Missouri’s highest court has ordered the state to provide federal retirees with $152 million in refunds for income taxes paid between 1985 and 1988.
The court’s May 25 decision could be the first in a series of judicial rulings that deal a severe financial blow to the 23 states that have taxed the benefits of federal pensioners but not those of teachers and other public-sector retirees. Federal retirees in Virginia filed a similar suit last week.
In March, the U.S. Supreme Court ruled that states must tax the pensions of federal, state, and local retirees on an equal basis. The Court, however, left open the question of whether federal retirees were entitled to refunds for state income taxes paid in previous years. (See Education Week, April 26, 1989.)
Yolanda Murphy, a spokesman for Gov. John Ashcroft of Missouri, said last week that the Governor and legislative leaders had met to discuss “how to move forward with a plan” to resolve the court’s refund order.
Phillip Moeckli, executive director of Missouri nea, said state leaders were debating whether to hold a special legislative session before the start of the next fiscal year on July 1 or take up the issue in September when lawmakers reconvene to override gubernatorial vetoes.
“Everything is up in the air right now,” the official of the National Education Association affiliate said.
The Federation of Tax Administrators has estimated that the states that have taxed federal workers’ pensions could lose $2.5 billion if they are forced to provide retroactive refunds. In Missouri, the supreme court’s decision could wipe out $32 million of the $50-million increase in state school aid approved this year, according to leaders of the state teachers’ unions.
Missouri lawmakers adjourned on May 12 without acting on Governor Ashcroft’s proposal to temporarily increase taxes on tobacco and corporations to cover the cost of the refund order, which some had anticipated.
“The ball is in the Governor’s court,” said Ronald Crain, assistant executive secretary of the Missouri State Teachers Association.
Ms. Murphy added that Mr. Ashcroft “is not going to be left with any alternatives but to cut programs if the legislature doesn’t take some action to deal with this shortfall.”
Virginia Lawsuit
In Virginia, retired federal employees have filed suit in state circuit court to force the state to provide them with income-tax refunds retroactive to 1985.
The state, which has some 200,000 federal retirees who pay a total of $150 million a year in income taxes, was expected to be among the states hardest hit by the Supreme Court’s ruling.
In an emergency session shortly after the ruling, the legislature extended state income-tax exemptions to all retirees, including those from the private sector, if they earn $16,000 a year or less.
Lawmakers, however, left it to the courts to decide whether the state must refund taxes levied on federal employees’ pensions. It gave retirees a year following the resolution of legal disputes to file amended returns.
The suit filed by some 200 retired federal employees contends that they are eligible for refunds under a state law that provides for “an expeditious remedy for tax relief against taxes that have been erroneously, illegally, or unconstitutionally collected.”
“The state took money from people that it wasn’t supposed to be taking, so we’ve got to give it back to them,” said Michael J. Kator, the retirees’ lawyer.--nm & dc
