By Pension and Benefits Editorial Staff
West Virginia unlawfully discriminated against a retired federal employee by subjecting his pension benefits to state income tax, while exempting the benefits of state retirees, according to the United States Supreme Court. In an opinion that was consistent with established precedent, a unanimous Court stressed that there were no significant differences between the law enforcement responsibilities of the federal employee and the responsibilities of the state law enforcement employees that were sufficient to warrant the discriminatory treatment, no matter the limited scope of the tax preference.
Discriminatory state tax preference challenged under intergovernmental immunity doctrine. A retired employee of the U.S. Marshal’s Service brought suit after West Virginia subjected his federal pension to state income tax. The fact that West Virginia does not also tax the state pension benefits of retired state law enforcement employees, the retiree argued, constituted unlawful discrimination.
The retiree’s argument was based on the “intergovernmental immunity doctrine,” as codified at 41 U.S.C. Sec. 111 (Sec. 111), which authorizes states to tax the pay or compensation of federal employees, but only if the “taxation does not discriminate against the officer or employee because of the source of the pay or compensation.” Reflecting the understanding of Congress in adopting Sec. 111, the Supreme Court has consistently invalidated state laws that discriminate in favor of retired state employees and against retired federal employees (see Davis v. Michigan Dept. of Treasury, U.S. Sup. Ct (1989), 489 U.S. 803).
A West Virginia trial court, finding no significant differences between the law enforcement duties of the federal employee and the state employees, ruled that the state law represented “precisely the type of favoritism” Sec. 111 prohibits. The West Virginia Supreme Court of Appeals, however, reversed, stressing that the intent of the statute was to “give a benefit to a narrow class of state retirees,” and not to harm federal retirees. The United States Supreme Court reversed the state supreme court and remanded the proceedings.
State trial court had it right. Writing for a unanimous Supreme Court, Justice Gorsuch initially explained that a state violates Sec. 111 when it treats retired state employees more favorably than retired federal employees and the differential treatment is not justified by significant differences between the two classes. Given the undisputed findings of the trial court that there were no significant differences between the jobs of the federal marshals and the state law enforcement employees, the Court had “little difficulty” concluding that West Virginia’s law unlawfully discriminated against the federal retiree because of the source of his pension benefits.
Narrow scope did not save tax preference. West Virginia conceded that the state law favored retired state law enforcement employees. However, the state argued that the tax preference should be permitted because it was narrowly drawn and affected so few people that it could not “materially interfere with the operations of the federal government.”
The Court rejected the state’s “ambitious rejoinder,” stressing that Sec. 111 prohibits “any state tax that discriminates against a federal officer or employee,” and not just those that seem “especially cumbersome.” Justice Gorsuch further noted that the Court, in Davis, expressly rejected any suggestion that a discriminatory tax in permissible as long as it does not interfere with the federal government’s ability to perform its government function.
Rejecting the invitation to revise the express text of Sec. 111, Gorsuch did advise that a state could continue to provide an exemption to only a narrow subset of state retirees as long as it also extended the exemption to a comparable class of federal retirees. The distinguishing factor under such circumstances, Gorsuch noted, would be the comparable treatment of the similarly situated employees, and not the narrow scope of the law or the limited number of affected retirees.
Intent of state law not a relevant consideration. The state alternatively argued, adopting the reasoning of the West Virginia Supreme Court of Appeals, that the statute should be upheld because it was not intended to harm federal retirees, but only to help certain state retirees. The Court acknowledged the plausibility of the state suggestion, but dismissed it as irrelevant. Under Sec. 111, the Court stressed, what matters is not the intent “lurking behind the law,” but whether the letter of the law treats those who deal with the federal government as well as it treats those with whom the state deals itself (see Phillips Chemical Co. v. Dumas Independent School Dist., U.S. Sup. Ct (1960), 361 U.S. 376).
State preference expressly defined by reference to job responsibility. Shifting focus, the state attempted to comport the statute with Sec. 111 by maintaining that the retired state law enforcement employees and the retired U.S. marshal were not “similarly situated,” even if their job responsibilities were substantially similar. Contending that the employees were not similarly situated for “other reasons,” the state argued that the state law was not discriminatory because it was directly related to and justified by a lawful and significant difference between the two classes.
The Court disagreed, finding the state’s argument foreclosed by the fact that the state law defined the favored class explicitly by reference to job responsibility. The state singled out for preferential treatment retirement plans associated with West Virginia police, firefighters, and deputy sheriffs. For purposes of Sec. 111, a similarly situated federal retiree would, accordingly, be someone who had similarly job responsibilities to a state police officer, firefighter, or deputy sheriff. Again, adopting the trial court’s finding that there were no significant differences between the federal retiree’s job responsibilities and those of the state law enforcement retirees, the Court confirmed that the state law treats similarly situated persons differently because of the source of their compensation, in violation of Sec. 111.
Federal retirees similarly situated to state retirees who do receive benefits. The Court further rejected the state’s attempt to salvage the law by noting that the federal retiree’s job responsibilities were also similar to those of state law enforcement retirees who do not qualify for the exemption. According to the Court, the relevant inquiry was not whether federal retirees were similarly situated to state retiree who don’t receive a tax benefit, but whether the federal retirees were similarly situated to the state retirees who do receive the benefits. The fact that West Virginia treated federal retirees no worse than some similarly situated state employees, thus, could not save the statute.
Terms of law did reflect intent to counter comparative generosity of federal benefits. Finally, the state argued that the statute may reflect an intention to favor certain state law enforcement retirees in order to compensate them for the fact that their pensions are less generous than those of the federal marshals. Adhering to strict textual analysis, the Court explained that the West Virginia law does not classify persons or groups based on the relative generosity of pension benefits. Federal marshals would be denied the state tax exemption even if their benefits would be identical to those of state retirees. Relying on Davis, the Court rejected the purported state rationalization, stressing that a tax exemption that was intended to account for differences in the amount of retiree benefits would not discriminate on the basis of the source of those benefits. The state could have enacted a law that was by its terms focused on the comparative disparity between federal and state retirement benefits. The fact that the law enacted by the state, by contrast, discriminated against federal retirees solely because of the source of their benefits, rendered it unlawful.
SOURCE: Dawson v. Steager, US Sup Ct, No. 17-419.
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