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Opinion analysis: A win for one taxpayer, but not many more

West Virginia cannot impose its state income tax on federal retirement benefits paid to a retired U.S. marshal while exempting its own pension payments to former state law enforcement officers, the Supreme Court ruled Wednesday in a 9-0 decision. That result is a resounding — if unsurprising — victory for the petitioner, retired U.S. marshal James Dawson, who sought a $4,285 state tax refund from West Virginia for tax years 2010 and 2011. It may matter much less for other former federal workers inside and beyond the Mountain State.

The eight-page opinion by Justice Neil Gorsuch makes the case look like an easy one. As Gorsuch frames it, West Virginia grants a “generous tax exemption” to retired state law enforcement officers but denies “the same benefit” to federal law enforcement retirees. That policy runs up against the intergovernmental tax immunity doctrine — first announced in the landmark 1819 case McCulloch v. Maryland and codified at 4 U.S.C. § 111, which says that state income tax laws cannot “discriminate” against federal officers or employees “because of the source of [their] pay or compensation.” In Gorsuch’s view, West Virginia’s disparate treatment of federal and state law enforcement retirees is a classic case of anti-federal discrimination that the intergovernmental tax immunity doctrine plainly prohibits.

Gorsuch’s opinion emphasizes a state trial court’s finding that there are no “significant differences” between a U.S. marshal’s “powers and duties” and the responsibilities of the state law enforcement officers who can claim the income tax exemption. He quickly makes mincemeat of West Virginia’s various arguments in defense of its tax distinction. It doesn’t matter, according to Gorsuch, that most state retirees who weren’t law enforcement officers (and even some who were) receive the same treatment as Dawson — there is no exception in the intergovernmental tax immunity doctrine for de minimis discrimination. Nor does it matter whether West Virginia’s law was motivated by anti-federal animus: The intergovernmental tax immunity doctrine depends on “treatment rather than intent.” And West Virginia can’t salvage its law by arguing that its tax exemption aims to compensate state employees whose pensions are less generous than those of their federal counterparts. As Gorsuch notes, the state’s statute on its face does not distinguish between larger and smaller pensions, and “an implicit but lawful distinction cannot save an express and unlawful one.”

With that, Gorsuch wraps up his opinion, reverses the West Virginia Supreme Court’s decision, and sends the case back down for further proceedings, “including the determination of an appropriate remedy.” That remedy will presumably include a several-thousand-dollar state tax refund for Dawson. But Dawson may be one of the few to benefit from the holding.

First, the Supreme Court’s holding applies only to federal retirees whose powers and duties were not “significantly different” from the powers and duties of the West Virginia state law enforcement officers who received an exemption. At oral argument, Chief Justice John Roberts asked whether a former U.S. attorney general, if she or he lives in West Virginia, would qualify as an official whose responsibilities were not “significantly different” from state police. That question drew laughter, and it probably doesn’t require a judicial response, as no living former attorney general is a West Virginia resident. But former employees of the FBI, Immigration and Customs Enforcement, the Secret Service and a range of other agencies will present harder line-drawing questions.

Second, West Virginia will have to decide whether to respond to the Supreme Court’s opinion by “leveling up” or “leveling down.” It will presumably have to make payments to some number of federal retirees whose job duties were similar to Dawson’s and whose refund claims fall within the state’s three-year statute of limitations. But rather than granting those retirees an exemption going forward, West Virginia could choose instead to roll back the exemption for retired state law enforcement officers. Or West Virginia could do what some other states have done in response to the Supreme Court’s earlier intergovernmental tax immunity holdings: It could repeal the income tax exemption for state retirees but raise their pension benefits at the same time. That move would leave the state retirees almost as well off as before (albeit possibly with a slightly larger federal tax bill), and it would be a rather hollow victory for the federal retirees who rallied to Dawson’s cause.

Beyond West Virginia, the impact may be more muted. As the solicitor general noted in a certiorari-stage filing in Dawson’s case, “the question presented here has not arisen with great frequency” in recent years. Ever since the court struck down a Michigan law that exempted state employees’ retirement benefits but taxed federal pensions three decades ago, most states have excised the remaining vestiges of discrimination against federal retirees from their tax laws. The few surviving state tax statutes that have been challenged on the ground that they discriminate against federal retirees apply to a vanishingly small number of workers. What Judge Frank Easterbrook once said about the Supreme Court’s civil liberties cases likely applies to Dawson v. Steager as well: The Supreme Court “extirpates … practices that have already disappeared or dwindled among the states. It obliterates outliers.” West Virginia’s distinction between state and federal law enforcement retirees was an outlier. The court on Wednesday obliterated it — and left the state to clean up the mess.

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Past case linked to in this post:

McCulloch v. Maryland, 17 U.S. 316 (1819)

Recommended Citation: Daniel Hemel, Opinion analysis: A win for one taxpayer, but not many more, SCOTUSblog (Feb. 20, 2019, 2:41 PM),