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

DATE: SATURDAY, April 16, 1994                   TAG: 9404210012
SECTION: EDITORIAL                    PAGE: A9   EDITION: METRO 
SOURCE: 
DATELINE:                                 LENGTH: Medium

FEDERAL RETIREES ARE OFFERED A DEAL

After the pandering of George Allen's gubernatorial campaign last year, the deal now proposed is not a worst-case scenario for the general tax-paying public. Moreover, according to a poll conducted for Attorney General James Gilmore, a majority of the affected retirees are willing to accept the offer of 50 cents on the dollar, with no interest.

Those affected are the nearly 200,000 retirees who between 1985 and 1989 paid Virginia income tax on their federal pensions. Because the pensions of retired state employees were not similarly taxed, the U.S. Supreme Court ruled in 1989, Virginia (and other states) were in longstanding violation of a half-century-old congressional statute.

Virginia and the other states changed their laws. Yet to be finally decided, however, is whether Virginia also must refund taxes collected in the five years before the court decision.

Including interest, the commonwealth - with its high number of federal retirees, due to the military presence in Tidewater and the civilian bureaucratic presence in the Northern Virginia suburbs - faces a potential liability of as much as $700 million, including interest. On the other hand, the state's liability could be zip.

The odds may be in the retirees' favor, but in a case as bizarre as this, who knows? Thus, the proposed settlement: Take 50 cents on the dollar in a four-year mail-in refund program, a sure thing, or go to court for the whole enchilada plus interest, a gamble. Under the deal, retirees in the latter group would have until Sept. 15 to file action. According to the poll, only 19 percent would sue the state; 58 percent would accept such a deal and 16 percent were unsure.

Un-American as the thought is, a few of the federal retirees might even believe it was their obligation to have paid a fair share of the state's tax burden: Some 5 percent said they wouldn't seek a refund.

The refund money, of course, doesn't come free. To pay for the first $58.9 million installment of the $234 million in settlement money, Gov. Allen has proposed using $40 million in unspent balances from the 1992-94 budgets, canceling renovation and construction projects at community colleges and Old Dominion University, reducing community-service grants to public TV and radio stations, and cutting back on aid to local arts groups. That would hurt.

In our view, the federal pensioners are prospective beneficiaries not of a redress of tax injustice but of the high court's discovery of a tax-law loophole. And keep in mind: The state income tax is graduated. Those qualifying for the biggest refunds will be those who are the most affluent.

If Virginia is so flush it can spend $234 million over the next four years on tax relief, it's too bad the money can't be used, say, for lowering the taxes on low- and moderate-income families with young children. That wouldn't serve the interests of a special group of pleading plaintiffs, but it would serve the public good.