
                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: THURSDAY, January 20, 1994                   TAG: 9401200295
SECTION: EDITORIAL                    PAGE: A10   EDITION: METRO 
SOURCE: 
DATELINE:                                 LENGTH: Medium

WIMPINESS ON RETIREES' TAXES

FOR DECADES, the pension income of federal retirees in several states was subject to state income tax even though state retirees' pensions were not. Many of Virginia's 200,000 federal retirees think they got a raw deal, and want some of the money back. The rawer deal would be simply to give it to them.

But that isn't stopping Gov. George Allen. After pandering to the federal retirees as a candidate, he now is following through on his pledge for a quick settlement of their claim that the state owes them nearly $500 million in back taxes. Why is it always the bad promises that politicians fulfill?

As governor rather than candidate for governor, Allen can afford to stop kowtowing to the lobby. Indeed, given the condition of state finances, you might say he can't afford not to. Instead, in his maiden state-of-the-commonwealth speech this week, he practically implied he wants to fork over the money without a fight.

Allen said new Attorney General James Gilmore is seeking an out-of-court settlement. If Allen has his way, any money "found" or "saved" by the 1994 General Assembly will be set aside to pay off the pensioners. In other words, a portion of the taxes of all Virginians should in Allen's view be forked over to the 200,000 lucky pensioners, rather than used for such public purposes as education, prisons, transportation or economic development.

The formal rationale for the payoff is that courts will require repayment anyway, so why let the bill mount up, what with interest payments and all.

But it is not certain that the courts will force repayment. The U.S. Supreme Court's 1989 decision overturning the longstanding practice in Virginia (and other states with state income taxes) was based on a technical interpretation of a 50-year-old congressional statute, a law that all previous courts had interpreted differently. The repayment issue hinges on similarly technical issues regarding retroactivity and the adequacy of avenues for appeal during the tax years in question. Last week, a state circuit-court judge in Alexandria reaffirmed the point, ruling that the state owed nothing.

And the interest argument runs two ways. Even assuming the state eventually will be required to pay the claim, to pay now would be to forgo interest the state could earn until the courts speak with finality.

If the issue of federal-pension taxation were a matter of fundamental equity and violation of basic constitutional rights, support for quick settlement would be easier, even compelling. But that's not what this is about.

Federal pensioners were not required to bear a tax burden greater than Virginians' in general. The tax code had exempted state pensions on the eminently reasonable grounds that it made little sense for the state in effect to tax itself. To get into compliance with the 1989 ruling, the state made its retirees' pensions subject to state income tax - then put more money into retirees' health benefits to offset the tax impact.

For a governor who condemns the heavy hand of Washington and calls for an expanded role for states within the federal framework, Allen is curiously wimpy on the federal-pensions issue. Perhaps, eventually, Virginia may have to pay up. But why cry "Uncle Sam" before you have to?

by CNB