Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, July 14, 1994 TAG: 9407140079
SECTION: EDITORIAL PAGE: A15 EDITION: METRO
SOURCE: Ray L. Garland
DATELINE: LENGTH: Long
Ostensibly, the special assembly session was called to ratify a final settlement with an estimated 186,000 federal retirees for state taxes collected in the three years prior to a 1989 U.S. Supreme Court ruling that states must tax federal and state pensions equally or not at all.
It is frequently said that the tax on federal pensions was illegally imposed, but that's a half-truth. Neither the Supreme Court of the United States nor the Supreme Court of Virginia has yet ordered a retroactive refund, despite several opportunities to do so, which hardly makes the question of legality definitive.
The moral issue was even less clear. Nongovernmental pensions were always taxed, and this larger group of citizens was due no consideration whatsoever. Moreover, the money in question had not been put in a slush fund, but spent in ways that probably benefited federal retirees living in Virginia equally with other citizens.
Still, the state should not rest on a technicality and was right to settle a grievance that wasn't going away. It's also true that waiting upon events, as virtually all leading Democrats advocated until this year, would have exposed the state to the slight risk of a future court order for full restitution with interest. That had to be weighed because the U.S. Supreme Court, after two confused passes at the subject of refunds, had tiresomely agreed to hear the matter a third time next spring. If full refunds were ordered, Virginia could have been exposed to claims in the range of $800 million.
The plan worked out by House Majority Leader Richard Cranwell of Vinton seems well-structured and fair. Those federal retirees owed the least - logically, those with the lowest incomes - would get all their money back the first year. Those owed the most will receive it in installments over five years. The total sum contemplated, $340 million, should not place an undue burden on the state general fund.
But Democrat Cranwell went far beyond this to demonstrate why a politician possessing his level of skill and cunning is a mixed blessing. Not content with raising Gov. George Allen's bid to settle the federal pension case, he bested Republicans in bidding for the votes of all senior citizens with a new round of tax breaks. In fairness, you can say Republicans deserve the lion's share of the credit for making that happen, or got their comeuppance, whichever you prefer.
That last point requires some exposition. It was, unfortunately, an election year in Virginia in 1989 when the Supreme Court handed down its decision in the federal pensions case. Called into session to deal with that, Democrats vied with Republicans to see who could give all seniors the most generous tax breaks. The result was that a couple 65 or older could receive $40,000 in ordinary income and $10,000 in Social Security benefits and owe a state income tax of $96. Meanwhile, a younger working couple with the same total income would owe more than 20 times as much, or $2,142. They would also be paying, with their employer, $7,650 in Social Security taxes.
More respectable legislators were a bit shamefaced over this deal, so blatant in its unfairness to younger taxpayers, and were also worried about its drag on future state revenues. The next year, 1990, the assembly quietly amended the law, giving those over 65 a uniform exemption of $12,000, indexed for inflation, reduced by the amount of Social Security received. That is, so long as Social Security benefits were less than $12,000 ($12,944 in 1993), the taxpayer still got a deduction against income, in addition to the extra personal exemption given those over 65, worth $800.
Only the hopelessly addled or those with a political agenda could fail to see the elemental fairness in this. But counting Social Security benefits against the "age deduction" created at least the illusion of taxing Social Security. Republican candidates were quick to seize upon it and undoubtedly won a few seats using it.
There was poetic justice in that state of affairs, because national Democrats for years have maintained control of Congress largely on the promise of guarding Social Security and Medicare.
Sick of having the issue turned against Democrats in Virginia, Cranwell expanded the bill ratifying the settlement with federal retirees to exclude Social Security from the age deduction. To keep costs within reason, he did reduce the deduction from the some $13,500 it would have been in 1995 to $10,000. In 1996, the deduction will rise to $12,000.
By eliminating the Social Security offset and making it a pure, 100-percent deduction, there will be a significant decrease in state taxes for most senior citizens. A few of them, mainly federal civilian retirees who never qualified for Social Security, will actually see their taxes go up a bit.
Under the new formula, the most affluent seniors will save about $650 a year on their state taxes beginning in 1996. This simple change will cost the state treasury some $120 million over the next three years, and far more in the years ahead as the percentage of seniors in the population rises.
Nor were present and future state retirees left out. The bill sweetened their benefits at an initial cost to taxpayers of about $70 million in the 1996 budget.
Between now and the end of Allen's term, this measure will cost the state treasury an estimated $700 million in payments or revenues forgone. "It's the governor's money," chortled House Speaker Tom Moss of Norfolk, who had every reason to be pleased with the plums Democrats had plucked from this pie.
Ray L. Garland is a Roanoke Times & World-News columnist.
by CNB