Dawson v. Steager, ___ U.S. ___, No. 17-419 (20 February 2019)

In McCulloch v. Maryland, 4 Wheat. 316 (1819), the Supreme Court invoked the Constitution’s Supremacy Clause to invalidate Maryland’s attempt to tax the Bank of the United States.  Chief Justice Marshall wrote: “the power to tax is the power to destroy,” and if States could tax the Bank they could defeat the federal legislative policy establishing the Bank.  For several decades, the Court interpreted McCulloch “to bar taxation by one sovereign of the employees of another.”  Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 810 (1989).

Over the years, though, the Court moderated its stance and upheld neutral State income taxes – taxes that treated federal and state employees evenly.  See Helvering v. Gerhardt, 304 U.S. 405 (1938); Graves v. New York ex rel. O’Keefe, 306 U.S. 466 (1939).  The intergovernmental tax immunity doctrine came to be understood to bar only discriminatory taxes.  It was this understanding that Congress “consciously . . . drew upon” when enacting 4 U.S.C, § 111 in 1939. Davis, 489 U.S. at 813.  Section 111 provides in pertinent part:

The United States consents to the taxation of pay or compensation [of] an officer or employee of the United States . . . by a duly constituted taxing authority having jurisdiction, if the taxation does not discriminate against the officer or employee because of the source of the pay or compensation.

Since the statute’s enactment, the Court has upheld an Alabama income tax that did not discriminate on the basis of the source of the employee’s compensation. Jefferson County v. Acker, 527 U.S. 423 (1999).  But the Court invalidated a Michigan tax that discriminated in favor of retired state employees and against retired federal employees. Davis, 489 U.S. at 814.  The Court struck down a Kansas law that taxed retirement benefits of federal military personnel at a higher rate than state and local government retirement benefits.  Barker v. Kansas, 503 U.S, 594, 599 (1992).  The Court also rejected a Texas law that imposed a property tax on a private company operating on land leased from the federal government, but imposed a less burdensome tax on property leased from the State. Phillips Chemical Co. v. Dumas Independent School Dist., 361 U.S. 376, 378, 380 (1960).

The petitioner, James Dawson, worked for the U.S. Marshals Service, a federal law enforcement agency.  He is retired and he receives federal retirement benefits.  West Virginia taxes the retirement benefits of all former federal employees, including Mr. Dawson’s retirement benefits; but West Virginia does not tax the pensions of former state law enforcement employees.  Mr. Dawson sued alleging that West Virginia violated 4 U.S.C. § 111 by imposing a discriminatory tax on his federal retirement benefits.

The Supreme Court held that a State violates §111 when it treats retired state employees more favorably than retired federal employees and “no significant differences between the two classes” justify the differential treatment. Davis, 489 U.S. at 814-816 (1989).  Here West Virginia expressly affords state law enforcement retirees a tax benefit that similar federal retirees cannot receive.  West Virginia did not dispute that there were no significant differences between Mr. Dawson’s job responsibilities and those of the tax-exempt state law enforcement retirees.

West Virginia threw up a medley of arguments in support of its tax: 1) the tax should be allowed because it affects so few people it could not interfere with the operations of the federal government; 2) the tax should be upheld because it was not intended to harm federal retirees but only to help state retirees; 3) the State treats federal employees no worse than some similarly situated state employees; and 4) the State favors state law enforcement retirees only because their pensions are less generous than those of their federal counterparts.  The Court rejected all of these arguments.  None of the arguments surmounts the meaning of the plain words of §111.

The Court held that West Virginia’s tax statute unlawfully discriminates against federal law enforcement retirees, such as Mr. Dawson.

John Polk is a Special Counsel at Berenzweig Leonard, LLP. John can be reached at [email protected].