Supreme Court Reaffirms States Cannot Discriminate Against Federal Retirees

The Supreme Court on Wednesday issued a ruling with potentially far-reaching impacts for former federal employees, finding they should not face disparate tax treatment compared to their state counterparts.

In an unanimous decision, the court said it had “little difficulty” ruling in favor of a U.S. Marshals Service retiree who sued the state of West Virginia for violating the 1939 Public Salary Tax Act. West Virginia violated the law and the related intergovernmental tax immunity precedent, the court ruled in Dawson v. Steager, in making the annuities of certain state law enforcement officers tax free but not granting the same benefit to James Dawson, the Marshals retiree.

The state law “unlawfully discriminates against Mr. Dawson,” the court said in an opinion authored by Associate Justice Neil Gorsuch. There is no discernable difference between the job performed by Dawson and the state employees enjoying the tax benefit, Gorsuch wrote. The court also found West Virginia’s argument that it was only trying to help state law enforcement retirees and not harm federal retirees to be immaterial.

“We can safely assume that discriminatory laws like West Virginia’s are almost always enacted with the purpose of benefiting state employees rather than harming their federal counterparts,” Gorsuch wrote. “Yet that wasn’t enough to save the state statutes in [previous cases] and it can’t be enough here.”

Dawson won an initial suit in a West Virginia state court, but the state’s Supreme Court of Appeals reversed the decision. The state did not intend to place federal employees at a disadvantage and the scope of people benefiting from the state's tax laws is narrow, the appeals court said.

The federal Supreme Court rejected that argument, finding that the scope of beneficiaries had no bearing on the applicability of the law. The relevant tax law banning discrimination against federal employees “codifies a legal doctrine almost as old as the nation,” Gorsuch said.

Prior to the decision, observers said the case could have opened the floodgates to states treating federal retirees disparately if the court ruled against Dawson.

“The Supreme Court’s ruling in Dawson v. Steager will determine whether federal retirees throughout the country will be subject to a different set of state tax rules than their state government counterparts,” Richard Thissen, then president of the National Active and Retired Federal Employees Association, said last year. He added that state governments cannot be given free rein to start carving out federal workers from tax exemptions because if they are, “More and more states will follow the lead of West Virginia, and one exemption after another will be granted to differing classes of state government retirees.”

The precedent that federal retirees and their spouses be treated the same as state government retirees, Thissen added, would “face a death by a thousand cuts.”

John Hatton, NARFE's deputy legislative director, said his organization was pleased with the decision, but not surprised by it. The new precedent will ensure tax laws are applied equitably to state and federal employees and retirees, he explained, even in cases with narrow applications. 

"It should stop states from trying to carve out one exemption after another," Hatton said, adding such an outcome would lead to states "shifting the tax burden to federal employees and retirees." 

The case was also noteworthy because the Justice Department, then under the leadership of Attorney General Jeff Sessions, filed an amicus curiae, or friend of the court brief, in support of Dawson. Federal law, members of the solicitor general’s office and other department attorneys wrote, prohibited West Virginia from providing tax exemptions for its own employees without also extending them to federal workers.

“The United States has a substantial interest in ensuring that its employees and retirees receive equitable tax treatment from the states,” the Justice officials wrote. A state violates the requirement that it enforce tax laws without discrimination “when it imposes more burdensome taxation on those who deal with the federal government (including federal retirees), because of their federal status, than on similarly situated persons who deal with the state.”

The Trump administration’s filing was a rare display of support on behalf of federal retirees, as the White House has repeatedly put forward proposals to slash their benefits. The administration has said it will push to do away with federal employees’ pensions altogether.