- work opportunities for individuals with disabilities, including persons with most severe disabilities. UCPA recommends that the committee concurrent with its efforts to create pension equity for so-called "permanently disabled" individuals examine ways in which it may use the tax code to help the millions of individuals with disabilities who can work given appropriate supports take advantage of new and assistive technology to maximize their work opportunities and benefits. The fact is that we cannot afford not to invest in a new kind of future one of productive independence for individuals with disabilities, and of increased productivity for the entire nation. While expecting every person with a disability to work is unrealistic, not assisting those who could work is inequitable and unsound public policy: UCPA believes a return to work goal must underlie tax code initiatives targeted to assist so-called "permanently disabled" former employees. UCPA urges the committee to consider tax code changes which recognize and make more affordable the full panoply of services including, but not limited to, assistive technology and other supports available to persons with disabilities able and willing to work. To that end, UCPA recommends that the committee provide direct income subsidies to disabled workers through income tax credits and deductions. Individuals with disabilities incur substantial expenses in the conduct of their everyday lives as they try to learn, work, recreate, and live in the community. The cost of personal assistance to enable individuals with severe disabilities to work can be a barrier to employment, as individuals with disabilities often do not earn enough in wages to afford to pay for personal assistance in addition to a rent or mortgage, utilities, food, and related life expenses. Other examples of extraordinary expenses include the cost of accessibility modifications such as a wheelchair lift for a van or hand controls for a car; a wheelchair ramp or alternative signaling device for an accessible home; or medications and medical supplies. There are major expenses for assistive technology, including wheelchairs, hearing aids, animal companions, computers, augmentative communications devices and the training and maintenance costs of the equipment. Not the least of these extraordinary expenses is for health specialists above and beyond the typical health expenses incurred by the average person. All of these expenses conspire to trap individuals with disabilities in a cycle of poverty and total government dependency from which most cannot escape without tax assistance to level the economic playing field. In order to promote the goal of employment and increased self sufficiency for individuals with disabilities, there must be financial incentives for beneficiaries and recipients to take the risk of leaving the disability roles for payrolls. This could be accomplished by modifying the current Earned Income Tax Credit for low-income workers to individuals with disabilities, and by creating a Personal Assistance Services Tax Credit for working individuals with disabilities who have significant needs for personal and technological assistance in order to work. The Earned Income Tax Credit should be extended to include persons with disabilities age 18 and older, structured to ensure that it helps bridge the gap between the Substantial Gainful Activity level and a minimum income level for low-income workers with disabilities. The present Substantial Gainful Activity level for non-blind beneficiaries is $500 per month, or $6,000 per - year less than the Federal poverty level! It is impossible for an individual with a severe disability to live on this level of income, especially given their extraordinary expenses of living with a disability. Accordingly, UCPA recommends changes to address the cost of long-term services for working persons with the most significant disabilities. To do this, we propose a tax credit of one-half of all personal assistance services up to $15,000 for any individual with a disability who is working. Expenses for personal assistance services beyond $15,000 per year should be deductible as a medical expense. Personal assistance is defined as one or more persons or devices assisting a person with a disability with tasks which that individual would typically do if they did not have a disability. This includes assistance with such tasks as dressing, bathing, getting in and out of bed or one's wheelchair, toileting (including bowel, bladder and catheter assistance), eating (including feeding), cooking, cleaning house, and on-the-job support. It also includes assistance with cognitive tasks like handling money and planning one's day or fostering communication access through interpreting and reading services. The proposed modification of the EITC and changes in medical care deductions for personal assistance will help to offset the extraordinary expenses of living with a disability and assist people with severe disabilities to re-enter the workforce by giving them a measure of economic equity with those wage earners and tax payers who do not need to pay these extraordinary costs. In closing, UCPA notes that the linchpin of the 401(k) legislative concept is the receipt of disability benefits by "permanently disabled" former employees. We urge that the committee proceed with great care in evaluating the proposal and in resolving some of the statutory and administrative problems which the proposal appears to create. Concurrently, we strongly urge that the committee, as it carries out its mission to simplify the tax code, recognize and emphasize the ability of individuals to work -- including former and prospective employees alike. UCPA believes a disability need not and should not be presumed to be lifelong in nature. Tax code work incentives are just as appropriate as the pension equity which the committee proposes to consider. Moreover, work-directed tax incentives are certain to be widely utilized by persons with disabilities of all ages. Finally, the changes which UCPA proposes would create a more "user-friendly" tax code. Such a system is consistent with UCPA's vision of a system which encourages people with disabilities to become tax-payers rather than tax-takers, a system which reduces federal disability payments and increases the revenues which consumers provide to the American economy. Thank you for this opportunity to submit this testimony for the record. STATEMENT OF CHIEF MASTER SERGEANT JAMES E. LOKOVIC, USAF (RET.) DIRECTOR, MILITARY AND GOVERNMENT RELATIONS AIR FORCE SERGEANTS ASSOCIATION Mr. Chairman and distinguished committee members, the federal government must take whatever steps it can to end the practice of certain states imposing taxes on retirees who were once stationed there but no longer reside in that state. A significant number of military retirees are forced to pay these unfair "source taxes." The 160,000 members of the Air Force Sergeants Association appreciate your assistance in ending this practice. AFSA represents the millions of enlisted active and retired Air Force, Air Force Reserve and Air National Guard members, and their families. - Action must be taken to prohibit these states from claiming a portion of this alreadylimited retired pay through source taxation. It penalizes military retirees for having been assigned to serve in those states. They were stationed there by the federal government not as a result of their own choice. While there, they were subject to paying taxes to their state of residence. Once retired, the military member should be subject to paying taxes only to the state where they currently live. AFSA strongly believes military retired pay is not a "pension" that states can lay a claim to as the result of work performed within that state. Military retired pay is the result of years of relatively low pay and sacrifice in the national interest, far above what most people experience. Military retirees served a career expecting a reliable retirement income after their last assignment. This retirement was hard-earned through years of difficult life, oftentimes facing mortal risk. They should pay no more than other citizens and in ways no more unfair than the rest. If anything, there really should be a tax break for those who fought our wars and secured our peace - not a penalty. - Military members are unique in that their retired pay was earned dollar-for-dollar from a career of service to their nation, not to the individual states in which they served. Further, most enlisted members served in numerous states during their careers. These moves were not voluntary. They were ordered to locate there. And while there, they paid state taxes. The greatest unfairness is to those who served in more than one state that practices source taxation. Again, these retirees did so under government orders. To lose portions of retirement to more than one state is most burdensome to this group. If enlisted retirees are taxed, it should only be by the state where they currently reside and receive services. We strongly appreciate and endorse your proposal to end the practice by penalizing source taxing states with a withholding of individual federal tax return information. This proposal would effectively prevent these states' ability to audit individuals. The threat of such a penalty would be a strong inducement to end the practice. We are also hopeful that if legislation is not passed that ends the practice in totality, then this committee's alternative approach would prevent any future efforts by other states. Mr. Chairman, we again thank you for your proposal to use your legislative jurisdiction to end this unfairness. We appreciate your help in ending this unfairness. As always, AFSA is ready to assist you in matters of mutual concern. I am writing to you with respect to the recent hearing on miscellaneous tax proposals, and would respectfully request that this letter be included in the printed record. The ICMA Retirement Corporation ("RC") welcomes this opportunity to present its views on the issue of individual ownership of assets of section 457 plans. RC was founded more than 20 years ago as a not-for-profit independent corporation by the International City/County Management Association exclusively for the benefit of public sector employees. RC manages $4.5 billion in Section 457 plan assets for more than 4,300 public employers and 200,000 public employees. Recent developments in California have highlighted two flaws in Section 457 plans: Plan assets are subject to the claims of third parties and, under certain circumstances, may be used for other purposes by the employer itself. The recent bankruptcy filing in Orange County highlights the first concern; an earlier attempt by Los Angeles County to use $250 million of plan assets to balance its budget highlights the other. On behalf of its public sector employer and employee clients, RC strongly endorses the letter and subsequent suggested language provided by the National Association of Government Deferred Compensation Administrators (NAGDCA), of which we are a member, to the Committee on Ways and Means. (See attachment.) We believe that this language is preferable to the suggested language of the Joint Tax Committee because it is broad enough to accommodate the variety of vehicles currently serving Section 457 plans. Unduly limiting the types of investment options available to participants would burden both the participants and their employers by restricting their investment options and adding administrative obstacles. As structured, the suggested language would eliminate the ability of the public sector to invest in the ICMA Retirement Trust and many similar arrangements. Again, we strongly endorse the language proposed by NAGDCA to protect the retirement savings of public sector employees. Thank you for the chance to provide our point of view as you consider the best vehicles for Section 457 plans, while maintaining their flexibility and transferable benefits. Attachment American Federation of State, County and Municipal Employees National Association of Police Organizations National Association of Government Deferred Compensation Administrators National Association of State Retirement Administrators International City-County Management Association The above organizations urge Congress to protect $40 billion dollars of public employee retirement savings currently invested in Section 457 plans throughout the country. These deferred compensation plans are the primary vehicle used by government employees to set aside their own money for future retirement needs. The savings set aside under the rules of the plan are tax deferred until the money is actually received at retirement. Section 457 of the Internal Revenue Code requires deferred compensation plans to follow a number of rules. Most rules exist to ensure that money saved is in fact used for retirement. One rule, however, defeats both that goal and the broader national purpose of encouraging saving for retirement. Section 457 (b)(6) requires the governmental employer to own assets of the deferred compensation plan--without recognition of the employee's interest in those assets. The IRC also requires that plan assets must be subject to the claims of the employer's creditors. During times of fiscal stress this requirement creates the possibility of seizure or manipulation of this money. Recent fiscal problems faced by local governments in Southern California emphasize that this is real. Placing public employees' reurement assets at risk is unnecessary and contrary to public policy Therefore, the above organizations propose that Congress adopt a simple amendment to the Internal Revenue Code to recognize the employee interest in these funds, thereby protecting them from employer bankruptcy or manipulation. No other change in the structure or operation of these plans is intended. Since Congress enacted Section 457 in 1978 over $40 billion dollars has been contributed to these plans by millions of public employees, including police, teachers, park rangers, and construction crews. Most plans exist without a penny of taxpayer support. The amendment set out below brings the Internal Revenue Code into line with the practical reality of these plans and employee expectauons: it is employee money and the tax law should not require it to be placed at risk. Proposed Amendment to Section 457 of the Code Section 457 (b)(6) of the code is amended and restated in is entirety to read: (A) all amount of compensation deferred under the law, shall be held in trust, custodial account, an annuity contract, insurance contract or other contract. The assets of such trust or contract shall be held and administered by the employer or its designee according to the requirements of this section and for the exclusive purpose of providing benefits for participants and their beneficiaries in the eligible deferred compensation plan. |