Military officer, legislators battle state's policy of taxing overseas GIs


When Air Force Maj. Steve Lynch was based in Germany from 1985 to 1988, he continued to pay income taxes in his home state of Maryland.

But he saw that other Marylanders who worked overseas for private employers or even for the University of Maryland did not; up to $70,000 of their earnings was exempted from the state's income tax.

"This is grossly unfair. It's discriminatory for the state of Maryland to tax military and federal employees overseas while giving tax breaks to others" who don't work for Uncle Sam, said Major Lynch, who is now based at Fort Meade.

He wants a state law to give an estimated 7,500 military personnel stationed overseas the same $70,000 exemption from Maryland income taxes given to non-government employees.

Delegate Clarence Davis, D-Baltimore, agrees. He sponsored a bill two years ago that resulted in a compromise law giving overseas military personnel an exemption from Maryland taxes on income up to $15,000 and partial exemption up to $30,000. That exemption should be expanded, he says.

"Troops who are overseas for two or three years shouldn't have to pay state taxes for that time," Mr. Davis said. Especially with the dollar's decline in value overseas, he said, "many of our military people are suffering from the high cost of living abroad."

Meanwhile, Delegate Sheila E. Hixson, D-Montgomery, is introducing a bill to provide the same exemption for non-military federal employees who are also taxed by Maryland while working abroad. Several thousand Maryland taxpayers may be covered by that situation, she said, which is similarly "discriminatory to government employees."

Maryland Comptroller Louis L. Goldstein denied that the state discriminates against federal employees. In a letter to Sen. Howard A. Denis, R-Montgomery, who is also investigating the issue, Mr. Goldstein explained that Maryland is only following federal law in taxing those employees. "We simply utilized the federally determined tax base" to assess state taxes, he said.

Federal law says that military personnel are subject to the income taxes of their state of residence, even though they receive no services from the state while overseas. (They also must pay federal income tax while overseas, but they receive services and benefits from the U.S. government, Major Lynch noted.)

A single military officer based overseas who earned $35,000 last

year would pay $7,300 in federal income taxes and about $2,500 in Maryland (and county) income taxes, the Cecil County native said.

Residence in another state would avoid those state income taxes. Pennsylvania, Illinois and New York grant income tax exemptions to military people based overseas.

But military personnel cannot arbitrarily pick a home state when shipped abroad. Voter registration, driver's license and homeownership are some of the factors considered. "Courts have been pretty strict about this," said Major Lynch, who is a lawyer.

Most troops serving in the Persian Gulf were exempted from Maryland taxes on Jan. 17, when President Bush declared the area a combat zone. Like the federal government, Maryland exempts all pay of enlisted personnel and warrant officers and the first $500 a month for officers serving in a war zone. That exclusion also applies to activated reserves and National Guard forces there.

But military pay for troops stationed in the Persian Gulf before the declaration of hostilities is still subject to Maryland taxes, as is income of personnel at support bases outside the gulf region, Major Lynch noted.

"It's not going to affect my taxes this year, and it may never affect them," he said. "But it is just a matter of fairness in the law."

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