State Taxes May Not Discriminate Against Federal Law Enforcement Officers

Retired federal law enforcement officers are entitled to the same state tax benefits as “similarly situated” retired state law enforcement officers, the U.S. Supreme Court held this week. 

For most of his career, James Dawson worked as a deputy U.S. Marshal. After retiring in West Virginia, Dawson learned the state taxes the benefits of all former federal employees, but does not tax the pension benefits of certain former state law enforcement officers. In other words, West Virginia law penalized Dawson for working as an officer of the federal government and not of the state.

Dawson sued in a West Virginia state court, alleging the state’s tax law violated 4 U.S.C. §111, a federal statute consenting to state taxation of federal employees’ pay or compensation only if “taxation does not discriminate against the officer or employee because of the source of the pay or compensation.” The trial court found it “undisputed” that “there are no significant differences” between Dawson’s powers and duties as a deputy U.S. Marshal and those of the state officials that West Virginia exempted from income tax. The court thus agreed with Dawson that the West Virginia statute violated federal law. But the West Virginia Supreme Court of Appeals “saw it differently.”

The West Virginia high court reversed the trial court, emphasizing that relatively few state employees receive the tax break denied to Dawson, and stressing that the statute’s “intent…was to give a benefit to a narrow class of state retirees,” not to harm federal retirees. Dawson appealed that decision to the U.S. Supreme Court, which granted certiorari.

On behalf of a unanimous bench, Justice Neil Gorsuch wrote, “the state trial court had it right.” The majority held, “[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.”

The Court then addressed and dispensed with West Virginia’s arguments in favor of its law.

First, West Virginia argued the two bases on which the state’s Supreme Court of Appeals upheld the law, that the statute’s favored class of retirees “is very small” and its intent was to help certain state retirees, not to harm federal retires. Unpersuaded, the Court held §111 “disallows any state tax that discriminates against a federal officer or employee – not just those that seem to us especially cumbersome.” Further, the Court held the intent of the West Virginia law is irrelevant, because it fails to treat federal employees “as well as” state employees.

Second, the state argued that its tax law’s disparate treatment of state and federal retirees is not unlawful because it is directly related to and justified by a lawful and “significant difference” between the two classes. The Court disagreed. Because the state statute gives preferential treatment to retired state police, firefighters, and deputy sheriffs based on the “nature of the jobs previously held by the retirees,” a “similarly situated” federal retiree is someone who held similar job responsibilities. As a retired deputy U.S. Marshall, the Court held, Dawson is thus entitled to the West Virginia tax benefit.

Lastly, West Virginia argued the Court should remand the case to explore whether the state statute favors retired state employees because their pensions are less generous than those of their federal law enforcement counterparts. The Court declined, stating the plain language of the statute does not classify persons based on the generosity of their pension benefits. In practical effect, the Court explained, even if Dawson’s pension were identical to a state police pension, the law as written would deny him a tax exemption.

The Court thus held West Virginia’s statute unlawfully discriminates against Dawson, reversed the judgment of the West Virginia Supreme Court of Appeals, and remanded the case for further proceedings not inconsistent with its holding.

Read the full opinion: Dawson v. Steager

This case law update was written by James P. Garay Heelan, Associate Attorney, Shaw Bransford & Roth, PC.

For thirty years, Shaw Bransford & Roth P.C. has provided superior representation on a wide range of federal employment law issues, from representing federal employees nationwide in administrative investigations, disciplinary and performance actions, and Bivens lawsuits, to handling security clearance adjudications and employment discrimination cases.

Posted in Case Law Update


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