The Virginia legislature late last week approved a measure that would extend full state income-tax exemptions to all retirees--including those from the private sector--if they earn $16,000 a year or less.
The measure, which also would phase in partial tax exemptions for retirees with income of up to $40,000, will deplete the entire $70 million remaining in the state’s “rainy day” fund, said Chris Bridge, a spokesman for Gov. Gerald L. Baliles.
Lawmakers returned to Richmond for a four-day special session last week to address a U.S. Supreme Court ruling last month ordering states to give equal tax treatment to federal, state, and local retirees.
The High Court’s ruling could affect as many as 23 states, most of which exempt the benefits of state and local retirees, but not retired federal workers, from taxation. (See Education Week, April 26, 1989.)
Virginia, which has some 200,000 federal workers who pay $150 million a year in income taxes, was among the states hardest hit by the Court’s ruling.
According to the Federation of4Tax Administrators, exempting federal pensioners from paying all state income tax could cost the states about $500 million. That amount could rise to as much as $2.5 billion if states are required to provide federal pensioners with refunds for the past three to five years.
Although the High Court’s ruling required tax equity only for federal pensioners, states have come under pressure to extend tax breaks to retir8ees from the private sector as well.
Such pressure was particularly keen in Virginia, where elections for governor and all seats in the House of Delegates will be held this fall.
Shortly after convening last week, Virginia lawmakers almost immediately scrapped Governor Baliles’s proposal to exempt all public- and private-sector retirees with incomes of $16,000 or less from paying income taxes.
Legislators complained that the Governor’s plan would be unfair to many federal and private-sector retirees, whose average incomes are well above $16,000.
Using the Governor’s plan as a rough blueprint, legislators crafted a compromise measure that extended partial exemptions to all retirees earning up to $40,000 a year.
Ms. Bridge said the Governor’s main concern was ensuring that the legislature did not adopt a plan that would cost more that the $70 million available in the rainy-day fund. If that had occurred, lawmakers would have been forced to reopen the state’s budget process.
She said the Governor supports the compromise measure and “is prepared to sign the bill.”
In related developments in other states affected by the Supreme Court’s decision:
The Georgia Supreme Court late last month issued a stay of a lower court ruling ordering the state to create an escrow account to cover the cost of potential refunds to federal retirees.
South Carolina lawmakers are considering whether to scrap a $17-million tax cut proposed by Gov. Carroll A. Campbell in order to comply with the High Court’s decision.
North Carolina revenue officials have decided not to tax federal retirees’ 1989 income.
