High Court Nixes Tax Loophole Biased for State Workers

WASHINGTON (CN) - A retired U.S. marshal prevailed at the Supreme Court on Wednesday in alleging that West Virginia discriminates by taxing his pension but not those of certain state workers.

“The problem here is fundamental,” Justice Neil Gorsuch wrote for the unanimous court this morning. “While the state was free to draw whatever classifications it wished, the statute it enacted does not classify persons or groups based on the relative generosity of their pension benefits. Instead, it extends a special tax benefit to retirees who served as West Virginia police officers, firefighters, or deputy sheriffs — and it categorically denies that same benefit to retirees who served in similar federal law enforcement positions.”

West Virginia had played the pension-generosity card, Gorsuch noted, as its final attempt to defend a law that retiree James Dawson had challenged as discriminatory.

Ruling against the state, Gorsuch said remand is not necessary to explore whether differences in compensation support the state’s scheme.

“Even if Mr. Dawson’s pension turned out to be identical to a state law enforcement officer’s pension, the law as written would deny him a tax exemption,” the 8-page ruling states (emphasis in original). “West Virginia’s law thus discriminates ‘because of the source of ... compensation or pay’ in violation of §111. Whether the unlawful classification found in the text of a statute might serve as some sort of proxy for a lawful classification hidden behind it is neither here nor there. No more than a beneficent legislative intent, an implicit but lawful distinction cannot save an express and unlawful one.”

Gorsuch emphasized that today’s ruling against West Virginia follows in the tradition of three cases where state tax schemes were found to be discriminatory: Davis v. Michigan Department of Treasury (1989), Barker v. Kansas (1992) and Phillips Chemical Co. v. Dumas Independent School District (1960). 

“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 Davis, Barker, or Phillips, and it can’t be enough here. Under §111 what matters isn’t the intent lurking behind the law but whether the letter of the law ‘treats those who deal with’ the federal government ‘as well as it treats those with whom [the state] deals itself.’”

Before taking his case to Washington, Dawson initially prevailed at the trial court, but the West Virginia Supreme Court of Appeals reversed based on the narrowness of the class of retirees that the state scheme benefits.

Gorsuch concluded Wednesday, however, that the trial court had it right.

“The narrowness of a discriminatory state tax law has never been enough to render it necessarily lawful,” the ruling states.

West Virginia Attorney General Patrick Morrisey took the ruling in stride.

“While we are disappointed with the court’s ruling we respect the decision and will work to comply," Morrisey said in a statement this afternoon.

Dawson’s attorney, Lawrence David Rosenberg at Jones Day, has not returned an email seeking comment.

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