Last week the Senate approved S. 3013 that would, if made
law, phase out the 13 to 25 percent cost-of-living allowances (COLAs)
for federal employees living in Alaska, Hawaii, and US territories, and
replace them with locality pay.
Senator Daniel Akaka (D-Hawaii) sponsored the bill and said it is
necessary because of concerns over how federal employee retirement
benefits are calculated. COLA payments are not subject to federal
income or payroll taxes, but they do not count toward federal retirement
benefits or as part of basic pay eligible for Thrift Savings Plan
matching funds.
Locality pay is treated as regular income for both
taxation and retirement purposes. In simple terms, this means that
feds in these areas would see their taxes go up, but so would their
retirement payments.
The move would affect approximately 46,000 federal employees working
in Alaska, Hawaii, Puerto Rico, the US Virgin Islands, Guam, and the
Northern Marian estimates.
The Congressional Budget Office (CBO)
estimates that direct spending would increase by a total of $302
million over 10 years - $295 million for additional retirement benefits
and $7 million for higher Social Security benefits to the anticipated
13,000 federal employees who would accrue additional benefits and
retire between 2009 and 2018.
However, the bill would also increase the portion of
salary on which employees pay taxes, equating to an increase in tax revenues of $1 billion over the next 10
years. $739 million would come from Medicare payroll and income tax
collections and $39 million from higher contributions from employees
toward retirement benefits. Additional Social Security tax receipts
would bring in an extra $233 million.
So, is this an attempt to treat
feds working in our outlying states and territories with equity or a
sneaky way to raise taxes on a few? You be the judge!
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