Davis v. Michigan Department of the Treasury

RESPONDENT:Michigan Department of the Treasury
LOCATION:Michigan Dept. of Treasury

DOCKET NO.: 87-1020
DECIDED BY: Rehnquist Court (1988-1990)
LOWER COURT: State appellate court

CITATION: 489 US 803 (1989)
ARGUED: Jan 09, 1989
DECIDED: Mar 28, 1989

Michael K. Kellogg – argued the cause for the United States as amicus curiae urging reversal
Paul S. Davis – argued the cause for the appellant, appearing pro se
Thomas L. Casey – argued the cause for the appellee

Facts of the case

Paul Davis, a resident of Michigan, worked for the federal government and upon retirement received benefits. Michigan law exempts state retirement benefits from state taxes. Smith unsuccessfully petitioned for a refund on the state taxes he paid on his federal retirement benefits. He then filed suit in the Michigan Court of Claims arguing that the state’s tax policy violated 4 U.S.C. 111 by taxing benefits paid to federal employees but not to state employees. The court dismissed his suit and so did the Michigan Court of Appeals.


Did Michigan violate federal law when it exempted state and local government pensions from taxation but levied taxes on federal government pensions?

William H. Rehnquist:

We’ll hear argument next in No. 87-1020, Paul Davis v. The Michigan Department of the Treasury.

Mr. Davis, you may proceed whenever you’re ready.

Paul S. Davis:

Mr. Chief Justice, may it please the Court:

The State of Michigan in its income tax taxes federal retirement benefits, but exempts retirement benefits paid to retirees from the State of Michigan.

Appellant submits that this different treatment constitutes an unlawful discrimination in violation of the federal statute 4 U.S.C. 111.

Appellant is a former federal employee and receives a retirement annuity under the Civil Service Retirement Act.

For the year 1979 and succeeding years, Appellant, in compliance with the Michigan income tax law, paid Michigan income tax on his retirement benefits.

After the decision of this Court in Memphis Bank & Trust Company v. Garner, which was in 1983, Appellant filed amended returns for several years, starting in the year… tax year starting in 1979 and sought refunds of the income taxes which he had paid on his federal retirement benefits.

The Michigan Commissioner of Revenue denied the requested refunds.

Appellant then filed a suit in the Michigan Court of Claims seeking a refund of those taxes.

The court of claims ruled against Appellant, and Appellant then appealed to the Michigan Court of Appeals.

In the court of claims and the Michigan Court of Appeals, Appellant relied on the federal statute, 4 U.S.C. 111, taking the position that the Michigan law discriminated against federal retirees, as compared with state retirees, in violation of the statute.

John Paul Stevens:

Mr. Davis, can I ask you a question about–

Paul S. Davis:

Yes, sir.

John Paul Stevens:

–the statute?

The statute is one that gives the consent of the United States to certain taxation.

Supposing the United States has not consented so the statute just simply doesn’t apply, would there be any prohibition against this taxation?

Paul S. Davis:

Yes, Your Honor.

The constitutional principles would then apply.

John Paul Stevens:

You think–

Paul S. Davis:

Of… of course at the time the statute was initiated, there was intergovernmental tax immunity–

John Paul Stevens:


Paul S. Davis:

–which would have exempted the retirement benefits.

John Paul Stevens:

And those cases have generally been repudiated pretty much by our later cases.

Paul S. Davis:

Well, the Graves case, which I was going to mention, at the… which was pending at the time the Public Salary Tax Act was being considered in 1939, and, and the Graves case for the first time held that all state… all federal salaries would be subject to taxation by the federal government, provided that the tax was nondiscriminatory.

But you think that even without the statute, you’d have a claim based directly on the Constitution?

Paul S. Davis:

Yes, Your honor.

Because the language of the statute really doesn’t help you at all.

It just… just says the United States hasn’t consented, if you’re right on your reading of it.

But… but maybe what my… what I’m suggesting is maybe the consent of the United States simply isn’t necessary for this tax.

Paul S. Davis:

Well, the consent of the United States was conditioned upon the tax being nondiscriminatory and–

That’s right, but I’m… I’m saying… say I agree with you that there’s no consent of the United States, but then you still have to have the second question of whether the tax is nevertheless invalid because it violates the Constitution.

And for that proposition, it seems to me you have to rely on some rather old cases.

Paul S. Davis:

–Well, Your Honor, in, in this case I’ve taken the position that since the statute applies, it’s not necessary to consider the constitutional question, but the constitutional question is important.

But the… but the statute doesn’t contain any prohibition.

There’s nothing in the statute that prohibits anybody from taxing anything.

It just says the United States consents to certain taxes.

Paul S. Davis:

Well, it has… it should be read I think in the… in the light of the law at the time the statute was initiated, and at that time the federal salaries were exempt from state taxation and, and it was only as a result of this statute, together with the Graves case which, in effect, reached the same result, that the federal compensation was made taxable by the state.

And the Graves case made clear that any such taxation must be nondiscriminatory which, of course, was what the statute also said.

Mr…. Mr. Davis, you don’t think you can draw from the statute a kind of a negative implication that Congress does not consent or objects, if you will, to the taxation of things that don’t fall within that definition?

Paul S. Davis:

Well, yes, Your Honor.

I think the statute by implication says that it consents to the taxation if the tax is nondiscriminatory, but does not consent if the tax is discriminatory.

Well, if one read the statute that way, it would put your case in a better light than just having to rely on the constitutional provisions, wouldn’t it?

Paul S. Davis:

Yes, sir.

I think the two should be read together.

In, in other words, the constitutional provision is important in defining what’s meant by nondiscriminatory as in the light of intergovernmental tax relations between the federal and state governments.

The Memphis Bank & Trust case in… involved a somewhat similar situation in the context of taxation on banks as distinguished from taxation on employees.

And in that case, the State of Tennessee taxed bank earnings under a formula where earnings from… which in… included interest on federal securities but excluded interest on state securities.

And this Court held that that was invalid.

And we had the same situation in Michigan, and Michigan had to make refunds of substantial amounts to Michigan banks as a result of that decision.

The Public Salary Tax Act, as I say, was pending at the time the Graves case was decided.

The State of Michigan takes the position that 4 U.S.C. 111 applies by its terms only to present federal officers and employees, and the state asserts that Appellant is a retiree and not a federal employee, which of course is conceded.

But the statute is not limited to compensation of present employees.

It expressly covers pay or compensation for personal services as an officer or employee of the United States.

Appellant submits that his compensation is clearly part of his compensation as a federal employee and the cases which we’ve cited in our brief show that the courts consider retirement compensation as… or retirement benefits as deferred compensation.

And one of the cases refers to the federal retirement system as a deferred compensation plan.

The brief of the National Association of Retired Federal Employees, filed as an amicus brief in this case, discusses the legislative history of the Retirement Act, and spells out various statements by the sponsors of that Act indicating that the retirement benefits are considered part of compensation and are matters of right and not matters of grace.

And the Treasury regulations which were enforced before 1933 also treated compensation… treated retirement benefits as compensation.

They also exempted… specifically exempted retirement benefits of state employees during that period, and that of course was in accordance with the intergovernmental tax immunities, which started with McCullogh v. Maryland.

The Michigan income tax clearly discriminates against federal retirees.

May I ask you a question about that, Mr. Davis?

Paul S. Davis:

Yes, sir.

Supposing the Michigan system taxed the… pensions of both federal employees and state employees, but granted an exemption to union workers in the automobile industry, something like that, just an entirely different exemption, would that discriminate against federal employees?

Paul S. Davis:

No, sir.

Well, it might conceivably raise questions–

Well, you see, this suggestion I make is–

Paul S. Davis:

–[inaudible] laws, but not so far as this statute or intergovernmental tax immunities are concerned because they’re not treating the state on the basis different from the federal government.

–But does a statute which discriminates in favor of a small group of Michigan citizens discriminate against ex-federal employees?

Paul S. Davis:

No, sir, not unless it gives a benefit to the state, as distinguished from the federal government.

I don’t find that in the language of the statute either.

Paul S. Davis:

Well, the statute of course–

It only refers to being discriminated against, and I’m not sure the federal employees have been discriminated against here.

There’s a discrimination in favor of one group of Michigan citizens.

But you say if it was a different group of Michigan citizens, there would be no violation of the statute.

Paul S. Davis:

–Well, unless they bear some relationship to the state.

In other words, this, this is an attempt to favor the state as compared with the federal government, which is a violation of the statute and also the Constitution.

Appellant urges that this Court reverse the decision of the court of appeals and order that refunds be made of the taxes in question in this case.

I’d like to reserve the remainder of my time for rebuttal.

Thank you, Mr. Davis.

Mr. Kellogg, we’ll hear now from you.

Michael K. Kellogg:

Thank you, Chief Justice, and may it please the Court:

The statute at issue here, 4 U.S.C. 111, precludes states from levying discriminatory taxes upon the compensation of federal employees.

In response to Justice Stevens’ question, I believe that the last clause of Section 111 has to be read as an affirmative prohibition upon discriminatory–

Why does an exception from a broad consent have to be read as an affirmative prohibition?

Michael K. Kellogg:

–Well, for… one reason is the historical context in which the statute was passed.

At that time, the Court, the year before, had abrogated the doctrine of intergovernmental immunity insofar as it applied to federal taxation of state employees.

This tax act was designed to subject the income of state employees to federal taxation.

At the same time the Court felt–

It was designed to increase the power of the state to tax federal employees.

That was the purpose of the statute.

Michael K. Kellogg:

–That’s correct.

Some sort of reciprocity.

So that if you had no statute here, what would be the objection to this, this tax?

Michael K. Kellogg:

Well, the constitutional doctrine of intergovernmental immunity precludes the states from opposing any sort of discriminatory tax on–

But would this be a discriminatory tax in my other hypothetical if they exempted automobile workers’ pensions?

Michael K. Kellogg:

–I think it would be for some of the reasons you stated in your dissent in the County of Fresno case.

I would not note that the Court in that–

That’s quite different.

That… right there you are worried about the electoral body there that would discriminate against the federal employees.

Michael K. Kellogg:

–Well, that’s certainly the motivating force behind the doctrine.

The federal government has no representation in the individual states and, therefore, there’s not the usual sort of political restraint upon the taxing power of the states.

By forcing the state to treat those who deal with itself the same as those who deal with the federal governments, the state is precluded from pursuing its own parochial interests at the expense of the federal government.

But your view… just to be sure I’m clear on it, your view is this would be an unconstitutional tax even if you didn’t have this statute.

Michael K. Kellogg:

Yes, it would be an unconstitutional tax.

The Court has never wavered.

The doctrine of intergovernmental–

So, my… my, my own view is that the government’s position would be much weaker here if it has to depend on just the Constitution if it can’t get any affirmative mileage out of the statute.

Michael K. Kellogg:

–Well, we certainly believe we get affirmative mileage out of the statute, but the constitutional doctrine, although it has wavered considerably in, in the scope of the doctrine given it to it by the Court, the Court has never wavered in the basic principle that the states are precluded from imposing a discriminatory tax upon those who deal with the federal government.

For example, in the Memphis Bank case mentioned by Appellant, the state in that case taxed federal obligations while exempting from taxations federal obligations.

Oh, yes, but this case would be entirely different if the only people whose pensions were being taxed were federal… ex-federal employees.

But that’s not this case.

Federal employees are in the same class as all Michigan citizens except Michigan employees.

Michael K. Kellogg:

And that was exactly the case in the Memphis Bank case and in the Phillips Chemical case, as well as in the City of Manassas case, which the Court summarily affirmed last term.

In the Memphis Bank case, the Court specifically noted that the obligations of private entities were taxed to the same extent as the obligations of federal entities.

Only the obligations of state entities were exempted from the taxation.

Similarly, in the Phillips Chemical case, lessees of private property–

But again, was that not a statute that contained a prohibition?

Michael K. Kellogg:

–It was a statutory prohibition on discrimination, but the Court specifically noted that it interpreted the statute to the same extent as the constitutional doctrine.

So, the Court relied on constitutional cases in construing the scope of the nondiscrimination principle in this statute.

We think that the Court should do essentially the same thing here.

Michael K. Kellogg:

There’s no reason why the nondiscrimination principle in Section 111 should have any different scope than the Court has given to nondiscrimination–

Why… why should Congress enact a statute like this if all it meant to do was to proclaim the Constitution?

Michael K. Kellogg:

–Well, because at the time the statute was originally proposed, the states were precluded, under the case of Collector v. Day and Dobbins case, from taxing those who dealt with the federal government at all.

The doctrine of intergovernmental immunity, as originally interpreted, was a very broad one which precluded states from imposing any tax on the income of those who dealt with the federal government.

When was this statute enacted?

Michael K. Kellogg:

The statute was enacted in 1939.

The statute was enacted exactly three weeks after this Court decided in the Graves case that, in fact, federal taxes… federal incomes were subject to state taxation.

So, in effect, a statute which had been proposed to open up the federal government to this sort of taxation, ended up being merely a codification of the Court’s decision three weeks earlier.

But it was originally proposed in order to have some sort of parity because the Court had decided in 1938 in Helvering v. Gerhardt that state incomes were subject to federal taxation.

And Congress merely felt that there should be some sort of parity in the two sorts of taxations.

That’s why the… that’s why the statute was proposed.

As it ended up being enacted, it merely codifies the constitutional principle of nondiscrimination, which this Court stated last term, is at the heart of modern intergovernmental tax immunity.

So, we would state–

Let me… let me take you one step further.

In… instead of all Michigan employees, supposing it just exempted Michigan police officers, but doesn’t exempt FBI agents who live in the… in the state, would it still be unconstitutional?

Michael K. Kellogg:

–It, it would still be unconstitutional.

Supposing it just investigated… it exempted Michigan legislators, but didn’t invest… exempt Michigan congressmen, do you think that would still make it unconstitutional?

Michael K. Kellogg:

Well, the… the inquiry would be whether there are significant differences between the two classes so that they’re not similarly situated.

Well, I’m assuming no, assuming that they’d perform exactly the same jobs.

But if you just exempt one Michigan employee who has a counterpart in the federal system, the, the tax is unconstitutional?

Michael K. Kellogg:

I would say that that would have to be.

The, the–

It has to be?

Michael K. Kellogg:

–There has to be a break–

Do you think that’s what Congress intended here?

Michael K. Kellogg:

–Now, Michigan argues, of course, that retirees are not covered under Section 111, that it only applies to compensation of current employees.

We would say that that’s both wrong and irrelevant.

It’s wrong because a pension is deferred compensation for services as a federal employee within the meaning of the statute.

It’s also irrelevant for the reasons explained that the statute merely codifies the constitutional principle which would apply to the pensions of federal employees whether or not they fell within the meaning of the statute.

Well, that… that’s not logical.

It doesn’t codify it if it’s different from it.

Your first argument… it doesn’t codify it if it’s different from it.

If he’s right that… that it only covers current employees, it does not codify the constitutional principle.

Michael K. Kellogg:

Not completely.

I mean, it’s not an exhaustive codification.

You can’t have it both ways.

Michael K. Kellogg:

Just as applied to this specific group of employees in the same way that the statute in Memphis Bank codified the constitutional principle as applied to federal obligations.

Now, Michigan, while acknowledging that its statute treats state employees more favorably for tax purposes than federal employees–

xxx ex-employees.

Michael K. Kellogg:


Argues that the tax is nonetheless… that this sort of discrimination is nonetheless constitutionally permissible for several reasons.

The first is the point Justice Stevens was inquiring about that the federal retirees are not singled out for a tax imposed upon them alone.

As I noted, the Court has already unanimously rejected that argument in both the Memphis Bank case and in the Phillips Chemical case in which private parties dealing with the federal government, as well as federal employees, were taxed in a similar way whereas the state got a special tax exemption.

In both cases, the Court stressed that however it treats private entities, the state cannot impose a heavier tax burden on those who deal with the federal government than on those with whom it deals itself.

The second argument that Michigan puts forward is that the discrimination is justified–

Mr. Kellogg, supposing in this case the State of Michigan had said we’re going to tax Michigan employees and federal employees on their retirement benefits, but we’re not going to, to tax private employees.

Michael K. Kellogg:

–It’s not clear from the Court’s precedents whether that would be permitted or not.

We would argue that it would constitute discrimination.

But that’s not Phillips and it’s not Memphis, is it?

Michael K. Kellogg:

But it’s not Memphis.

In the County of Fresno case, in Justice Stevens in his dissent made an argument as to why such a tax would be constitutionally suspect.

The majority did not have to deal with that question in that case, however, because the Court specifically found that private parties, state employees and federal employees were all treated in a similar way, that there was no discrimination.

I would note that there is one case in 1962 in which the Court summarily affirmed a district court decision upholding a tax exemption given to charitable organizations that did not apply to either the states or the federal government.

And the reasoning of the district court in that case was that the charitable organizations, because they have no power to tax and are dependent upon voluntary contributions, are not similarly situated with the state and federal governments.

Now, because that was a summary affirmance, it’s not clear to what extent the precedential value of that would… would exist now.

A final argument that the State of Michigan makes is that the economic burden on the United States is simply not sufficient… significant enough to interfere with essential government functions.

But it’s precisely that sort of amorphous inquiry into the degree of interference with governmental functions that has been long since abandoned by this Court and has been replaced by the principle of nondiscrimination, which makes such an inquiry unnecessary.

Once it is shown that the state’s system of taxation viewed as a whole treats those who deal with the states more favorably, no further inquiry is necessary into the economic effects of the tax.

Simply put, the State of Michigan must make a choice.

They can tax both federal and state pensions, or they can make both federal and state pensions nontaxable.

Michael K. Kellogg:

But they cannot impose a tax on federal pensions that does not imply to state pensions, a tax that increases the costs and decreases the revenues of the federal government while simultaneously decreasing the costs and increasing the revenues of the federal… of the state government.

It’s precisely that sort of disparity in treatment that the doctrine of intergovernmental immunity was designed to prevent.

It seems sort of silly, though, doesn’t it?

I mean, so they will tax them both and just increase the pensions for the state workers.

You get exactly the same result as, as you would get by not taxing the state workers I suppose.

Michael K. Kellogg:

No, it wouldn’t be the same result.

Why not?

Michael K. Kellogg:

Because state pensions are subject to federal tax.

If the state increased its own pensions in order to reflect the fact that they are now taxed, they would be subject to a higher federal tax burden.

So, they would have to increase them–

Increase them a little bit more.

Michael K. Kellogg:

–by more, which means in effect that what the state is doing is getting the federal government to subsidize its pensions through its discriminatory taxation.

And that’s a no-no.

Michael K. Kellogg:


Unless the Court has any further questions, nothing further.

Thank you, Mr. Kellogg.

Mr. Casey, we’ll hear now from you.

Thomas L. Casey:

Mr. Chief Justice, and may it please the Court:

Michigan courts held that Mr. Davis is not an employee within the meaning of the… Section 111.

We believe that judgment is correct and should be affirmed.

Alternatively, we believe that even if he is covered by this statute, the Michigan classification system is permissible, because if you look at the legislative history of that statute, it is clear that the only type of discrimination which is prohibited is discrimination which is aimed at or which threatens the efficient operation of the federal government itself, not the individual employee.

Finally, we submit that if the constitutional doctrine of intergovernmental tax immunity applies, the Michigan classification is still permissible because that doctrine also, when properly interpreted according to its constitutional foundations, only prohibits discrimination which substantially interferes with the federal government’s activities.

They are directed at the sovereigns not at the individuals.

The Michigan courts decided this case on a preliminary statutory interpretation question: is Mr. Davis, a retiree, an employee within the meaning of Section 111?

They found that he was not.

We believe that decision is absolutely correct.

It is consistent with the definition of employee and annuitant in the civil service statutes.

It’s consistent with the definitions in the Internal Revenue Code.

It’s consistent with definitions in the Michigan Income Tax Act and the Michigan Administrative Code.

For those reasons, the judgment should be affirmed.

Thomas L. Casey:

If, however, the Court finds that Mr. Davis is deemed to be an employee and may assert the protections of this statute, we must look further into the background of the statute.

Unlike Mr. Davis and the federal government, we submit that this statute is more than merely a codification of the constitutional principle.

We believe when you look at the, the congressional history and the context of the times and the evolution of the doctrine, it’s clear that the statute does two things, both of which are designed to narrow the preexisting constitutional doctrine as it existed before Graves.

The first thing the statute does is it contains a broad waiver of immunity for employees, and the other thing that the statute does, it contains a narrow exception to that immunity for taxation which discriminates against employees because of the source of the compensation.

As we’ll show, the legislative history indicates that that portion of the statute was intended to preserve the immunity of the United States.

It was not intended to preserve any immunity of the individual employee.

Well, how, how, how do you show that from the legislative history?

Thomas L. Casey:

The only real legislative history dealing with this aspect are the reports of the Senate and House committees, which we have cited and quoted from in our brief.

The text of the bills was debated on the House and Senate floors, but there… there was no debate that I’ve been able to locate dealing with this discrimination question.

Those reports from the House and Senate committees clearly indicate… we’ve quoted them on… in our brief on page 34 and 35.

There’s an extensive quotation.

It’s from the Senate report pages 11 and 12, and the first sentence there reads:

“The consent is not intended to operate, nor could it operate, as a consent to any taxation to which as individuals these officers and employees are entitled to object. “

And it goes on to indicate that an individual employee may assert whatever individual constitutional rights he or she may have.

If Mr. Davis feels this classification in the Michigan tax system violates his own equal protection rights, he may assert that as an individual.

We submit that it does not violate those rights since there is substantial rational basis for the statute.

The last line of that quotation indicates the true extent of are… the narrowness of the exception to the broad waiver of immunity.

Quoting from the Senate and House reports,

“To protect the Federal Government against the unlikely possibility of State and local taxation of compensation of Federal officers and employees which is aimed at, or threatens the efficient operation of, the Federal Government, the consent is expressly confined to taxation which does not discriminate against such officers or employees because of the source of their compensation. “

It’s clear that that narrow exception to the broad waiver of immunity was designed to protect the federal government against taxation by the states which is aimed at or threatens the efficient operation of the federal government.

So, you suggest from that bit of legislative history that no individual has a right, when he is taxed in violation of the provision, only perhaps the United States could sue?

Thomas L. Casey:

Mr. Davis can make the allegation, but in order to substantiate coverage under this statute, it has to be alleged and proven that the discrimination against him has this kind of substantial interference with federal activities.

The statute has to be found to be aimed at or threaten the efficient operation of the federal government itself.

Well, there’s nothing in the statute at all that suggests that.

That would be purely imported from this sentence in the legislative history, wouldn’t it?

Thomas L. Casey:

That’s correct.

The, the statute itself by its terms does not define the word “discriminate”.

Well, in fact, the statute refers to discrimination against the officer or employee of the United States, indicating a concern with the individual.

Thomas L. Casey:

If it could be shown, for example, in this case if the taxation effort against Mr. Davis was so severe that the federal government was its… the operations of the federal government were threatened, that would be sufficient under the statute.

Yes, but under that view, they… you’re saying it would… it would be permissible for them, unless you can make that kind of a showing, to give an exemption to every Michigan citizen except federal employees?

Thomas L. Casey:

In those circumstances, it would seem that that statute would be clearly aimed at the federal government.

Without… but you wouldn’t have to prove anything beyond the fact that it discriminated against federal employees, would you?

Thomas L. Casey:

There would have to be some showing of the effect of the statute on the federal government.


I don’t understand that because in, in its terms it would discriminate against federal employees.

I thought your argument was that this doesn’t discriminate against federal employees; it discriminates in favor of a small group of Michigan citizens, which is a quite different argument.

Thomas L. Casey:

What… we view the Michigan system as a classification which confers a benefit on retired state employees.

The rest of the world, many millions of Michigan taxpayers, are all treated the same, including the, the few thousand retired federal employees.

But that’s a very different argument for saying… from saying that Mr. Davis has to prove that the… the operations of the federal government are going to grind to a halt if they don’t get this exemption.

Thomas L. Casey:

Well, the first part of the statute is a broad exception… or, excuse me… a broad waiver of immunity.

At the time the statute was proposed, the states could not tax the income of federal employees.

This came up while the Graves case was still pending.

The Congress was aware that there was a shift evolving in the interpretation of the constitutional doctrine, but as this legislation was proposed, states could not tax federal employees.

The first sentence–

Why, why should we look at the time when it was proposed?

It seems to me we look at the time it was adopted.

At the time Congress adopted it, there was already… it was already clear that… that the states could tax the federal–

Thomas L. Casey:

–Graves said that the states can tax federal employees.

–And Graves came out three weeks before the statute was passed, isn’t that right?

Thomas L. Casey:

That’s correct.

So, we say… we submit that the statute is narrower than the constitutional doctrine.

The only… the statute prohibits discrimination which is aimed at or which threatens the efficient operation of the federal government.

That is the only type of discrimination which the statute exempts from taxation.

The, the statute consents to taxation of federal employees, but to protect the federal government, there is this exception for discriminatory taxes which are aimed at or threaten the efficient operation of the federal government.

Well, it seems to me if all 50 states could engage in selective taxation of this type, that there certainly is a threat to the federal government interest.

Thomas L. Casey:

If all 50 states did engage in this and there was sufficient financial consequences to the federal government, then yes, there would be a violation of the statute.

Well, I think–

Thomas L. Casey:

In this case there was no–

–I think it’s the mere threat of that under your interpretation.

Thomas L. Casey:

–Well, we submit there has to be more than just a mere threat.

Thomas L. Casey:

The Graves case and… and others indicate there… the harm to the federal government cannot be mere speculation.

There has to be some kind of showing of, of harm.

That… Graves was an economic burden case and not a discrimination case, but we’re arguing, in essence, that the discrimination aspect should be interpreted substantially the same as the economic burden aspect.

In the Phillips case, for example, upon which Mr. Davis relies very heavily, the Court specifically said in… in at least two points in the opinion that where taxation of the private use of the government’s property is concerned, the government’s interest must be weighed in the balance.

That’s all we’re asking the Court to do in interpreting this statute or the constitutional doctrine: weigh the government’s interests in the balance.

If the government’s interests, as a government, as a sovereign entity, are not harmed by the Michigan statute, there is no violation of the federal statute–

But the Phillips… Phillips was a county school tax in Texas on one leasehold interest of the government.

Certainly if you had taken that by itself, you would have said the federal government isn’t going to stand and fall on whether that… it must be the idea if the practice became widespread or the potential threat, as Justice O’Connor says, not just that one particular bit of taxation is going to stop the federal government in its tracks.

Thomas L. Casey:

–The… in, in Phillips this Court made a specific finding that the discrimination did affect not only the private lessee, but also the federal government.

The, the key word in our interpretation here is there has to be discrimination against the private entity and the federal government not just–

You, you say in Phillips that the discrimination was against the government itself as, as an owner, whereas here it’s just against a government employee?

Thomas L. Casey:


There is no allegation and no showing on the facts of this case that the federal government suffers any adverse consequences at all from the Michigan classification.

Had the federal government come in or had Mr. Davis alleged and shown some negative impact on the federal government, we would have a different case.

What, what we’re asking the Court to do is interpret this federal statute and the constitutional doctrine in such a way as to say that discrimination is prohibited… discrimination against an employee is prohibited only if it has this kind of substantial adverse effect on the government, not just on the individual.

They argue for a broad interpretation of the constitutional doctrine.

They say that the discrimination is prohibited if it affects the federal government or anyone with whom the federal government deals.

Clearly that is too broad, we suggest.

Well, but the statute certainly says that.

Thomas L. Casey:

I, I don’t, don’t believe the statute does say that.

You don’t think it does?

Thomas L. Casey:

We view the statute as doing two things, as I said.

Number one, it is… it is a very broad consent to taxation.

It’s a broad waiver of the constitutional immunity from taxation that individuals had at that time.

Secondly, it is a… there’s a narrow exception to that waiver in the last sentence that we’ve quoted from the Senate report.

And the only basis for that exception is to protect the federal government as an entity.

Now, this dovetails very neatly with the economic burden cases involving the constitutional doctrine where the Court has pointed out that the… the whole basis for the doctrine is to protect the integrity of two sovereign governments.

It’s not designed to protect in… individual employees from having to pay a higher burden of tax.

It’s not designed now under the modern doctrine to protect the federal government from having to ultimately pay the entire economic burden.

All, all we’re saying is that when you’re looking at an alleged violation of either the statute or the constitutional doctrine, the focus has to be on the impact on the sovereign entity of the federal government.

Thomas L. Casey:

We believe that’s consistent with the congressional history of the statute and with the constitutional principles underlying the doctrine of intergovernmental tax immunity.

The United States in its amicus brief has argued that there might be some economic burden to it.

We submit that that is pure speculation.

As I understand their argument, they’re saying if Michigan taxed its state retirees, then if the Michigan legislature raised the state pensions, then some of that extra pension money would go to the federal government in the form of federal income taxes.

We submit there’s no guarantee that that would happen at all.

That is pure speculation.

And Graves, as we’ve quoted extensively in our brief, indicates that you cannot speculate as to the negative impact on the government.

What, what is the rate of the tax that we’re talking about?

Thomas L. Casey:

Michigan income tax is 4.6 percent.

So, in other words, if they gave a 4.6 percent increase or I guess the after-tax equivalent of 4.6 percent, then that would equalize it.


Thomas L. Casey:

Well, it’s kind of ironic here.

If Michigan did, as the government hypothesizes… tax its state employees and then raises the pension, Mr. Davis, the plaintiff in this case, would not get any benefits.

A hundred and thirty thousand or so state retirees–

Well, he might be entitled to a refund for the period that the discrimination occurred.

Thomas L. Casey:

–Perhaps, but… yes.

But there are some–

Which is probably what he’s much more interested in than the future.

Thomas L. Casey:

–True, but… now, we don’t have much of a factual record in this case, but my understanding is that there are about 24,000 retired federal employees in the State of Michigan.

I assume they’re interested in it, too.

But if Michigan chose to tax its state employees… state retirees, then those 130,000 people would suffer.

The federal retirees would not gain anything, and the only entity that would benefit would be the United States government.

We submit that that’s not the appropriate way to look at it.

The appropriate way to look at it is does the federal government suffer now, not will they get a benefit in the future if the situation changes.

Do you have an idea of how many taxpayers there are in Michigan?

Thomas L. Casey:

There are approximately four and a half million individual taxpayers in Michigan.

And they’re all treated the same as the federal employees.

Thomas L. Casey:

Except for the 130,000 state retirees who benefit from this.

Michigan’s income tax isn’t graduated then.

It’s just a flat 4–

Thomas L. Casey:

Flat 4.6.

There’s a Michigan constitutional prohibition against a graduated income tax.

One other element that the United States has raised, it says that it is unprotected from taxation efforts by Michigan.

We submit that that is simply not the case.

In Washington v. United States, this Court’s opinion said that a political check is provided when a state tax falls on a significant group of state citizens who can be counted upon to use their votes to keep the state from raising the tax excessively and thus placing an unfair burden on the federal government.

In… in this case, we have four million, 300 and some thousand Michigan taxpayers who are in exactly the same situation as the 24,000 federal retirees.

That we submit is a significant group of state citizens whose votes will protect the federal retirees.

We have argued to some extent in our brief a… we… we’ve made an argument about the appropriate remedy.

Should we lose all our substantive arguments, we admit that Mr. Davis should get his tax refund with interest, but the question arises what about these other 24,000 people.

I’ve discussed that extensively in our brief, and if the Court has no questions about it, I don’t propose to argue it in detail here except to say that we suggest that the proper remedy would be to remand the case to the state to let the state courts or the state legislature make the first determination about whether the exemption should be extended or withdrawn.

–My, my only question about that question is why that question is here.

Is… is it here?

This is not a class action, is it?

Thomas L. Casey:

It’s not a class action, but–

So, why do we have to answer that at all?

Thomas L. Casey:

–If, it this Court issues an opinion stating that the current Michigan classification is unconstitutional or in violation of the statute, there are these 24,000 taxpayers out there.

Well, that’s… there are other days in the future too.

Thomas L. Casey:

Well, that… that’s–

But that’s not… it’s not here, is it?

Is that question here?

Thomas L. Casey:

–It is not specifically raised, no.

We put it in more or less as a preventative measure to indicate that if the choice is between extending the exemption to the federal retirees or withdrawing it from the state retirees, we would prefer extending it to the state retirees.

If I may briefly conclude, we suggest that Mr. Davis and the United States in this case are asking the Court for a per se rule that he as an individual retired federal employee is entitled to every tax benefit that Michigan law gives retired state employees, regardless of whether the federal government as a sovereign entity suffers any adverse effects from the state tax statutes.

We urge this Court to reject such a per se rule and instead interpret the federal statute and the constitutional doctrine according to their fundamental underlying premise, which is protecting the functions of government as entities from the taxing power of other government… governments.

The, the purpose of the constitutional doctrine and the purpose of the statute is not to protect individual employees as individuals.

Mr. Davis has his own individual equal protection remedy he may assert.

The purpose of the statute and the Constitution is to protect governments as sovereigns from each other.

We submit that on the facts of this case, there has been no allegation and no showing that the Michigan classification system has that kind of effect on the federal government and, therefore, the judgment of the State of Michigan Court of Appeals should be affirmed.

If there are no questions–

Thank you, Mr. Casey.

Mr. Davis, you have four minutes remaining.

Paul S. Davis:

If the Court please, the argument with respect to the scope of the statute… the, the state takes the position that present employees are not covered.

But the present retirees who are no longer present employees are not covered.

But the statute does not limit the scope to present employees because it says… refers to compensation for personal services as an officer or employee.

And as I mentioned earlier, this is deferred compensation.

So, it’s our position that this is clearly within the scope of the statute.

Now, with respect to the adverse effect on the United States government, both in the Phillips case and in the Memphis Bank case, the objections were made, in one case by the landowner or lessee, in the other case by the bank, not by the government itself.

And those… those cases demonstrate that once discrimination is shown, that is the end of the inquiry.

It’s not necessary to show a specific damage or economic effects to the government itself.

And that’s the reason for the… in effect, a blanket ban on discrimination against the federal government.

Of course, in the Phillips case, Mr. Davis, it was the government… the United States was the owner of the underlying leasehold.

So, I suppose you can say it suffered damage by demonstration as soon as the tax was imposed.

Here you’re a degree or two removed from that, the tax being on… on your income and not on the government.

Paul S. Davis:

Well, it’s a difference of degree, but still the… the impact was on somebody dealing with the United States, just as retirees are people who are former employees of the government who deal with the government.

So, it’s… the same principle should be applicable.

Now, a question was raised about this overall impact.

Now, there are several other states.

In Appellant’s brief mention was made of the… I, I guess it may have been the jurisdictional statement.

Mention was made of the fact that the State of Virginia and the State of Georgia have similar statutes.

And the brief of the National Association which intervened, which has appeared as an amicus, also mentions the States of Arizona, New York and Arkansas as being states which have similar statutes.

So, it may have a broad effect in that way.

I don’t think that’s particularly relevant, but since the Court asked about it, I thought it might be mentioned.

With, with respect to the remedy, as has been pointed out, Appellant takes the position he’s entitled to a refund of the taxes which he has paid.

And for the future, it is up to the state to decide whether it should extend the exemption to… given by the state to its retirees to all federal retirees, or whether the state should tax both its own and federal retirees which is done by some other states.

If the Court has no further questions, I… I have nothing further.

William H. Rehnquist:

Thank you, Mr. Davis.

The case is submitted.

The honorable court is now adjourned until tomorrow at ten o’clock.