding that has to come back and be applied for at the end of the year.
Or, if there are solutions in the recordkeeping area other than the item-by-item log, that there are some responsibilities on the Corps of Engineers as an employer and the tax administration agency to recognize these burdens that are imposed on the individuals.
Mr. NADLER. Thank you, Mr. Duncan.
I want to thank the chairman for again being somewhat lenient in his interpretation of the time rules.
Mr. BRYANT. Thank you. The Chair recognizes the gentlelady from Texas, Ms. Jackson Lee.
Ms. JACKSON LEE. I thank the chairman very much and apologize for not being here for the actual testimony, though I've had the opportunity to review the summaries, because of matters that held me on the floor of the House.
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Let me just make a few comments, and then I have some questions. And if the chairman would allow unanimous consent for me to submit my entire opening statement in the record, I would so ask.
Mr. BRYANT. Without objection.
[The prepared statement of Ms. Jackson Lee follows:]
PREPARED STATEMENT OF HON. SHEILA JACKSON LEE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. Chairman, let me say that I have several concerns about Congress intervening in disputes between States. I'm not really sure if the issue of whether state taxation of non-resident employees at certain Federal facilities should even be before this Congress. It is a well understood fundamental concept that States have the ability to tax citizens, regardless of their State or residency. The U.S. Supreme Court has held in Shaffer v. Carter, that states may tax income derived from ''sources'' within the State without regard for whether the earner is a resident or not. States may tax income based on the residence of the individual regardless of the sources of income. In the two bills that are before us it does appear that the constitutional constraint on a State's taxation of non-resident incomes is satisfied because there individual, and double taxation is avoided (neither Washington nor Texas has state income taxes). My biggest concern here is that if the Congress gets involved in these individual cases, it would create a preferred class of taxpayers at the expense of other taxpayers--both resident and nonresident--in both States. What about the workers who live in New Jersey but work in New York. Should they be exempt from paying New York taxes at the higher rate. What about the citizens who live in New Jersey but work in Pennsylvania. Should they also be exempt. If Congress intervenes in these disputes on behalf of the taxpayers of Washington and Tennessee, it will no doubt encourage many others to come forward and appeal to Congress to appeal their cases. I dare say Mr. Chairman I'm not sure if we should open this Pandora's box.
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Ms. JACKSON LEE. This is certainly an issue that raises the horns of dilemma or has us sitting perched very well on them, almost tipping over, and I'm not really sure if the issue of whether State taxation of nonresident employees at certain Federal facilities is rightly before Congress, except for the fact that it has a Federal implication.
And I think I'm noting for the panelists--and I'm sure they are aware of the Shafer v. Carter case--that States may tax income derived from sources within the State without regard to whether the earner is a resident or not.
My caution in this instance, and certainly it will be appropriate to study this legislation as it moves to the floor of the House, and I'm sure there will be many supporters of it, but I would ask Mr. Duncan if he would sort of give me the global impact if we were to intervene in this instance as these two pieces of legislation suggest. Give me the furthest hypothetical that you could imagine that we might then likely find ourselves being asked to intervene in as evidence of what we just did in this instance.
Mr. DUNCAN. I think Mr. Smith--Professor Smith--did a very good job of leading you part way down what I would think would be the proverbial slippery slope here; of, how is it that you might define the rules closely enough to solve the problems that you want and not open up others?
These bills, to their credit, I think, are quite narrowly drawn. The concerns I would have are, what about the installation that is only within one State? I'm concerned--to me, one of things that makes a difference here, a big difference, is one State does not have an income tax; the other does. What about issues of Federal contractors and employees of Federal contractors performing services on these installations?
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What about if certain of the services, or the installations entirely, were to be privatized or in some way no longer maintained by the Federal Government? Does that make a difference? Then it becomes people in any temporary assignment of a Federal employee to some other jurisdiction--does that make a difference? It then begins to spread to intermittent work in a State by private sector employees, to regular employment in another State by private sector employees. I think it just would be a snowballing effect in terms of people who would feel aggrieved.
Ms. JACKSON LEE. You know, narrowly-drawn legislation has great merit as it passes the House, but then all of a sudden there is great mystery to how narrowly-drawn legislation can still become precedent for someone wanting to do something that may be farfetched but has some glimmer of relevance to the legislation. That's my concern.
Mr. DUNCAN. And that's a real danger as we see it. We've sat here this morning and defined very clearly, or carefully, about no benefits and this installation and what these people do. And the next time some group comes that institutional body of knowledge may well not be here, and things will get crammed into the same rationale, and it begins to spread. That's a very serious concern on our part.
Ms. JACKSON LEE. Mr. Smith, do you think that this narrowly-drawn legislation would protect the commuter tax that many of our east coast States utilize? What comes to mind, of course, is New Jersey and New York, where it would not prohibit the commuter tax that they utilize.
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Mr. SMITH. Which they assess, as I understand it, on income earned by nonresidents who commute across these eastern State lines. I think that these two bills are certainly sufficiently removed from that general taxing regime, that there isn't any short-term danger from the precedent that it would set.
One thing that it strikes me that it does do is start a little bit of wedge between Federal employees and private sector employees. Everyone today, as I've been listening, has been saying that, ''Well, you cross the State line and work in the private sector. Obviously, you have some benefit because the State regulates the place of employment and your employer.'' There may be State safety laws and the like.
And to some extent, focusing on the special status of Federal employees as working for the Federal Government is, I think, a philosophical change in policy direction from what we saw from legislation at the end of the New Deal: in 1939, the Public Salary Act, and then in 1940, the Buck Act. And it's sort of going back to treat Federal employees--even though very few by these bills--different than they would be in the private context.
I'm also concerned about, if we have a no benefit principle, what does it mean? For instance, is it farfetched to say that employees at Fort Campbell in Kentucky are benefited from proximity to the rest of the State of Kentucky--in particular, Kentucky's enforcement of environmental laws which may improve air quality in that part of the State? Is that de minimus, or is that something to think about? I'm not positive.
Ms. JACKSON LEE. Well, you raise a very valid point. In fact, you took my train of thought where I was going.
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I see the red light, but let me just conclude by saying you've raised the specter of concern that I have. Air quality--suppose, unfortunately, there is a work accident and you have the opportunity of a choice of laws in some sense, so which tort laws are better in one State over the other? And you have that ability to accept that benefit because you happen to be working one place and living another place.
So, benefit is sort of a term that may be moved one direction to another direction, and I think we need to study these as this bill proceeds and moves to the floor of House. And I thank you very much for your testimony.
Mr. BRYANT. Thank you. Mr. Nadler has an additional question.
Mr. NADLER. I have one more question that was just suggested and which he may know the answer to--Professor Smith.
There must be private plants, manufacturing plants, situated in one building on two sides of a State line. I know my father, many years ago, worked in a Ford assembly plant on the assembly line in a plant that was in Marlow, which I think--the plant was partially in New York, mostly in New Jersey--but I think the State line went right through the middle of the building.
How is that handled now in the current law in a private facility? If you're working on the assembly line, and today you're doing the doors, and that's in New Jersey and you pay the New Jersey tax, and next week they send you to work on the headlights, but that's in New York. Do you pay the New York tax? I mean, how is that handled in the private sector today?
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Mr. SMITH. Mr. Duncan perhaps can respond to that better than I can, but at least as a matter of starting principles, if each State fully insisted upon its taxing jurisdiction, it could require the employer and the employee to account in some fashion properly for the relative time spent. Whether that's actually done at plants like that, I have no idea.
Mr. DUNCAN. I don't know either, Mr. Chairman. I can put out an inquiry and see if our people have any experience. Each State could do, I suspect, as Professor Smith would suggest, but my sense is that over time there has probably developed some other accommodation, where they either assign it all to one place or another.
Mr. NADLER. Well, thank you very much.
Can I make another comment?
Mr. BRYANT. Sure.
Mr. NADLER. Was that the end of this panel?
Mr. BRYANT. Yes, this is the end.
Mr. NADLER. Then I'm not going to make the statement. Thank you, Mr. Chairman.
Mr. BRYANT. As I understand--I don't have any further questions. I would like to thank this panel for testifying and being with us today. I understand Chairman Gekas will schedule a markup soon on this.
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Again, thank you; our appreciation for your being here today. Thank you.
Mr. NADLER. Mr. Chairman.
Mr. BRYANT. Yes.
Mr. NADLER. Mr. Chairman, I request unanimous consent pursuant to the rules for the minority to put additional--or for any member of the committee, really--to put additional materials into the record for 1 week.
Mr. BRYANT. Without objection.
Mr. NADLER. Thank you, Mr. Chairman.
Mr. BRYANT. And this subcommittee meeting is adjourned.
[Whereupon, at 1 p.m., the subcommittee adjourned.]
A P P E N D I X
Material Submitted for the Hearing
OREGON DEPARTMENT OF REVENUE,
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Salem, OR, April 16, 1997.
Hon. GEORGE E. GEKAS, Chairman,
Commercial and Administrative Law Subcommittee,
House Judiciary Committee,
Washington, DC
DEAR CHAIRMAN GEKAS: I am writing to express my concern over a piece of proposed federal legislation which would have an impact on the state of Oregon. The proposal, contained in H.R. 874 would prohibit Oregon from imposing an income tax on Washington residents who are federal employees working on a dam on the Columbia River.
As you know, Oregon has the authority to tax most residents of other states to the extent the nonresident performs personal services in this state. For those nonresidents who receive compensation for personal services rendered partly within and partly without Oregon, we have developed an allocation method to ensure that only that portion of the compensation directly related to work performed in this state is taxed by Oregon. This allocation method is published in Oregon Administrative Rule 150—316.127(A) (copy enclosed). We believe this Administrative Rule addressing allocation of compensation for personal services is adequate to ensure that all nonresidents will be treated alike and will not be taxed on income earned outside of the state of Oregon.
The state of Oregon protects its own residents from paying income tax on the same income to more than one state. This is done by allowing a credit against the tax otherwise due to Oregon for taxes paid to the other state on mutually taxed income. A ''credit for taxes paid to other states'' is common to states which impose an income tax on income earned by their residents within another state's jurisdiction. The situation which is addressed H.R. 874 becomes an issue to Washington residents who work in Oregon only because the state of Washington has chosen not to impose an income tax. It does not seem reasonable to require the state of Oregon to bear the burden of compensating Washington residents as well as Oregon residents for taxes on income which both states have a legitimate right to tax
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There is one other aspect of the proposed legislation that is somewhat troublesome. A primary value of this agency is that we support consistent equitable treatment for all taxpayers. Oregon's current method of taxation ensures consistency and equity only inasmuch as all individuals are subject to the same rules. I am concerned that the proposed exemption for Washington residents who are federal employees working on hydroelectric facilities located on the Columbia River will grant a special advantage to a select few. This proposal would give an benefit to a specific class of taxpayer that is not available to others that perform personal services in more than one state, i.e. riverboat pilots, traveling salespeople, etc. The fact that the exemption is only available to government employees raises the specter of negative public perception (employees of the government looking out for their own).
Thank you for the opportunity to express my concerns about this provision. Please feel free to contact me if you want to discuss the issue further.
Sincerely,
JIM BROWN, Acting Director.
cc: HON. JERROLD NADLER.
HON. EARL BLUMENAUER.
HON. PETER DEFAZIO.
HON. ELIZABETH FURSE.
HON. DARLENE HOOLEY.
HON. BOB SMITH.
------
OREGON DEPARTMENT OF ADMINISTRATIVE RULES, JANUARY 1996
GROSS INCOME OF NONRESIDENTS; PERSONAL SERVICES--150—316.127—(A)
(1) Personal Service
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(a) Except as provided in section (2) of this rule, the gross income of a nonresident (who is not engaged in the conduct of a business, trade, profession or occupation on the nonresident's own account, but receives compensation for services in the status of employee) includes compensation for personal services only to the extent that the services were rendered in this state.
(b) Compensation for personal services rendered by a nonresident wholly outside this state and in no way connected with the management or conduct of a business in this state is excluded from gross income regardless of the Fact that payment is made from a point within this state or that the employer is a resident individual, partnership or corporation.
(c) Compensation for personal services rendered by a nonresident wholly within this state is included in gross income although payment is received at a point outside this state or from a nonresident individual, partnership or corporation.
(2)(a) Exception 1: If a nonresident qualifies under federal Public Law (P.L.) 101—322, Oregon cannot tax the compensation received by a nonresident. See OAR 150—316.127(E).
(b) Exception 2: A nonresident who receives compensation as an employee of an air carrier may be exempt from Oregon tax. To qualify for the exemption, the employee must:
(A) Perform regularly assigned duties as such an employee on an aircraft in more than one state, and
(B) Earn 50 percent or more of that compensation outside of Oregon. For purposes of this section, the employee is deemed to have earned 50 percent or more of the compensation outside of Oregon if, for the calendar year, the employee's scheduled flight time in Oregon is less than 50 percent of the employee's total scheduled flight time.
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(3) Allocation of personal services
(a) Where compensation is received for personal services rendered partly within and partly without this state, that part of the income allocable to this state is included in gross income. In such cases the test of physical presence is used to determine the situs of the rendition of the services, except where the peculiar nature of such services causes the objective of the employment to be accomplished or to take effect within this state, as, for example, where a nonresident acts as a fiduciary of an Oregon estate or trust. The gross income from commissions earned by a nonresident traveling salesperson, agent, or other employee for services performed or sales made, whose compensation is in the form of a specified commission on each sale made, or services rendered, includes the specific commissions earned on sales made, or services rendered, in this state; and allowable deductions must be computed on the same basis.
(A) If nonresident employees are employed in this state at intervals throughout the year, as would be the case if employed in operating boats, planes, etc., between this state and other states and foreign countries, and are paid on a daily, weekly or monthly basis, the gross income from sources within this state includes that portion of the total compensation for personal services which the total number of actual working days employed within the state bears to the total number of working days both within and without the state.
(B) If the employees are paid on a mileage basis, the gross income from sources within this state includes that portion of the total compensation for personal services which the number of miles traversed in Oregon bears to the total number of miles traversed within and without the state.
(C) If the employees are paid on some other basis, the total compensation for personal services must be apportioned between this state and other states and foreign countries in such a manner as to allocate to Oregon that portion of the total compensation which is reasonably attributable to personal services performed in this state.
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(b) The gross income of all other nonresident employees, including corporate officers, includes that portion of the total compensation for services which the total number of actual working days employed within this state bears to the total number of actual working days employed both within and without this state during the taxable period. In the case of corporate officers and executives who spend only a portion of their time within this state, but whose compensation paid by a corporation operating in Oregon is exclusively for managerial services rendered by such officers and executives while within this state, the entire amount of compensation so earned is taxable without apportionment.
Example 1: Jan is a nonresident of Oregon. She works for A-Corp. Jan manages offices in Oregon and Washington. A-Corp pays her a salary of $30,000 for the management of both offices. She worked in Oregon 132 days. She would figure her compensation subject to Oregon tax as follows:
g,w318,d020
Her compensation subject to Oregon tax is $18,000.
Example 2: John manages one office. That office is located in Oregon. He only spends a portion of his time, however, in Oregon and is a nonresident of Oregon. B-Corp pays him a salary exclusively for managerial services in the total amount of $30,000. The entire $30,000 would be taxable to Oregon.
(c) Total compensation for personal services includes sick leave pay, holiday pay and vacation pay. Sick leave days, holidays, and vacation days are not considered actual working days either in or out of this state and are to be excluded from the calculation of the portion of total compensation for personal services taxable to this state.
Example 3: Joan is a nonresident of Oregon. She actually worked a total of 220 days during the year and was paid for 40 nonworking days (holidays, sick days and vacation days). She worked 110 days in Oregon. Her compensation (including compensation for holidays, sick leave and vacations) was $26,000. She would figure her compensation subject to Oregon tax as follows:
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g,w318,d020
(d) Total compensation for personal services includes amounts paid in a form other than money. To the extent the payments are treated as compensation for federal income tax purposes, they will be treated as compensation for Oregon tax purposes and shall be apportioned as provided in paragraph (3) of this rule. Examples include nonqualified stock options, personal use of a business asset, employer-paid membership fees, etc.
[Publications: The publication(s) referred to or incorporated by reference in this rule is available from the Department of Revenue pursuant to ORS 183.360(2) and ORS 183.355(6).]
Hist: Eff. 1/69, Amended 11/73, 12/19/75, 1/1/77, 12/31/81, 12/31/84; Amended and Renumbered from OAR 150—316.127(1) to OAR 150—316.127, 12/31/85, 12/31/87; Amended and Renumbered from OAR 150—316.127 to OAR 150—316.127—(A); and transferred some material from OAR 150—316.127—(A) to OAR 150—316.127—(B), OAR 150—316.127—(C), and OAR 160—317.1274—(D), 12/31/89, 12/31/90; Amended 12/31/91, 12/31/92; Amended and transferred some material from OAR 160—316.127—(A) to OAR 150—316.127—(E), 12/31/93; Amended 12/31/94, 12/31/95
41—650CC
1997
STATE TAXATION OF EMPLOYEES AT CERTAIN FEDERAL FACILITIES
HEARING
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BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
ON
H.R. 865 and H.R. 874
STATE TAXATION OF EMPLOYEES AT CERTAIN FEDERAL FACILITIES
APRIL 17, 1997
Serial No. 8
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Printed for the use of the Committee on the Judiciary
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
STEVEN SCHIFF, New Mexico
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
SONNY BONO, California
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
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CHRISTOPHER B. CANNON, Utah
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN ROTHMAN, New Jersey
THOMAS E. MOONEY, Chief of Staff-General Counsel
JULIAN EPSTEIN, Minority Staff Director
Subcommittee on Commercial and Administrative Law
GEORGE W. GEKAS, Pennsylvania, Chairman
STEVEN SCHIFF, New Mexico
LAMAR SMITH, Texas
BOB INGLIS, South Carolina
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ED BRYANT, Tennessee
STEVE CHABOT, Ohio
JERROLD NADLER, New York
SHEILA JACKSON LEE, Texas
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
RAYMOND V. SMIETANKA, Chief Counsel
CHARLES E. KERN II, Counsel
C O N T E N T S
HEARING DATE
April 17, 1997
TEXTS OF BILLS
H.R. 865
H.R. 874
OPENING STATEMENT
Gekas, Hon. George W., a Representative in Congress from the State of Pennsylvania, and chairman, Subcommittee on Commercial and Administrative Law
WITNESSES
Bryant, Hon. Ed, a Representative in Congress from the State of Tennessee
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Campbell, Dwight, a resident of Goldendale, WA, and U.S. Army Corps of Engineers employee
Cunningham, James D., Sr., national president, National Federation of Federal Employees
Duncan, Harley T., executive director, Federation of Tax Administrators
Hastings, Hon. Doc, a Representative in Congress from the State of Washington
Hays, Roger, chairman, Tax Equity Committee, United Power Trades Organization
Lovett, Worth, Federal employee at Fort Campbell
Smith, James Charles, professor of law, University of Georgia
Smith, Hon. Linda, a Representative in Congress from the State of Washington
Thompson, Hon. Fred, a Senator in Congress from the State of Tennessee
Wilen, Joy E., owner, Joy Wilen & Associates, Vancouver, WA
Wilson, Edwin, Federal employee at Fort Campbell
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Bryant, Hon. Ed, a Representative in Congress from the State of Tennessee: Prepared statement
Campbell, Dwight, a resident of Goldendale, WA, and U.S. Army Corps of Engineers employee:
Exchange of correspondence with the Oregon Department of Revenue
Prepared statement
Cunningham, James D., Sr., national president, National Federation of Federal Employees: Prepared statement
Duncan, Harley T., executive director, Federation of Tax Administrators: Prepared statement
Hastings, Hon. Doc, a Representative in Congress from the State of Washington: Prepared statement
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Hays, Roger, chairman, Tax Equity Committee, United Power Trades Organization:
Letter dated April 9, 1997, to Chairman Gekas, from Kenneth L. Taylor
Prepared statement
Sundry correspondence to Chairman Gekas, dated April 9, 1997, from Steve Dodson, David G. Burke, and Mike Church
Jackson Lee, Hon. Sheila, a Representative in Congress from the State of Texas: Prepared statement
Lovett, Worth, Federal employee at Fort Campbell: Prepared statement
Smith, James Charles, professor of law, University of Georgia: Prepared statement
Smith, Hon. Linda, a Representative in Congress from the State of Washington: Prepared statement
Tanner, Hon. John S., a Representative in Congress from the State of Tennessee: Prepared statement
Thompson, Hon. Fred, a Senator in Congress from the State of Tennessee: Prepared statement
Wilen, Joy E., owner, Joy Wilen & Associates, Vancouver, WA: Prepared statement
Wilson, Edwin, Federal employee at Fort Campbell: Prepared statement
APPENDIX
Material submitted for the hearing
(Footnote 1 return)
See generally 2 Jerome R. Hellerstein and Walter Hellerstein, State Taxation, Warren, Gorham and Lamont, 1992, chapter 20 (especially section 20.03—20.05), for a discussion of state personal income taxation and the taxation of nonresidents in particular.
(Footnote 2 return)
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.
(Footnote 3 return)
Shafer v. Carter 252 U.S. 37 (1920).
(Footnote 4 return)
New York en. rel. Cohn v. Graves, 300 U.S. 308 (1937) and Lawrence v. State Tax Commission< 286 U.S. 276 (1932).
(Footnote 5 return)
See Hellerstein and Hellerstein, supra, note 1 for a complete discussion.
(Footnote 6 return)
Act of October 17, 1940, 566 Stat. 777, codified at 50 U.S.C. App. 574.
(Footnote 7 return)
4 U.S.C. 113 also provides that Members of Congress shall not be considered to be residents of any state other than the state from which they are elected for purposes of individual income taxation.
(Footnote 8 return)
Under P.L. 101—322, passed in 1990, compensation paid to an employee of an interstate railroad or to an interstate motor carrier may be subject only to the income tax laws of the state of the employee's residence. P.L. 97E193 provides that compensation paid to an employee may be subjected to tax only in the state of the employee's residence or where the employee performs 50 percent or more of his/her time.
(Footnote 9 return)
P.L. 104—95 prevents a State from imposing an income tax on payments from qualified pension plans and certain nonqualified retirement arrangements unless the recipient is a resident of the State.
(Footnote 10 return)
They are required to file only one tax return unless they also have income from sources in other states.
(Footnote 11 return)
P.L. 104—4 requires that any measure containing an ''intergovernmental mandate'' that imposes greater than $50 million in ''direct costs'' on state and local governments must be the subject of a fiscal cost estimate by the Congressional Budget Office. The measure is subject to a point of order under the House Rules if funds are not provided to offset the costs of the mandate. The Act also provides that all Committee Reports accompanying a measure containing a preemption of state authority must contain a clear statement of the extent of the preemption and the impact of the preemption. The Act defines ''intergovernmental mandate'' to include ''any enforceable duty'' imposed on state and local governments and further defines ''direct costs'' to include amounts that states ''would be prohibited from raising in revenues....''