News and Insights

Supreme Court Rules West Virginia Tax Bias Discriminatory

Tax Development Feb 28, 2019

The United States Supreme Court ruled in Dawson v. Steager1 that West Virginia unlawfully treats retired state employees more favorably than retired federal employees by exempting some state pension benefits and not federal pension benefits.

James Dawson was a retired U.S. Marshals Service law enforcement employee who found that his home state of West Virginia subjected his federal pension benefits to income tax, while exempting similar state pension benefits. A West Virginia trial court found no differences between Dawson’s job duties as a federal marshal and those of state and local law enforcement officers exempted from state taxation. The lower court held that the statute violates the intergovernmental tax immunity doctrine as codified in 4 U.S.C. § 111. The West Virginia Supreme Court of Appeals, however, reversed this decision, emphasizing that the state tax exemption only applies to a narrow class of state retirees and was never intended to discriminate against former federal marshals. What the state was trying to do was to provide a benefit to the lower pension plan of the state employee by not taxing them on their pensions. 

In overturning the Court of Appeals decision, the U.S. Supreme Court unanimously agreed with Dawson that the state statute discriminated against him in violation of § 111. The Court had previously held2 that a state violates the intergovernmental tax immunity doctrine when it treats retired state employees more favorably than retired federal employees, and there are no significant differences between the two classes to justify different treatment. The Supreme Court noted that a discriminatory tax, no matter how limited, is prohibited. The decision also noted that the intent of the law to benefit a certain class, and not harm another similarly situated class is irrelevant in determining discrimination. If the state had intended to “draw a distinction based on the generosity of pension benefits, it [should] enact a law that actually does that.”

The Supreme Court of Appeals decision was reversed, and the case was remanded to determine appropriate remedy. 

While this holding was specific to discrimination against federal employees, that analysis used by the Court could be used in future cases to challenge the constitutionality of many targeted benefits. This case could be relevant to strike down targeted credits provided to a specific company. This reasoning may be useful to strike down other benefits in all areas of state taxation that have the result of trying to provide a benefit to one class of taxpayer that inadvertently results in higher taxation of a similarly situated party.

1 No. 17-419 (U.S. February 20, 2019).
2 Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989).


Mark Nachbar

Mary Bernard