In 1939, Congress enacted the Public Salary Tax Act, which allows state and local governments to tax federal employees as long as the tax does not discriminate against an employee “because of the source of the pay or compensation.” When the Supreme Court returns from its summer recess, one of the cases on its merits docket may be Dawson v. Steager, a dispute about the interpretation of this law.
The case arose when James Dawson retired from the U.S. Marshals Service in 2008 and began receiving retirement benefits from the Federal Employee Retirement System. Under West Virginia law, the first $2000 of Dawson’s retirement income was exempt from state taxes, but Dawson and his wife argued that all of his retirement income should be exempt because he would not have to pay state taxes if he had retired from a state law enforcement job. A state tax commissioner rejected that argument, as did the office that hears appeals from the commissioner’s rulings. But a state court ruled for Dawson, holding that the state’s tax laws treats different kinds of retirement income differently, depending on the source – which is “precisely the kind of favoritism” that federal law and a doctrine known as intergovernmental tax immunity prohibit.
The West Virginia Supreme Court of Appeals reversed. It reasoned that the law exempting the retirement income of state law enforcement officers from taxation only applied to some officers, and was “not intended to discriminate against federal marshals.” Dawson took his case to the U.S. Supreme Court, which asked the government to weigh in earlier this year.
In its brief, the government recommended that review be granted. It told the justices that the West Virginia court had applied the wrong standard: It should not have looked at whether state law treats Dawson differently from most employees, but instead should have considered whether the disparate treatment of federal and state law enforcement officers “is directly related to, and justified by, significant differences between” the two. The government acknowledged that issues relating to intergovernmental tax immunity “have not arisen with great frequency,” but it nonetheless concluded that “this issue has sufficient legal and practical importance to warrant the Court’s review.”
The case has been distributed to the justices for consideration at their June 14 conference. The justices could act on the petition as soon as Monday, June 18, although an announcement that they have granted review would be more likely (because of the court’s recent practice of generally only granting review after considering a petition at two or more conferences) to come on Monday, June 25.
