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PREVENTING MULTIPLE STATE INCOME TAXES ON

SALARIES OF GOVERNMENT EMPLOYEES

FEBRUARY 27, 1945.--Committed to the Committee of the Whole House on the

state of the Union and ordered to be printed

Mr. HOBBS, from the Committee on the Judiciary, submitted the

following

REPORT

(To accompany H. R. 534)

The Committee on the Judiciary, to whom was referred the bill (H. R. 534) to amend the Judicial Code in respect to the original jurisdiction of the district courts of the United States in certain cases, and for other purposes, having carefully considered the same, report the bill favorably to the House with the recommendation that

it do pass.

In the Seventy-eighth Congress hearings were held on a similar measure, H. R. 2203, which was subsequently amended and reported as H. R. 3592. The latter bill passed the House and was reported favorably by the Senate Judiciary Committee on August 15, 1944. H. R. 534 is identical with H. R. 3592 as it was reported to the Senate

.

last year.

The principal purpose of the bill is to relieve Federal employees from multiple State income taxes on their salaries and to permit only the State in which such employee is domiciled to levy such tax.

GENERAL STATEMENT

Hearings were held by a subcommittee in June and November 1943 on an earlier bill (H. R. 2203). From the information furnished the committee it appears that many Federal employees who would normally be stationed in the District of Columbia, because of the abnormally crowded conditions in the District have been required to work in other taxing jurisdictions. (See letter of Hon. Paul V. McNutt, Administrator of the Federal Security Agency, dated June 1, 1943, hereafter set out.)

These conditions no doubt have accentuated the problem of multiple State income taxation. However, according to the advice of the Attorney General, since 1939 numerous cases have arisen in which a

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person employed by the United States and stationed in a State other than the State of his domicile has been subjected to an income tax by each of the States involved. It is recognized also that there are probably numerous individuals other than Federal officers and employees who may be temporarily sojourning for business reasons in a State other than that of their domicile and who are, therefore, subjected to multiple taxation on their incomes.

Prior to the decision of the Supreme Court in Grares v. New York ex rel. O'Keefe (306 U. S. 466 (1938)), salaries of Federal officers and employees which were received from the United States were deemed immune from taxation under State income tax laws. The O'Keefe case held, however, that such an implied immunity did not exist, although the Court indicated that the Congress could grant such an immunity in order to protect agents of the Federal Government from State burdens.

By section 4 of title I of the Public Salaries Tax Act of 1939 (act of April 12, 1939, 53 Stat. 574, 575; U. S. Code, title 5, sec. 84 (a)), the United States consented to the levy of State income taxes on salaries received by officers and employees of the Federal Government after December 31, 1938.

The bill under consideration would qualify the foregoing consent by adding a provision to the 1939 act to the effect that the compensation of an officer or employee of the United States shall be subject to State tax only in the State in which such officer or employee is domiciled.

Section 1 of the bill proposes to amend the Judicial Code by conferring on United States district courts jurisdiction of all actions involving the liability of any Federal officer or employee for State income taxes if the claim of domicile on the part of such officer or employee is disputed by the State.

DEPARTMENTAL VIEWS

Following are letters received from the Attorney General, Administrator of the Federal Security Agency, and Acting Secretary of the Treasury, addressed to the earlier bill:

OFFICE OF THE ATTORNEY GENERAL,

Washington, D. C., May 31, 1943.
Hon. HATTON W. SUMNERS,
Chairman, House Committee on the Judiciary,

House of Representatives, Washington, D. C. MY DEAR MR. CHAIRMAN: This is in response to your request for the views of the Department relative to a bill (H. R. 2203) the purpose of which is to prevent the levy of multiple State income taxes on the salaries of Government employees and to permit only the State in which such employee is domiciled to levy such tax.

Prior to the decision of the Supreme Court in Graves v. New York er rei. O'Keefe (306 U. S. 466), which was rendered in 1938, salaries of Federal officers and employees which were received from the United States were deemed immune from taxation under the State income-tax laws. The O'Keefe case held, however, that such an implied immunity did not exist, although the Court indicated that the Congress could grant such an immunity in order to protect agents of the Federal Government from State burdens.

By section 4 of title I of the Public Salaries Tax Act of 1939 (act of April 12, 1939, 53 Stat. 574, 575; U. S. C., title 5, sec. 84 (a)), the United States consented to the levy of State income taxes on salaries received by officers and employees of the Federal Government after December 31, 1938.

The bill under consideration would qualify the foregoing consent by adding a provision to the 1939 act to the effect that the compensation of an officer or employee of the United States shall be subject to State taxes only in the State in

which such officer or employee is domiciled. The purpose of the proposed amendment is to eliminate multiple State taxation of Federal salaries. Since 1939 numerous cases have arisen in which a person employed by the United States and stationed in a State other than the State of his domicile has been subjected to an income tax by each of the States involved. The objective of the legislation would be to eliminate this result.

In addition, section 1 of the bill would amend the judicial code by conferring on United States district courts jurisdiction of all actions involving the liability of any Federal officer or employee for State income taxes if the claim of domicile on the part of such officer or employee is disputed by the State.

It is reasonable to assume that there are probably numerous individuals other than Federal officers and employees who may be temporarily sojourning for business reasons in a State other than that of their domicile and who are, therefore, subjected to multiple taxation on their incomes.

This Department has no information as to the extent to which this situation may exist in respect to persons other than Federal officers and employees. Whether officers and employees of the United States should be singled out and granted the relief proposed by the legislation is a question of legislative policy concerning which I prefer not to submit any suggestions.

I have been advised by the Director of the Bureau of the Budget that there is no objection to the submission of this report. Sincerely yours,

FRANCIS BIDDLE, Attorney General.

FEDERAL SECURITY AGENCY,

Washington, D. C., June 1, 1948. Hon. HATTON W. SUMNERS, Chairman, Judiciary Committee,

House of Representatives, Washington, D. C. DEAR MR. SUMNERS: This is to express the interest of this Agency in H. R. 2203, a bill to amend the judicial code in respect to the original jurisdiction of the district courts of the United States in certain cases, and for other purposes. This proposal would place all Government employees wherever stationed on an equal basis with respect to the number of State income taxes to which their salaries would be subject. In common with a number of other departments and agencies, this Agency has many employees recruited from all parts of the country in accordance with civil-service procedures who would normally be departmental employees stationed in the District of Columbia but who, because of the abnormally crowded conditions in the District, have been required to work in other taxing jurisdictions.

In the summer of 1942, the Bureau of Old-Age and Survivors Insurance of the Social Security Board, having some 5,100 employees, was required to move from Washington to Baltimore. These employees are engaged in central office record keeping and processing of claims for old-age and survivors insurance benefits.

In February 1942, the Public Health Service received notice from the Public Buildings Administration to vacate its permanent building at Nineteenth and Constitution Avenue for use by the Allied Nations War Strategy Board. Later, the Surgeon General and his administrative headquarters force were moved to Bethesda, Md., and housed in a temporary building which had just been constructed. In that building, there are approximately 250 employees who reside and are domiciled outside of the State of Maryland.

The salary of a nonresident whose occupation is carried on in Maryland is taxable under the Maryland income-tax law and the State taxing authorities have taken the position that this provision is applicable to these employees. Many of these employees are paying a tax where they are domiciled, either in the District of Columbia or in one of the States other than Maryland, where they maintain their voting residence, and are under the additional burden of paying another tax to the State of Maryland. This situation is a decided disadvantage to the Agency and particularly to the Public Health Service, from the standpoint of recruiting new employees and retaining experienced personnel.

The existing situation also discriminates against employees on duty in Maryland but not domiciled there as compared with other departmental employees of the Government working in the District of Columbia. It is my earnest hope that some remedial legislation will be enacted.

The Bureau of the Budget, advises that there is no objection to the submission of this report to your committee. Sincerely yours,

PAUL V. McNUTT, Administrator

TREASURY DEPARTMENT,

Washington, D. C., November 3, 1945 Hon. HATTON W. SUMNERS, Chairman, Committee on the Judiciary,

House of Representatives, Washington, D. C. MY DEAR MR. CHAIRMAN: Reference is made to an informal telephone request made on October 26, 1943, by Mr. Frank Connell, clerk of your committee, for a report on H. R. 2203 (78th Cong., 1st sess.) entitled "A bill to amend the Judicial Code in respect to the original jurisdiction of the district courts of the United States in certain cases, and for other purposes.”

The proposed legislation would amend section 24 of the Judicial Code (36 Stat. 1091; 28 U. S. C., sec. 41), as amended, to give the district courts of the United States jurisdiction of all actions, suits, or proceedings involving the liability of any officer or employee of the United States or any Territory or possession thereof, or of the District of Columbia, or of any agency or instrumentality of the foregoing, for State tax on compensation for personal services as such officer or employee. Further it would amend title I of the Public Salary Tax Act of 1939 (53 Stat. 574), as amended, to provide that the compensation of any such officer or employee shall be subject to State tax only in the State in which such officer or employee is domiciled, but if it is not subject to tax in the State of his domicile it is not to be immune from taxation in any other State in which, except for the proposed legislation, it would be lawfully subject to a State tar. Domicile of such an officer or employee for the purpose of the proposed legislation is placed in the State which he expressly declared to the tax authority seeking to impose tax to be the State of his domicile, provides he has acquired a domicile in such State under the laws of the State prior to the date of the imposition of the tax from which immunity is claimed. The term “State" is defined to include the District of Columbia.

In section 4 of the Public Salary Tax Act of 1939 the United States gave consent to the taxation of the compensation of such an officer or employee "by any duly constituted taxing authority having jurisdiction to tax such compensation if such taxation does not discriminate against such officer or employee because of the source of such compensation” (53 Stat. 575; 5 U. S. C., sec. 848).

The purpose of this consent, as described in the report made by the Committee on Ways and Means concerning the Public Salary Tax Act of 1939, was "to facilitate reciprocal taxation as between State and Federal Governments

*" (House of Representatives, 76th Cong., 1st sess., Rept. No. 26, p. 4). It was further stated:

"The consent is not intended to operate, nor could it operate, as a consent to any taxation to which as individuals these officers and employees are entitled to object either under the provisions of the Federal Constitution or of the constitutions or statutes of the respective States. For example, the consent has no effect upon the rights of an officer of the Federal Government to object that the imposition of a State tax upon him is invalid under the fourteenth amendment. Thus he may urge that a particular tax is invalid as to him because of an unreasonable classification, or the lack of geographical jurisdiction to tax, or for other reasons. Similarly, the consent has no effect upon the rights which such officers and employees possess as individuals under the various State constitutions and laws. To protect the Federal Government against the unlikely possibility of State and local taxation of compensation of Federal officers and employees which is aimed at, or threatens the efficient operation of, the Federal Government, the consent expressly confined to taxation which does not discriminate against such officers or employees because of the source of their compensation” (ibid., pp. 4, 5). The proposed legislation would

withdraw a portion of the consent which it was deemed necessary to give in the Public Salary Tax Act of 1939 to promote reciprocal taxation between the Federal Government and the State governments.

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Thus a Federal employee now subject to tax in the State of his residence or the State wherein he renders the services for which he receives the compensation involved would be removed from the taxing power of such State if subject to tax in the State of his domicile. This withdrawal can scarcely be viewed with favor by States whose taxing power is thereby limited. Particularly will State disapproval be increased by the fact that Federal employees will be favored over the employees of private employers who will remain subject to tax in the State of residence or where services are performed, though also subject to tax in the State of domocile.

The decisions of the Supreme Court of the United States in the case of Helvering v. Gerhardt (304 U. S. 405 (1938) and Graves v. People of State of New York Ex rel, O'Keefe (306 U. S. 466 (1939)), together with the Public Salary Tax Act of 1939, have largely settled the issue of the power of the Federal Government and the State governments to tax the compensation of officers or employees of the other government, although it will be noted that there has been no decision by the Court since the O'Keefe case bearing on the authority of the Congress to exempt the compensation of Federal officers or employees from State taxation. There has been no comparable settlement of questions whicn may be thought to arise under the provisions of the Current Tax Payment Act of 1943 (Public Law No. 68, 78th Cong., 1st sess., ch. 120) with respect to the deduction by State governments of Federal tax from the remuneration of their officers and employees and the return of amounts thus withheld to the Federal Government. The operation of these provisions has depended upon the reciprocity in tax matters which has been built up between the States and the Federal Government. Any interference with that reciprocity may be the occasion for difficulties in connection with the system for deducting Federal tax from wages and salaries at the source.

In view of this possibility, the fact that the proposed legislation would unduly favor Federal employees over private employees, and the careful consideration which was given the consent of the United States to the taxation of Federal employees at the time of the Public Salary Tax Act of 1939, this Department is inclined to the opinion that the enactment of the proposed legislation would be undesirable.

In view of the request that this report be expedited, it has not been possible to submit the report to the Director of the Bureau of the Budget. Sincerely yours,

John L. SULLIVAN, Acting Secretary of the Treasury.

CHANGES IN EXISTING LAW

In compliance with clause 2a of rule XIII of the Rules of the House of Representatives, changes in existing law made by the bill are shown as follows (existing law in which no change is proposed is shown in roman, and new matter is printed in italics):

JUDICIAL CODE

Sec. 24. The district courts shall have original jurisdiction as follows:

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Twenty-eighth. Of cases brought to enjoin, set aside, annul, or suspend in whole or in part any order of the Interstate Commerce Commission.

Twenty-ninth. Of all actions, suits, or proceedings, involving the linbility of any officer or employee of the United States or any Territory or possession thereof, or of the District of Columbia, or of any agency or instrumentality of any one or more of the foregoing, for State tax on the compensation for personal services as such officer of employee, where the claim of domicile on the part of such officer or employee is disputed by the taxing authority of any State.

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