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West Virginia income tax exemption for state law enforcement retirees unlawfully discriminated against retired federal marshal

By Ronald Miller, J.D.

A West Virginia statute that provided a tax exemption for state law enforcement officers when they retired, but did not apply to federal law enforcement personnel, unlawfully discriminated against a retired U.S. marshal.

A state violates the intergovernmental tax immunity doctrine when it treats retired state employees more favorably than retired federal employees and there is no “significant differences between the two classes” to justify the differential treatment, ruled a unanimous U.S. Supreme Court. In this case, the pension benefits of certain former state and local law enforcement employees were exempt from state taxation under West Virginia law, but the benefits of former federal employees were not exempt from taxation. A retired member of the U.S. Marshals Service alleged that the state statute violated the intergovernmental tax immunity doctrine as codified at 4 U.S.C. §111. The High Court agreed, finding that §111 prohibits treating retired state employees more favorably than retired federal employees where there is no “significant differences between the two classes” to justify the differential treatment (Dawson v. Steager, February 20, 2019, Gorsuch, N.).

Intergovernmental tax immunity doctrine. Under 4 U.S.C. §111, the United States consents to state taxation of the pay or compensation of federal employees, but only if the state tax does not discriminate on the basis of the source of the pay or compensation. The intergovernmental tax immunity doctrine has come to be understood to bar only discriminatory taxes. The state of West Virginia does not tax the pension benefits of certain former state law enforcement employees, but it does tax the benefits of all former federal employees. A retired U.S. marshal brought suit alleging that the state violated §111.

A West Virginia trial court found that “there are no significant differences between [the federal employee’s] powers and duties as a U.S. Marshal and the powers and duties of the state and local law enforcement officers” that West Virginia exempts from income tax. However, the West Virginia Supreme Court reversed the judgment, emphasizing that relatively few state employees receive the tax break denied the federal marshal. It also stressed that the state law was intended to give a benefit to a narrow class of state retirees, not to harm federal retirees.

Differential treatment. The U.S. Supreme Court concluded that the West Virginia trial court had it right. A state violates §111 when it treats retired state employees more favorably than retired federal employees and there is no “significant differences between the two classes” to justify the differential treatment. Here, West Virginia expressly affords state law enforcement retirees a tax benefit that federal employees cannot receive. Moreover, there weren’t any “significant differences” between the federal marshal’s former job responsibilities and those of the tax-exempt state law enforcement retirees. Thus, the Court had little difficulty finding that West Virginia’s law unlawfully “discriminate[s]” against the federal marshal “because of the source of [his] pay or compensation,” just as §111 forbids.

Limited reach irrelevant. The High Court was unpersuaded by the state’s contention that even if its statute favored some state law enforcement retirees, the favored class was very small. Section 111 disallows any state tax that discriminates against a federal officer or employee, and the Court declined to create a new and judicially manufactured qualification to §111 that cannot be found in its text.

Intent is irrelevant. The Court also rejected the state’s argument that it should uphold the statute because it was not intended to harm federal employees, only to help certain state retirees. Under the terms of §111, the “State’s interest in adopting the discriminatory tax, no matter how substantial, is simply irrelevant.” What matters under §111 isn’t the intent lurking behind the law but whether the letter of the law “treat[s] those who deal with” the federal government “as well as it treats those with whom [the State] deals itself.”

Similarly situated. The state persisted, arguing that even if retired U.S. marshals and tax-exempt state law enforcement retirees had similar job responsibilities, they weren’t “similarly situated” for other reasons. Thus, West Virginia contended, the difference in treatment its law commanded doesn’t qualify as unlawful discrimination because it is “directly related to, and justified by,” a lawful and “significant difference” between the two classes. This argument also failed.

The state statute singles out for preferential treatment retirement plans associated with West Virginia police, firefighters, and deputy sheriffs. The distinguishing characteristic of these plans is the nature of the jobs previously held by retirees who may participate in them. Thus, a similarly situated federal retiree is someone who had similar job responsibilities to a state police officer, firefighter, or deputy sheriff. The state trial court had correctly focused on this point of comparison and found no “significant differences” between the former federal employee’s duties as a U.S. marshal and those of state law enforcement retirees who benefited from the exemption.

Nature of inquiry. The Court next rejected West Virginia’s contention that the federal retiree’s former job responsibilities were also similar to those of other state law enforcement retirees who don’t qualify for the exemption. Here, the Court found that the state again misunderstood the nature of the inquiry under §111. The relevant question isn’t whether federal retirees are similarly situated to state retirees who don’t receive a tax benefit; but whether they are similarly situated to those who do. Because the state statute unlawfully discriminated against the retired U.S. Marshal, the U.S. Supreme Court reversed the judgment of the West Virginia Supreme Court.