FEDERAL RESTRICTIONS ON STATE TAXATION OF MILITARY PAY REVISITED: A NOTE ON TAX AVOIDANCE THROUGH DOMICILE SHIFTING FOLLOWING REMOVAL OF THE WITHHOLDING PROHIBITION

As part of the Tax Reform Act of 1976, Congress ended the federal prohibition against withholding of state income taxes from military pay. This change promises improved tax compliance and administration.But because the domicile-only jurisdictional rule imposed on the states for taxation of military pay was not also ended, the advent of withholding has prompted many military personnel to change their domiciles to states not taxing military pay. The jurisdictional rule should be changed to remove this avenue of tax avoidance and to improve the equity of state income taxes in other respects.