That (a) part III of 
subchapter B of chapter 1 of the Internal Revenue Code of 1986 
(relating to items specifically excluded from income) is amended by 
redesignating section 137 as section 138 and by inserting after section 
136 the following new section:

``SEC. 137. CERTAIN PENSIONS AND ANNUITIES UNDER STATE OR LOCAL 
              RETIREMENT SYSTEMS.

    ``(a) General Rule.--Gross income does not include any amount 
(otherwise includible in gross income) received by an individual as a 
qualified governmental pension.
    ``(b) Dollar Limitation.--The aggregate amount excluded under 
subsection (a) for the taxable year shall not exceed--
            ``(1) the social security exclusion amount applicable to 
        the taxpayer for such year, reduced by
            ``(2) the sum of--
                    ``(A) the aggregate amount excluded from gross 
                income under section 72(b) with respect to any 
                qualified governmental pension, and
                    ``(B) the social security benefits (within the 
                meaning of section 86(d)) received by the taxpayer 
                during such year which were excluded from gross income.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Qualified governmental pension.--The term `qualified 
        governmental pension' means any pension or annuity received 
        under a State or local retirement system to the extent such 
        pension or annuity is not attributable to service--
                    ``(A) which constitutes employment for purposes of 
                chapter 21 (relating to the Federal Insurance 
                Contributions Act), or
                    ``(B) which is covered by an agreement made 
                pursuant to section 218 of the Social Security Act.
            ``(2) Social security exclusion amount.--The social 
        security exclusion amount applicable to any taxpayer for any 
        taxable year is the portion of the aggregate amount received as 
        a qualified governmental pension by such individual during such 
        taxable year which would not be includible in gross income if 
        the amounts so received were social security benefits (as 
        defined in section 86(d)). For purposes of the preceding 
        sentence, amounts received as a qualified governmental pension 
        during such taxable year shall not be taken into account to the 
        extent such amounts exceed the applicable maximum benefit 
        amount.
            ``(3) Applicable maximum benefit amount.--The term 
        `applicable maximum benefit amount' means--
                    ``(A) in the case of an unmarried individual, the 
                maximum individual social security benefit,
                    ``(B) in the case of a joint return, 150 percent of 
                the maximum individual social security benefit, or
                    ``(C) in the case of a married individual filing a 
                separate return, 75 percent of the maximum individual 
                social security benefit.
        For purposes of the preceding sentence, marital status shall be 
        determined under section 143.
            ``(4) Maximum individual social security benefit.--
                    ``(A) In general.--The term `maximum individual 
                social security benefit' means, with respect to any 
                taxable year, the maximum total amount (as certified by 
                the Secretary of Health and Human Services to the 
                Secretary) which could be paid for all months in the 
                calendar year ending in the taxable year as old-age 
                insurance benefits under section 202(a) of the Social 
                Security Act (without regard to any reduction, 
                deduction, or offset under section 202(k) or section 
                203 of such Act) to any individual who attained age 65, 
                and filed application for such benefits, on the first 
                day of such calendar year.
                    ``(B) Part years.--In the case of an individual who 
                receives a qualified governmental pension with respect 
                to a period of less than a full taxable year, the 
                maximum individual social security benefit for such 
                individual for such year shall be reduced as provided 
                in regulations prescribed by the Secretary to properly 
                correspond to such period.
            ``(5) State or local retirement system.--The term `State or 
        local retirement system' means any pension, annuity, 
        retirement, or similar fund or system established by a State, 
        any political subdivision of a State, or the District of 
        Columbia.''
    (b) Subparagraph (A) of section 86(b)(2) of such Code (defining 
modified adjusted gross income) is amended by inserting ``137,'' before 
``911''.
    (c) The table of sections for part III of subchapter B of chapter 1 
of such Code (relating to items specifically excluded from income) is 
amended by redesignating the item relating to section 137 as section 
138 and by inserting after the item relating to section 136 the 
following new item:

                              ``Sec. 137. Certain pensions and 
                                        annuities under State or local 
                                        retirement systems.''
    (d) The amendments made by this Act shall apply to taxable years 
beginning after the date of the enactment of this Act.
Amends the Internal Revenue Code to exclude from gross income any amount received by an individual as a governmental pension under a State or local retirement system.  Limits such amount to the applicable social security exclusion.
To amend the Internal Revenue Code of 1986 to provide individuals receiving State or local governmental pensions an exclusion equivalent to that received by social security recipients.