Tales of Hoffman : Ex-Californian Struck Chord in Striking Down Pension Tax

William and Joanne Hoffman are planning a party--a big one, replete with congressional representatives, heads of several dozen national lobbying groups and maybe even the governor of Nevada.

They’re celebrating because they took on the state of California and they won. Thousands of out-of-state retirees will be richer as a result.

Last month, President Clinton signed a bill that bans states from taxing the pension income--including 401(k) and previously untaxed IRA distributions--of former residents.

Technically, the bill was called HR-394. But anyone who had been following it for a while might have called it “Hoffman’s revenge.” The target was California because it started other states down the same road.

“This is a case where one guy made a difference,” said Harley T. Duncan, executive director of the Federation of State Tax Administrators. “He pushed and he pushed and he pushed. If it wasn’t for Bill Hoffman, this never would have happened.”

It didn’t happen a moment too soon, Hoffman said.

Growing budget problems during the last several years prompted numerous states to look for additional sources of revenue. Taxation of nonresidents became a growth field, with no less than 15 states authorizing taxes on the pensions of retirees who had moved out of state.

The now-banned taxes on pensions are only part of the so-called source taxes that bedevil Americans who cross state lines to do business or retire. Several states--not to mention a handful of cities--also tax the income of entertainers, professional athletes, consultants, attorneys and accountants who come into town for temporary work, whether it’s a concert, a sporting event or a consulting job.

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The pension taxes were onerous for numerous reasons, Hoffman said.

First, most people were unaware of the taxes so they didn’t pay them. “We believe the people who paid the tax were just the tip of the iceberg,” said Jim Shepherd of the Franchise Tax Board in Sacramento. But when the state found errant taxpayers it billed them for back taxes, interest and penalties, resulting in walloping bills. Since it was hard to find scofflaws--many of whom didn’t even know they were in violation--the laws were enforced inconsistently.

California authorities acknowledge, for example, that they mainly hit up government workers because those were the people who were most easily ferreted out. About 25,000 former Californians--mainly teachers and other government employees--complied with the tax. People receiving pensions from private sources rarely paid.

Another argument against the tax was that people who were hit by source taxes were unable to vote in the state assessing the tax, nor were they able to use its public services.

Meanwhile, if the state where they had resettled had an income tax, that state received less tax revenue. That’s because most states allow you to take a tax credit for taxes paid to other states.

California and other tax authorities said the pension source tax was justified because the income that was targeted was actually earned while the person was working in the Golden State. More important, this money had never before been subject to state tax because it was put in tax-deferred pension plans.

However, state tax authorities said they don’t plan to fight the new law and know of no legislative effort to recover the money, such as by making pension contributions taxable.

While the new law provides great relief for those who might have owed state pension taxes in the future, current retirees are not completely off the hook.

The law, which goes into effect for the 1996 tax year, does not provide amnesty for those who haven’t complied in the past. If you spent all or part of your working life in California, you still must file a California return and pay taxes on California pension income received in the 1995 tax year, experts said. And if you owe back taxes for previous years, you are obligated to pay those too.

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Still, to many retirees, Hoffman is a hero. Oddly enough, he never planned it that way.

A retired scientist who spent his career at Hughes Aircraft Co. in El Segundo, Hoffman simply wanted to retire to a city in Nevada that he and his wife had discovered during their many trips to Lake Tahoe.

But it wasn’t long after they had settled in Carson City nearly a decade ago that Hoffman discovered what he believed was an outrageous provision in California’s tax law. Even though he had sold his home, set up residence in another state and could no longer vote in California, the Golden State was going to levy income tax on Hoffman’s pension income--forever.

Hoffman vowed to fight the law and wasn’t shy about saying so. The next thing he knew, somebody mentioned his battle in a newspaper article.

Nearly overnight, he was flooded with 400 to 500 letters from other similarly agitated retirees. He and wife Joanna formed Retirees to Eliminate State Income Source Taxes, or RESIST of America.

For the next nine years, the couple spent 10 hours a day, six days a week, buttonholing congressional representatives, calling special-interest groups and talking to worried retirees and prospective retirees who were concerned about the impact of California’s source tax on pensions. And as the Hoffmans became increasingly successful in gaining the support of legislators in low-tax and no-tax states such as Nevada, they got an increasing amount of publicity. That attracted new members, new questions and newfound allies in the form of pensioners groups representing firefighters, police officers, military organizations, teachers and dozens of other public employees.

Six years ago, U.S. Sen. Harry Reid (D-Nev.) became a staunch supporter and helped guide the bill through Congress.

In the end, Hoffman was the linchpin holding together a coalition of 30 million people from throughout the U.S. and in all walks of life. He wrote a monthly newsletter, advising members of the progress in fighting source taxes.

This month members get their final newsletter, which invites them to the victory party in Carson City’s biggest hotel on March 9. With 500 to 1,000 guests expected, the Ormsby House happily agreed to provide group rates.

“But be sure to tell them you’re with RESIST,” cautioned Joanna Hoffman, the event’s organizer and a stickler for detail. “Otherwise they’ll charge you $40 a night. It ought to be $35.”