Argument analysis: What would John Marshall do?

“[I]n McCulloch vs. Maryland, the court said that in general we don’t want to be micromanaging all the details of state taxation,” attorney Lawrence Rosenberg told the justices at the end of Monday’s oral argument in Dawson v. Steager. That’s not the way that McCulloch is usually remembered—far more famous is Chief Justice John Marshall’s statement in the 1819 case equating “the power to tax” with “the power to destroy.” But in any event, it was apparent by the end of the argument that the current court does not want to be micromanaging state tax regimes.

The argument also made clear, however, that an easily administrable rule for cases like Dawson won’t be so easy to find. The approach suggested by the U.S. solicitor general—who urged the justices to vacate the West Virginia state supreme court’s decision and send the case back down for further proceedings—seemed to attract the most support from the bench. But as Michael Huston, an assistant to the solicitor general, acknowledged, that approach still would leave lower courts with “difficult questions.” Further splits are almost inevitable, and so the justices may soon find themselves immersed yet again in the details of state taxation.

At first glance, Dawson looks like a straightforward case. Petitioner James Dawson, a retired U.S. marshal, wants West Virginia to exempt his federal retirement benefits from state income tax. Dawson points to the fact that West Virginia already exempts benefits paid to retired state and local law-enforcement officials who participate in particular pension plans. West Virginia emphasizes the fact that Dawson and other federal retirees receive the same tax treatment as the 98 percent of former state and local government workers who do not participate in one of the favored plans. Lurking in the background is the intergovernmental-tax-immunity doctrine—created in McCulloch and codified at 4 U.S.C. § 111—which bars states from discriminating against federal officers or employees through their tax laws.

Rosenberg, representing Dawson, led off with an attractively simple summary of the issues at play. West Virginia’s tax regime violates federal law, Rosenberg said, because it “facially discriminates” against retired U.S. marshals and in favor of retired state law-enforcement officials with the same job duties. Justice Sonia Sotomayor quickly pushed back, noting that although some retired state law enforcement officials are eligible for the exemption that Dawson seeks, others are not. Rosenberg responded that “there would still be discrimination” if any retired state law enforcement officials with the same job duties as U.S. marshals enjoyed exemption, but several justices seemed skeptical. As Justice Elena Kagan put it, “an antidiscrimination provision doesn’t necessarily require a most favored nation clause.”

Justice Ruth Bader Ginsburg then asked Rosenberg whether a U.S. marshal is more similar to the West Virginia state and local law enforcement officials whose pensions are exempt or to the officials whose pensions are taxed. Rosenberg responded that Dawson is “plainly most like a deputy sheriff”—a position that is eligible for the pension exemption—but Chief Justice John Roberts was not convinced. The role of a U.S. marshal—a presidentially appointed, Senate-confirmed official who oversees the marshals service for an entire federal judicial district—is “more policy, administrative,” said Roberts. Rosenberg responded that Dawson’s “basic duties as a law enforcement officer didn’t change” once he became the U.S. marshal for all of West Virginia, but Roberts was unmoved. “I mean, would you say that the attorney general would qualify [for a state tax exemption] in this situation?” the chief justice asked rhetorically. “He has law enforcement duties.”

Roberts asked the same question when Huston rose to represent the United States: “[A]re the benefits that, say …  your boss, the Attorney General receives, exempt?” The chief justice added that Huston, his former law clerk, should “[t]hink carefully before answering”—a line that drew laughter but did not draw a yes-or-no answer from Huston.

Huston instead urged the justices to apply a two-step approach. First, he said, the court should hold that “this West Virginia tax exemption here is facially discriminatory” and therefore in violation of the intergovernmental-tax-immunity doctrine and 4 U.S.C. § 111. “A tax is facially discriminatory,” said Huston, “when it’s not open to any federal employees ever, regardless of what job duties they perform or what their benefit level is or what their contribution rate is.”

“If that’s the problem,” asked Kagan, “why were you suggesting that we remand this?”

Huston had a reply at the ready. “[E]ven when a tax is facially discriminatory,” he told Kagan, “there is going to be a second question, which is, is this particular employee actually suffering discrimination?” He added that if West Virginia granted an exemption to retired state law enforcement officers, then a hypothetical “federally employed teacher” would be “the wrong plaintiff” to challenge the facially discriminatory state tax law. His response seemed to please Kagan, who said: “[O]kay, I get it. I get it.”

The other justices seemed to get it too, and they began to toss out the sorts of implementation questions that one might ask if one were imagining how an opinion might be written. When Justice Brett Kavanaugh asked what to do if a federal retiree is “equivalent to both the favored and the disfavored class,” Huston replied that “in that sort of unusual situation,” the federal retiree should win because “the state would not be able to meet its burden to defend its facially discriminatory law.” Justice Samuel Alito then asked how to resolve “situations where the federal employees are pretty similar to the [state employees] in the favored class, but they’re not identical.” Huston responded that in those close-to-the-line cases, what mattered most was whether states applied the court’s standard “in good faith.”

By the time that West Virginia solicitor general Lindsay See rose to speak, several of the justices already seemed to be on board with the United States’ approach, and See struggled to make inroads. She said that “Dawson is treated the same as similarly situated state employees,” but as Sotomayor quickly noted, the state supreme court “didn’t find that, so you can’t rely on that.” See next tried to argue that the intergovernmental-tax-immunity doctrine and 4 U.S.C. § 111 are concerned only with “discrimination that at some level interferes with government functions,” but that didn’t seem to sway the bench either. “The statute is quite explicit,” said Ginsburg, that the test is not whether a state is “burdening the federal government.” Roberts soon joined in. It’s “not permissible,” he said, for a state to categorically exclude federal employees from a tax benefit. “[I]f your basis is something else, you ought to say that,” Roberts told See.

Justice Stephen Breyer seemed frustrated with West Virginia as well. “[V]irtually all the state police … [and] also the local police … can get [the exemption] and the feds can’t. Why isn’t that just the end of it?” Breyer asked. See responded that many local law enforcement retirees are not eligible for the full exemption, but “the State of West Virginia Tax Department does not keep those exact numbers.” That answer did not satisfy Breyer. “You can’t give them to me at all?” he asked. See replied that officers in only 30 of the “roughly 200 cities” with separate police forces are eligible for the exemption, though Roberts interjected that “[t]hat statistic doesn’t tell us anything” if Charleston—the state’s largest city—is one of the 30.

As the hour drew to a close, it seemed that the justices had little appetite for arguing about whether U.S. marshals are more similar to deputy sheriffs or Charleston cops. But the justices also did not seem ready to embrace a bright-line rule that would allow any federal retiree to recover when a state tax regime facially discriminates on the basis of federal or state service. If the court did adopt such a rule, the fiscal consequences for West Virginia could be severe. The state is home to nearly 19,000 retired federal employees, and it would be flooded with viable refund claims if relief were not limited to law-enforcement officials whose job duties mirrored those of the exempt West Virginia ex-workers.

All that makes the solicitor general’s suggestion for vacatur and remand seem rather alluring. But although that approach would stave off some of the more difficult intergovernmental-tax-immunity questions, it wouldn’t make those questions go away. One such question—the one that dominated the discussion Monday—is how to determine whether a federal employee or retiree is similarly situated to state workers who receive special tax benefits. A second question—not directly implicated by Dawson but in the offing—is what to do about state tax regimes that are facially neutral but gerrymandered to favor state employees and retirees over their federal counterparts. To be sure, nitty-gritty state tax issues are not the ones that most excite the justices (or, for that matter, most SCOTUS-watchers). But if Dawson turns out as expected, we can expect to see these issues back on the court’s docket in short order.  

Editor’s Note: Analysis based on transcript of oral argument.