May 15, 2002

The Honorable Thomas V. Mike Miller, Jr.
President of the Senate
State House
Annapolis MD 21401

Dear Mr. President:

In accordance with Article II, Section 17 of the Maryland Constitution, I have today vetoed Senate Bill 399 - Income Tax - Subtraction Modification for Retirement Income - Rollovers to Individual Retirement Accounts.

Senate Bill 399 allows income from a rollover individual retirement account (IRA) or annuity from an employee retirement system to be included in the subtraction modification allowed for retirement income under the State's income tax law. To qualify, the contributions to the IRA must consist entirely of the tax-free rollover of distributions from an employee retirement system and the tax-free rollover must have resulted from the mandatory withdrawal of amounts in the employee retirement system.

Maryland law provides a special pension exclusion from State taxable income for individuals who are at least 65 years old or who are totally disabled. The maximum exclusion allowed under this subtraction modification is indexed to the maximum annual benefit payable under the Social Security Act ($17,300 for 2001) and is reduced by the amount of any Social Security payment received. The current pension exclusion is limited to income received from an "employee retirement system." Individual Retirement Accounts and Keogh plans are not considered employee retirement systems and income from these plans is not deductible.

From a policy standpoint, Senate Bill 399 adheres to the general principles behind the State's pension exclusion. However, there are two concerns which prevent me from signing the measure into law this year. First, the extent of any general fund revenue loss from this tax change is unknown and cannot be reliably estimated. Under one set of assumptions developed by the Department of Legislative Services, general fund revenues could decline by approximately $1.7 million annually. This is not an insignificant loss, especially given the challenges the State faces in funding its commitments to public education.

Secondly, it is important to note that Senate Bill 399 represents only one of many attempts to broaden the exclusion of retirement income from State taxation. During the 2002 Session, bills were introduced that would increase the maximum pension exclusion, exclude income from individual retirement accounts, and exclude the retirement income of federal employees, military retirees, and teachers. The taxation of all retirement income, including rollovers from IRA accounts, should be one of the issues studied by the new Commission on Maryland's Fiscal Structure created by House Bill 1 and signed into law on May 6, 2002.

For the above reasons, I have vetoed Senate Bill 399.

Parris N. Glendening