The Defense Department said yesterday that starting July 1 it will withhold state income taxes from the paychecks of military personnel whose residences are in the District of Columbia, Virginia and Maryland and 32 other states.
The tax withholding could generate a substantial windfall for the jurisdictions, many of which currently are plagued with financial troubles. A federal study conservatively estimated that the states and D.C. could have reaped an additional $94 million in revenue in 1975 if the incomes taxes had been withheld by the armed services. Congress approved the withholding plans last year.
A Defense Department spokesman said that most of the states that have asked for the withholding requested it for all service personnel who declare the state as their residence. Eight states asked for the withholding only for those who declare the state as their residence and also are stationed there.
Wayne Anderson, executive director of the Advisory Commission on Inter-governmental Relations, said his agency found that "most states hadn't gotten 50 per cent compliance from military personnel" in paying their state income taxes.
Anderson noted that there is "lots of confusion" concerning where a soldier is to file a state return. There now are seven states with no income tax and Anderson said five fully exempt military pay from their income tax and seven partially exempt military pay. D.C., Maryland and Virginia all fully tax military personnel, he said.
Spokesmen for the Defense Department said they did not know whether the armed services have formal requirements establishing state residency for service personnel.
Anderson said his study showed that the percentage of military persons who claim residence in states with no income taxes is far greater than the percentage of military personnel that normally would come from those states.
Anderson said that when his commission recommended in November, 1975, that the armed services withhold state income taxes the same as any other employer, the armed services resisted it. Anderson said he believes that "withholding will be a powerful educational device" for service personnel.
A Defense official who asked not to be named said he thinks the new system will help service personnel "who claim they didn't know they had to file." He added that such an excuse is probably not valid in any event.
Having taxes automatically withheld is an attempt to correct the situation and give members of the armed services "the benefit of withholding," he said. The official said Defense does not know how many service personnel do not pay state income taxes even though they are required to do so.
When the withholding is started in July, each military division's finance center will withhold the taxes from the paychecks and forward the money to the respective states, the Defense spokesman said.
The states that have requested the withholding are:
Alabama, Arizona, Arkansas, California, Colorado, Delaware, Georgia, Hawaii, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Virginia, Wisconsin, and the District of Columbia.
In addition, Michigan and West Virginia have asked for more information about the new policy, the spokesman said.
Virginia, Maryland and D.C. are among the jurisdictions which asked for the withholding for all military personnel who declared the state as their residence if they are not stationed in the jurisdiction.
In one widely publicized case in late 1974, Maj. Gen. Frederic E. Davison, the former commander of the Military District of Washington, resigned as one of D.C. Mayor Walter Washington's top administrators after it was revealed that he had failed to pay income taxes to the city for 11 years between 1956 and 1973.
Davison paid his deliquent taxes in late December, 1974. He had lived in different parts of the world during the 11 years, but kept his residence in the District. He did not dispute his obligation to pay the income taxes and said the problem resulted from a family misunderstanding.