Dawson v. Steager

THE MEANING AND PURPOSE OF § 111

Dawson states that § 111(a) prohibits a state from imposing a tax that discriminates against federal employees “because of the source of pay.” Dawson argues that the Court in Davis v. Michigan Department of Treasury adopted a bright-line rule to determine whether a state violates § 111. Under this bright-line rule, according to Dawson, a state violates § 111 when it imposes a higher tax burden on the income of federal employees than the income of state employees, and “significant differences” between the federal and state employees do not support discriminatory tax treatment. Dawson further maintains that the Davis Court rejected a totality-of-the-circumstances test that would consider the number of state employees receiving favorable tax treatment in determining whether a state tax scheme that taxes federal employees more than state employees is discriminatory.

In contrast, Steager argues that the doctrine of intergovernmental tax immunity aims to prevent the taxing authority of one sovereign from interfering with the governmental functions of another. Steager thus emphasizes that § 111 forbids only state tax distinctions between federal and state employees that discriminate against federal employees “because of the source of the pay or compensation.” Steager agrees with Dawson that a state tax provision violates § 111 if the provision discriminates against federal employees, and there are no significant differences between federal and state employees to justify the discrimination, but asserts that the statute prohibits only those distinctions based on “the name at the bottom of a public retiree’s benefits check.”

THE APPLICATION OF THE DAVIS TEST

According to Dawson, the Supreme Court has always applied the bright-line test articulated in Davis rather than a totality-of-the-circumstances test. Dawson states that if a state tax provision fails the Davis test, then the provision discriminates against federal employees in violation of § 111. In applying the bright-line Davis test, Dawson argues that § 12(c)(6) discriminates against federal employees in violation of § 111. First, Dawson contends that West Virginia taxes him and other federal law-enforcement retirees higher than state law-enforcement retirees, as § 12(c)(6) allows most state law-enforcement retirees to exempt all their retirement benefits from tax, but only allows federal law-enforcement retirees like him to exempt the first $2,000 retirement benefits they receive. Second, Dawson posits that there are no “significant differences” between federal and state law-enforcement retirees to justify the higher tax burden placed on federal retirees. Specifically, Dawson notes that the duties of a U.S. Marshal are no different than the duties of State and local law-enforcement officers. Thus, after applying the Davis test, Dawson asserts that § 12(c)(6) violates § 111 because to receive the full tax exemption under West Virginia law, a retiree must receive retirement benefits from a state retirement plan, not from the federal government.

Steager argues that West Virginia’s Supreme Court of Appeals’ totality-of-the-circumstances test conforms with Davis because Davis involved a state tax provision that undisputedly discriminated against federal retirees in favor of state retirees, and did not hold that a state tax provision is discriminatory whenever “any state retirees [are] treated better than federal retirees.” Applying either approach to the Davis test, Steager contends that § 12(c)(6) does not discriminate against federal employees. First, according to Steager, § 12(c)(6) does not interfere with the functions of the federal government because the tax exemption applies only to 2 percent of state employees. As such, Steager maintains that a tax regime violates intergovernmental tax immunity when the regime discriminates against a large number of federal employees so as to interfere with federal governmental functions, which is not the case here due to the small number of state employees eligible for the full exemption. Second, Steager asserts that the political process provides adequate oversight to prevent discrimination. Specifically, Steager contends that West Virginia treats federal retirees the same as all but 2 percent of state retirees eligible for the § 12(c)(6) exemption, meaning the interests of all private sector retirees, all federal retirees, and over 98 percent of state retirees are aligned. Also, Steager notes that West Virginia implemented several policies that exclusively benefit federal retirees such as exemptions for federal military retirement income. . Finally, Steager suggests that an expansive view of § 111 would break from historical precedent. For the second step of the Davis test, Steager posits that there are significant differences between state and federal retirees to justify this disparate treatment based on state retirees contributing more into the state retirement plan than federal retirees contribute into the federal retirement plan. .

THE SCOPE OF THE DAVIS TEST

Dawson contends that the state court erroneously upheld § 12(c)(6) on grounds that the Davis Court rejected and instead relied upon state precedent, Brown v. Mierke. First, Dawson maintains that, in following Brown, the state court incorrectly held that Davis applies only when a state provides favorable tax treatment to all—not just some—state retirees. Second, Dawson argues that the state court erroneously determined that a state violates § 111 when the state intends to discriminate against federal retirees or provide benefits only available to state retirees. Here, Dawson asserts that state intent is irrelevant because the state could simply avoid liability by providing some benefit to a small number of state retirees without actively discriminating against federal retirees. Lastly, Dawson posits that the state court’s focus on the fact that West Virginia treated federal employees better than private-sector employees is misplaced because, according to Dawson, a state’s treatment of private-sector employees is irrelevant in determining whether a provision violates § 111. Dawson points out that the Davis court established that courts should not consider private sector employees in the § 111 analysis because the relevant inquiry focuses on whether a state imposes discriminatory tax treatment against federal retirees—not private-sector employees—and private-sector employees do not receive retirement benefits from state or federal plans. In this regard, the Davis test, Dawson asserts, provides a clear bright-line rule in comparison to the state court’s totality-of-the-circumstances test that involves whether there is intent to discriminate against federal retirees. As such, Dawson plainly states that the state court framework is unworkable, and that the correct standard is the Davis bright-line test.

In contrast, Steager argues that to prove § 12(c)(6) violates § 111 under the Davis test, Dawson must demonstrate that West Virginia’s tax regime treated him differently than “similarly situated” state retirees. Section 12(c)(6), Steager contends, applies to a narrow set of state employees, which Dawson does not fall within. Moreover, Steager asserts that a tax scheme that treats “similarly situated” federal and state employees the same is not discriminatory under § 111. Steager notes that satisfying a “similarly situated” test is difficult. First, Steager posits that unless a challenged statute defines a class arbitrarily or in a way that is “invidiously discriminatory,” in identifying similarly situated taxpayers, the court should focus on the classification stated in the statute itself. Second, according to Steager, the fact that federal employees may never qualify to receive a state tax exemption does not change this rule. As long as the statutory provision is facially neutral, the statutory provision does not discriminate even when it places a heavier burden on federal employees, contends Steager. Third, Steager states that to show § 12(c)(6) is unlawfully discriminatory, Dawson must show that West Virginia treated him differently than the most similar state employees. Accordingly, Steager asserts that Dawson was treated the same as similarly situated state retirees, and thus § 12(c)(6) does not discriminate against federal retirees. Steager points out that Dawson did not receive any retirement benefits from one of the exempt State-managed plans and was therefore similarly situated to many other state retirees, who did not receive retirement benefits from the exempt plans. Also, Steager disagrees with Dawson’s assertion that job duties are relevant to the § 111 analysis. According to Steager, job description is not a factor to determine whether state and federal employees are similarly situated because § 12(c)(6) does not focus on retirees’ former job duties, but the type of plan in which they are enrolled.