HILO, Hawai'i — Members of Congress are weighing a proposal by President Bush's administration to scrap the cost of living allowance for most federal employees in Hawai'i and replace the COLA with "locality pay," a step that would boost federal workers' retirements.

However, the shift also would increase the federal tax bite for Hawai'i's federal workers.

The COLA paid to workers in Hawai'i, Alaska and other areas outside the continental United States is not subject to federal income or Social Security taxes, and does not count toward workers' retirement benefits. Locality pay given to federal workers in high-cost areas of the Mainland is taxed and is considered part of the base pay used to calculate employees' retirement annuities.

Hawai'i Sens. Daniel K. Inouye and Daniel K. Akaka have co-sponsored a package of proposals in S3013 as an alternative to the administration's plan, including a proposal to phase in the locality pay more rapidly than the Bush administration had proposed.

If either the Senate plan or the Bush proposal is approved, the changes would affect about 40,000 federal civilian employees working outside the continental United States, including about 17,000 who work in Hawai'i.

Albert Miller, president of the Big Island COLA Defense Committee, submitted testimony in Hilo yesterday to representatives of Akaka's office and the U.S. Office of Personnel Management urging lawmakers to give federal employees in Hawai'i both COLA and locality pay.

Miller also urged that the 25 percent cap on COLA be lifted, and that COLA pay be counted for purposes of calculating retirement benefits for federal workers.

The sessions in Hilo and Kona yesterday to discuss the future of COLA were the first of a series of meetings scheduled around the state on this issue.

Charles D. Grimes III, deputy associate director of performance and pay systems for the Office of Personnel Management, said the Bush administration proposed the change in part because federal employees who are paid non-foreign COLA often seek to move to the Mainland late in their careers to earn locality pay that will boost their retirements. Those personnel shifts can be "disruptive," he said.

Grimes also said the 25 percent cap on COLA means that locality pay provided in some areas of the Mainland is now more generous than COLA, which has caused some dissatisfaction with COLA. For example, locality pay in San Francisco is now 32 percent, and that pay differential counts toward federal workers' retirement benefits there.

The administration proposal would phase in locality pay over seven years. The proposal in the bill offered by Akaka, Inouye and Alaska's Republican U.S. Sens. Ted Stevens and Lisa Murkowski would phase in the changes over three years to more quickly benefit federal workers who are approaching retirement.

The Bush administration proposed that employees of the U.S. Postal Service be left out of the changeover. Those workers would remain under what the Post Office calls Territorial COLA, which would remain frozen at 25 percent.

The Senate proposal would shift Post Office workers from COLA to "Territorial Pay" similar to locality pay, which would count toward retirement, said Jennifer Tyree, chief counsel for the Subcommittee on Oversight of Government Management, the Federal Workforce, and the District of Columbia, which is part of the Senate Committee on Homeland Security and Governmental Affairs.