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As States Work to Conform to EGTRRA, Congress Attempts to Make it Permanent

Last year, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), with far-reaching effects for investors. The new law expanded and permitted catch-up provisions for retirement savings. The law worked to lessen the tax burden on Americans, but managed to also cause great consternation for state legislators, since they would have to conform state laws to the new federal policies.

A particular portion of the EGTRRA works to extend tax-deferred savings opportunities. Specifically, it expanded defined contribution limits from $35,000 to $40,000; increased the maximum amount of a participant's salary considered for plan purposes from $170,000 to $200,000; and, increased elective deferral limits from $10,500 to $15,000 over a five year period, among other provisions. In addition, IRA catch-up limits were raised by $500 per year through 2005 and by $1,000 from 2006 and thereafter.

While these provisions were lauded for their benefits to retirement savers, it has cased some concern for its state tax implications. Twenty-three states and the District of Columbia have tax codes that automatically conform to federal law. Nine other states do not have an income tax or have taxes only on interest or dividend income. Of the 18 states that did not conform, 13 have already passed legislation bringing their laws into conformity, three states have not made decisions on whether to conform, and two, New Jersey and Pennsylvania, have laws that are so divergent from federal law that they are not considering legislation.

Now, Congress has taken up legislation to make permanent the provisions of the EGTRRA. The original sponsors of the bill in the House, Representatives Rob Portman (R-OH) and Ben Cardin (D-MD), introduced such legislation and it passed on June 21. Similar legislation has been discussed in the Senate and will likely be introduced soon, possibly in conjunction with pension reform legislation currently under consideration.

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