BILL ANALYSIS
SENATE RULES COMMITTEE AB 850
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THIRD READING
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Bill No: AB 850
Author: Morrissey (R) & Knight (R), et al
Amended: 6/27/96 in Senate
Vote: 21
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SENATE REVENUE & TAXATION COMMITTEE: 5-2, 6/5/96
AYES: Killea, Hurtt, Johnson, Marks, Thompson
NOES: Kopp, Petris
NOT VOTING: Boatwright
SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8
ASSEMBLY FLOOR: 51-20, 1/31/96 -- See last page for vote
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SUBJECT: Income tax: exclusions: qualified retirement
income
SOURCE: The author
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DIGEST: This bill enacts the Morrissey Retirement Income
Protection Act, which exempts non-resident pension income
from tax in conformity with federal law.
ANALYSIS: Existing law imposes a tax on all income of
California residents and the income of non-residents which
has its origin or source in California. Pension income
attributable to employment in California has been subject
to California income tax, even if the pensioner is no
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longer a resident of the state.
Federal law, as enacted on January 10, 1996 (Public Law
104-95), prohibits a state from imposing an income tax on
the pension of its former residents. This prohibition is
effective for the 1996 tax year.
Pension income, as defined in the new federal law, covers
the following types of income:
1. Qualified plans maintained by employers. "Qualified"
means that the plan does not discriminate in favor of
higher-level employees. Employer contributions to a
qualified plan can be deducted as a business expense by
the employer but are not considered income to the
employee at the time the contribution is made.
2. 401(k) and simplified employee pension (SEP) plans.
3. 403(a) annuity plans.
4. "Tax sheltered annuities" (TSA) available to certain
educational and tax-exempt groups.
5. Individual Retirement Accounts (IRA).
6. Deferred compensation plans available to employees of
state and local governments.
7. Plans established by the U.S. government, a state, or
its political subdivision for employees.
8. 501(c)(18) trusts established before 6/25/59 and funded
by employee contributions.
9. Retirement or retainer pay of a member of the armed
forces or the commissioned corps of the Public Health
Service or the National Oceanic and Atmospheric
Administration.
Non-qualified deferred compensation arrangements are also
considered pension income exempt from tax if the
distribution is paid out as an annuity over the life
expectancy of the individual or over a period of 10 or more
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years or as an annuity or lump sum from a "mirror plan." A
"mirror plan" is a retirement plan which provides benefits
that exceed limits established under qualified plans.
This bill, the Morrissey Retirement Income Protection Act,
incorporates into state law the federal prohibition on
states taxing former residents' pension income. Beginning
in 1996, it exempts from state income tax the types of
pension income listed above for former residents only.
This exemption exists as long as the federal law is in
place.
This bill is intended to incorporate into state law the
recent federal prohibition on states' ability to tax the
pension income of former residents. Although PL104-95 is
in effect as of January 1996, the state's Revenue and
Taxation Code states that this income is taxable. The
Franchise Tax Board cannot simply ignore the state statute.
The California Constitution (Article III, Section 3.5)
prohibits an administrative agency from refusing to enforce
a state statute on the grounds that federal law prohibits
its enforcement unless an appellate court has made a
determination that the state law is unenforceable under
federal law.
This bill would eliminate the need for the state to
litigate its ability to levy tax on former residents'
pension income.
California law provides that the state can tax all income
(unless otherwise exempt) of its residents and the income
of non-residents that has its origin or source in
California. California source income includes pensions
received by former residents attributable to their work in
California, as well as earnings by non-resident athletes
and entertainers attributable to performances in this
state.
The so-called "source tax" has become a source of
controversy for those who retired and moved out of
California. Many were surprised to receive tax bills from
California, even though they were now living in Nevada or
Oregon. These former Californians lobbied their
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Congressional representatives for relief for several years
and were eventually successful in getting Congress to enact
legislation which prohibited states from levying this tax.
It is interesting to note that the courts have consistently
upheld the state's right to tax this pension income, since
it is a form of deferred income attributable to California
employment. There have also been concerns that if states
were not able to tax this income upon a worker's
retirement, states might try to tax the income during the
taxpayer's work life. In 1990, then-Senator Pete Wilson
wrote to a constituent that "I am concerned that if states
lost the ability to tax this money when it is withdrawn,
they may decide to tax all pension contributions when they
are made. I believe this would discourage some individuals
from participating in a pension plan."
Similar Bills
SB 1517 (Johnston) is a similar bill which passed the
Senate 25-5 (Noes: Kopp, Leonard, Maddy, Petris, Sher)
earlier this year and is now in the Assembly Appropriations
Committee.
FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT: (Verified 7/10/96)
California State Employees Association (CSEA)
Peace Officers Research Association of California
California Union of Safety Employees
California State Firefighters Association
Los Angeles County Professional Peace Officers Association
California Professional Firefighters
ARGUMENTS IN SUPPORT: CSEA states, "California is one of
only 15 other states that collects 'source' income tax on
pensions on non-residents. It also taxes these people at
an inflated rate by combining their California pension
income with income earned outside of California to set the
tax rate. This tax rate is then charged to that portion of
their income derived from their California pension.
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"This bill, which excludes up to $50,000 of 'qualified
retirement income' from this source tax, corrects the
injustice for most of the retired state CSEA employee
members."
ASSEMBLY FLOOR:
AYES: Ackerman, Aguiar, Alby, Alpert, Baca, Baldwin,
Battin, Baugh, Boland, Bordonaro, Bowen, Bowler, Brewer,
Brulte, Cannella, Conroy, Cortese, Cunneen, Davis,
Firestone, Frusetta, Goldsmith, Granlund, Harvey,
Hawkins, Hoge, House, Kaloogian, Knight, Knowles,
Kuykendall, Margett, Mazzoni, McDonald, McPherson,
Miller, Morrissey, Morrow, Olberg, Poochigian, Rainey,
Richter, Rogan, Setencich, Sher, Takasugi, Thompson,
Villaraigosa, Weggeland, Woods, Pringle
NOES: Brown, Bustamante, Caldera, Ducheny, Escutia,
Figueroa, Friedman, Hauser, Isenberg, Katz, Kuehl, Lee,
Machado, Martinez, K. Murray, W. Murray, Napolitano,
Speier, Tucker, Vasconcellos, Archie-Hudson, Bates,
Burton, Campbell, Gallegos, Hannigan, Knox, Sweeney
DLW:ctl 7/10/96 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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