Dawson v. Steager

West Virginia engaged in unlawful discrimination in violation of 4 U.S.C. § 111 when it taxed the federal pension benefits of U.S. Marshals Service retirees and exempted from taxation the pension benefits of certain state and local law enforcement officers.

Petitioner worked in the U.S. Marshals Service. After his retirement, he inquired into the tax treatment of his pension, finding that West Virginia does not tax pension benefits of former state law enforcement employees but it does tax benefits of federal employees. Petitioner sued under 4. U.S.C. § 111, under which the United States consents to state taxation of compensation of its employees, but only if the tax “does not discriminate against the employee because of the source of the pay or compensation.” See Section 111(a), codifying the doctrine announced in McCulloch v. Maryland, 4 Wheat. 316 (1819), that the “power to tax involves the power to destroy” by which states could defeat federal policy by taxing the system creating it. In subsequent opinions, the Supreme Court interpreted McCulloch to bar taxation by one sovereign of the employees of another, and over time, invalidated state tax schemes that discriminated in favor of state employees. Here, the Court held that “A State violates § 111 when it treats retired state employees more favorably than retired federal employees and no ‘significant differences between the two classes’ justifies the different treatment.” The court found Petitioner’s responsibilities no different than those of state law enforcement and concluded that West Virginia’s law discriminates “because of the source” of compensation as § 111 forbids. REVERSED and REMANDED.