Federal Retiree Sues Virginia for Tax Discrimination

A federal retiree is suing the commonwealth of Virginia, claiming the Old Dominion is unfairly taxing residents who receive government pensions under the old Civil Service Retirement System.

Former NASA employee Karl Beisel has filed a lawsuit against the commonwealth’s Department of Taxation, alleging that Virginia’s tax exemption for the Social Security portion of certain pensions is discriminatory, violating the equal protection clause of the 14^th Amendment and Title 4, Section 111 of the U.S. Code. Retirees under the Federal Employees Retirement System and the Virginia Retirement System (the system for commonwealth employees) receive an exemption because Social Security is a component of their overall retirement plans; there is no comparable exemption for CSRS retirees like Beisel because CSRS predates the 1935 Social Security Act. CSRS covers employees hired before 1984 when FERS was created, at which time feds starting contributing to Social Security. CSRS was closed to new enrollees when FERS was implemented in the early 1980s.

Those employees enrolled in CSRS do not pay Social Security taxes, and so do not receive Social Security when they retire under that system. “Under CSRS, an employee with 30 years of service will have earned an annuity equal to 56.25 percent of the average of his or her highest three consecutive years of pay,” stated a March 2014 report from the Congressional Research Service. “With 30 years of service, an employee enrolled in FERS will have earned a pension equal to 30 percent of the average of his or her highest three consecutive years of pay, or 33 percent, if the individual is 62 or older at retirement.”

Beisel claims that because of the difference in how Virginia taxes pensions, CSRS retirees end up paying more in annual state taxes than FERS or VRS retirees. For example, a CSRS retiree living in Virginia receiving an annual retirement income of $42,000 pays $690 more in taxes than does a FERS or VRS employee with the same retirement income because of the tax exemption, according to Beisel’s calculations on his website.

Beisel, who moved back to Virginia recently after living in Texas, which does not have an individual state income tax, is seeking a state income tax refund from Virginia for 2013 “comparable to values that would have resulted if he had made payments” into Social Security -- that amounts to $1,161.62 -- as well as a comparable tax exemption going forward to be determined. He is also seeking refunds for 2011, 2012 and 2013 for “similarly-situated Virginia taxpayers.” There are approximately 80,000 CSRS retirees subject to Virginia income tax, according to the official complaint. Beisel estimates that amounts to $2,700 per retiree on average for the past three tax years, and could total approximately $1 billion when factoring in future years.

The complaint cites the Supreme Court cases Harper v. Va. Department of Taxation (1993) and Davis v. Michigan Department of the Treasury (1989) in its argument. Both of those cases sided with the plaintiff, concluding that taxing federal pensions as income while exempting state annuitants from a similar tax violated Title 4. Beisel cited F.S. Royster Guano Co. v. Virginia (1920), which involved tax exemptions for some corporations’ profits and not others in his argument that Virginia’s tax exemption system regarding CSRS, FERS and VRS violated the 14^th Amendment.

Neil McPhie, partner and director of legal services at Tully Rinckey, a federal sector labor and employment law firm in Washington, said he thinks the case will be dismissed early because the plaintiff “has not shown, for Constitutional purposes, that being a recipient of CSRS benefits places him in a suspect classification for judicial review of an Equal Protection Claim.” To be considered a suspect class (in this case, CSRS retirees), the group has to meet criteria suggesting they are likely the subject of discrimination. If the plaintiff can’t show that CSRS retirees as a class have been discriminated against, McPhie said, “then the state only has to show that there is a rational relationship between the tax and a ‘legitimate’ governmental reason offered as its justification. The fact that CSRS recipients did not pay into Social Security, nor reap the rewards of such payment, is likely to play a role in the state’s reasoning for the taxation of these benefits.”

McPhie is not involved with the case, and commented as an outside observer. Richmond, Virginia law firm Carrell Blanton Ferris is representing Beisel.

The Virginia Taxation Department declined to comment on the case.

(Image via Niyazz/Shutterstock.com)