West Virginia exempts income that police officers and sheriffs receive from state pension plans from personal income tax. It does not provide the same exemption to pension income received by federal law enforcement retirees who live in the state. The U.S. Supreme Court found that the exemption unlawfully discriminates against federal law enforcement employees.
U.S. Marshal Challenges Pension Exemption
The taxpayer spent most of his career as a U.S. Marshal. He served in West Virginia before his retirement. After his retirement, he received retirement benefits from the Federal Employee Retirement System. He claimed an exemption for this retirement income for the tax years in question. West Virginia denied the exemption.
He then challenged the West Virginia exemption claiming it violated the intergovernmental tax immunity doctrine under 4 U.S.C. §111. The statute allows state taxation of compensation paid to federal employees. It also prohibits discrimination against federal employees in the taxation of that income.
A West Virginia trial court agreed with the taxpayer. The West Virginia Supreme Court reversed. It concluded that West Virginia:
– applies the exemption only to a narrow class of state retirees; and
– never intended the exemption to discriminate against former federal marshals.
Unanimous Supreme Court Reverses
Justice Gorsuch delivered the opinion for a unanimous Court. It agreed with the trial court’s finding. West Virginia expressly affords state law enforcement retirees a tax benefit that federal retirees cannot receive. So, the pension exemption discriminates against federal retirees The Court rejected West Virginia’s argument about the narrow preference of the exemption.
The Court admitted the breadth or narrowness of a state tax exemption is not irrelevant. Under §111, the scope of a state’s tax exemption may affect the scope of its resulting duties. A state that exempts only a narrow subset of state retirees can comply with §111 by exempting the comparable class of federal retirees. But the narrowness or intent of a discriminatory state tax law has never been enough to render it lawful.
The Court reversed the West Virginia Supreme Court of Appeals and remanded the case for further proceedings.
Dawson v. Steager, U.S. Supreme Court, Dkt. 17-419, February 20, 2019, ¶401-370