Dawson v. Steager

Tax Law

A former federal marshal says he should get the same tax benefits West Virginia gives to its retired police officers and firefighters.

James Dawson, a retired federal marshal, thinks he's being unfairly taxed. West Virginia exempts the retirement income of some of its law enforcement officers (specifically, firefighters, sheriffs, and state and local police officers). But Dawson doesn't qualify for this tax benefit.

Dawson vs Steager

Dawson argues that West Virginia can't give its state officers special benefits unless it treats federal officers at least as well. So he sued Steager, the West Virginia tax commissioner.


Dawson's argument is based on an ancient Supreme Court rule, the doctrine of intergovernmental tax immunity. The Court announced the rule in 1819, in one of the most famous cases in its history: McCulloch v. Maryland. In McCulloch, it held the state of Maryland could not tax the federal Bank of the United States.

The Court's reasoning in McCulloch relied on foundational structural features of our system of government.  Under the separation of powers principle, state and federal government generally have separate and distinct areas of control. And under the federal supremacy principle, if state and federal laws clash, federal law wins.

Allowing Maryland to tax the federal bank would violate these principles, the Court said, because it would allow Maryland (or any other state) to starve the federal government of the money it needed to run itself. Therefore, the Court ruled that a state can't tax the federal government unless Congress agrees to it Later, Congress put this rule in statutory law at 4 U.S.C. § 111, so in this case both the constitutional and statutory laws apply.

Applying the rule: Wages of federal employees

After McCulloch, the Court dealt with variations of the same issue. It later held that states couldn't tax the wages that the federal government paid to its employees — until 1939, when Congress consented to states taxing federal employee income. The statute, 4 U.S.C. § 111 (still law today), allows states to tax federal employee wages, but only if the tax "does not discriminate against the officer or employee because of the source of the pay or compensation." In other words, a state can tax federal employee wages only if they treat federal employees at least as well as they treat state employees.

Later cases: State tax benefits for subgroups of state employees

But 4 U.S.C. § 111 didn't settle the issue completely, and the question of whether states tax federal employees fairly has come up repeatedly. For example, in the 1989 case Davis v. Michigan, the Court held it violated the doctrine for Michigan to exempt the retirement income of state employees while taxing the retirement income of federal employees.

The question is more complicated when states give tax benefits to subgroups of employees. In Jefferson County v. Acker, federal judges argued Alabama had taxed them unfairly. Alabama's law exempted judges from its license tax but only if they had a specific type of license under a different Alabama law. Federal judges had no need to get that other license, so they never would qualify for the tax exemption. Effectively, the judges said, Alabama had created a state-judge-only tax exemption.

But the Court wasn't willing to go that far. It said the test for deciding whether federal employees were being unfairly taxed was whether they were "similarly situated" with the group of state employees getting the tax benefit. In Acker, not all Alabama judges got the tax exemption, so the Court held it constitutional. The Court viewed Alabama's tax exemption as a way of mitigating its duplicative licensing scheme instead of a way of singling out federal judges.

Applying the doctrine to Dawson's case

In Dawson, the Court will resolve the issue of whether a state can give a tax benefit to a subgroup of state employees without giving the same benefit to similarly situated federal employees. The West Virginia trial court already determined Dawson was "similarly situated" to the West Virginia officers, and its Supreme Court of Appeals didn't disturb that finding, so that issue is not before the federal Supreme Court.

Dawson already gets some West Virginia tax benefits — an exemption for $2,000 of retirement income — because he's a government employee. West Virginia gives this benefit to all government retirees, state or federal. But Dawson wants all his retirement income to be exempt.

The rulings below

West Virginia's highest court, the Supreme Court of Appeals, ruled against Dawson. It said West Virginia wasn't discriminating against federal employees. It pointed out that, because Dawson gets to exempt $2,000 of retirement income, West Virginia treats him the same as the overwhelming majority (98%) of its state employees. Only a small group with a specific type of retirement plan qualify to exempt all their retirement income. And some West Virginia officers — like its capitol police and conservation officers — don't receive the benefit.

The federal government's view

The United States, through the Solicitor General's office, sided with Dawson.  It filed a brief arguing that the West Virginia courts should have considered whether there are significant differences between federal marshals' job duties and those of West Virginia's tax-exempt officers.

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