In each of the years 1979 through 1984, appellant, a Michigan
resident and former federal employee, paid state income tax on his
federal retirement benefits in accordance with the Michigan Income
Tax Act, which exempts from taxation all retirement benefits paid
by the State or its political subdivisions, but taxes retirement
benefits paid by other employers, including the Federal Government.
After the State denied appellant's request for refunds, he filed
suit in the Michigan Court of Claims, alleging that the State's
inconsistent treatment of retirement benefits violated 4 U.S.C. §
111, which authorizes States to tax
"pay or compensation for personal services as [a federal]
officer or employee . . . if the taxation does not discriminate
against the . . . employee because of the source of the pay or
compensation."
The Court of Claims denied relief, and the Michigan Court of
Appeals affirmed, ruling that appellant is an "annuitant" under
federal law, rather than an "employee" within the meaning of § 111,
and that that section therefore has no application to him. The
Court of Appeals also held that the doctrine of intergovernmental
tax immunity did not render the State's discriminatory tax scheme
unconstitutional, since the discrimination was justified under a
rational basis test: the State's interest in attracting and
retaining qualified employees was a legitimate objective which was
rationally achieved by a retirement plan offering economic
inducements.
Held:
1. Section 111 applies to federal retirees such as appellant.
The State's contention that the section is limited to current
federal employees is refuted by the plain language of the statute's
first clause. Since the amount of civil service retirement benefits
is based and computed upon an individual's salary and years of
service, it represents deferred compensation for service to the
Government, and therefore constitutes "pay or compensation . . . as
[a federal] employee" within the meaning of that clause. The
State's contention that, since this quoted language does not occur
in the statute's second, nondiscrimination clause, that clause
applies only to current employees, is hypertechnical, and fails to
read the nondiscrimination clause in its context within the overall
statutory scheme. The reference to "the pay or compensation" in the
latter clause must, in context, mean the same "pay or compensation"
defined in
Page 489 U. S. 804
the section's first clause, and thus includes retirement
benefits. The State's reading of the clause is implausible because
it is unlikely that Congress consented to discriminatory taxation
of retired federal civil servants' pensions while refusing to
permit such taxation of current employees, and there is nothing in
the statutory language or legislative history to suggest such a
result. Pp.
489 U. S.
808-810.
2. Section 111's language, purpose, and legislative history
establish that the scope of its nondiscrimination clause's grant or
retention of limited tax immunity for federal employees is
coextensive with, and must be determined by reference to, the
prohibition against discriminatory taxes embodied in the modern
constitutional doctrine of intergovernmental tax immunity. Pp.
489 U. S.
810-814
3. Michigan's tax scheme violates principles of
intergovernmental tax immunity by favoring retired state and local
government employees over retired federal employees. Pp.
489 U. S.
814-817.
(a) The State's contention that appellant is not entitled to
claim the protection of the immunity doctrine is without merit.
Although the doctrine is based on the need to protect each
sovereign's governmental operations from undue interference by
another sovereign, this Court's precedents establish that private
entities or individuals who are subjected to discriminatory
taxation on account of their dealings with a sovereign can
themselves receive the protection of the constitutional doctrine.
See, for example, Phillips Chemical Co. v. Dumas Independent
School Dist., 361 U. S. 376,
361 U. S. 387.
Pp.
489 U. S.
814-815.
(b) In determining whether the State's inconsistent tax
treatment of federal and state retirees is permissible, the
relevant inquiry is whether the inconsistency is directly related
to, and justified by, "significant differences between the two
classes."
Phillips, supra, at
361 U. S.
384-385. The State's claimed interest in hiring
qualified civil servants through the inducement of a tax exemption
for retirement benefits is irrelevant to this inquiry, since it
merely demonstrates that the State has a rational reason for
discriminating between two similar groups of retirees without
demonstrating any differences between those groups themselves.
Moreover, the State's claim that its retirement benefits are
significantly less munificent than federal benefits in terms of
vesting requirements, rate of accrual, and benefit computations is
insufficient to justify the type of blanket exemption at issue
here. A tax exemption truly intended to account for differences in
benefits would not discriminate on the basis of the source of those
benefits, but would, rather, discriminate on the basis of the
amount of benefits received by individual retirees. Pp.
489 U. S.
815-817.
4. Because the State concedes that a refund is appropriate in
these circumstances, appellant is entitled to a refund to the
extent he has paid
Page 489 U. S. 805
taxes pursuant to the invalid Michigan scheme. However, his
additional claim for prospective relief from discriminatory
taxation should be decided by the state courts, whose special
expertise in state law puts them in a better position than this
Court to fashion the remedy most appropriate to comply with the
constitutional mandate of equal treatment. Pp.
489 U. S.
817-818.
106 Mich.App. 98, 408 N.W.2d 433, reversed and remanded.
KENNEDY, J., delivered the opinion of the Court, in which
REHNQUIST, C.J., and BRENNAN, WHITE, MARSHALL, BLACKMUN, O'CONNOR,
and SCALIA, JJ., joined. STEVENS, J., filed a dissenting opinion,
post, p.
489 U. S.
818.
JUSTICE KENNEDY delivered the opinion of the Court.
The State of Michigan exempts from taxation all retirement
benefits paid by the State or its political subdivisions, but
levies an income tax on retirement benefits paid by all other
employers, including the Federal Government. The question presented
by this case is whether Michigan's tax scheme violates federal
law.
I
Appellant Paul S. Davis, a Michigan resident, is a former
employee of the United States Government. He receives
retirement
Page 489 U. S. 806
benefits pursuant to the Civil Service Retirement Act, 5 U.S.C.
§ 8331
et seq. In each of the years 1979 through 1984,
appellant paid Michigan state income tax on his federal retirement
benefits in accordance with Mich.Comp.Laws Ann. § 206.30(1)(f)
(Supp.1988). [
Footnote 1] That
statute defines taxable income in a manner that excludes all
retirement benefits received from the State or its political
subdivisions, but includes most other forms of retirement benefits.
[
Footnote 2] The effect of this
definition is that the retirement benefits of retired state
employees are exempt from state taxation, while the benefits
received by retired federal employees are not.
In 1984, appellant petitioned for refunds of state taxes paid on
his federal retirement benefits between 1979 and 1983. After his
request was denied, appellant filed suit in the Michigan Court of
Claims. Appellant's complaint, which was amended to include the
1984 tax year, averred that his federal retirement benefits were
"not legally taxable under
Page 489 U. S. 807
the Michigan Income Tax Law" and that the State's inconsistent
treatment of state and federal retirement benefits discriminated
against federal retirees in violation of 4 U.S.C. § 111, which
preserves federal employees' immunity from discriminatory state
taxation.
See Public Salary Tax Act of 1939, ch. 59, § 4,
53 Stat. 575,
codified, as amended, at 4 U.S.C. § 111. The
Court of Claims, however, denied relief. No. 84-9451 (Oct. 30,
1985), App. to Juris. Statement A10.
The Michigan Court of Appeals affirmed. 160 Mich. App. 98, 408
N.W.2d 433 (1987). The court first rejected appellant's claim that
4 U.S.C. § 111 invalidated the State's tax on appellant's federal
benefits. Noting that § 111 applies only to federal "employees,"
the court determined that appellant's status under federal law was
that of an "annuitant," rather than an employee. As a consequence,
the court concluded that § 111 "has no application to [Davis],
since [he] cannot be considered an employee within the meaning of
that act."
Id. at 104, 408 N.W.2d at 435.
The Michigan Court of Appeals next rejected appellant's
contention that the doctrine of intergovernmental tax immunity
rendered the State's tax treatment of federal retirement benefits
unconstitutional. Conceding that "a tax may be held invalid . . .
if it operates to discriminate against the federal government and
those with whom it deals,"
id. at 104, 408 N.W.2d at 436,
the court examined the State's justifications for the
discrimination under a rational basis test.
Ibid. The
court determined that the State's interest in "attracting and
retaining . . . qualified employees" was a "legitimate state
objective which is rationally achieved by a retirement plan
offering economic inducements," and it upheld the statute.
Id. at 105, 408 N.W.2d at 436.
The Supreme Court of the State of Michigan denied appellant's
application for leave to appeal. 429 Mich. 854 (1987). We noted
probable jurisdiction. 487 U.S. 1217 (1988).
Page 489 U. S. 808
II
Appellant places principal reliance on 4 U.S.C. § 111. In
relevant part, that section provides:
"The United States consents to the taxation of pay or
compensation for personal service as an officer or employee of the
United States . . . by a duly constituted taxing authority having
jurisdiction, if the taxation does not discriminate against the
officer or employee because of the source of the pay or
compensation."
As a threshold matter, the State argues that § 111 applies only
to current employees of the Federal Government, not to retirees
such as appellant. In our view, however, the plain language of the
statute dictates the opposite conclusion. Section 111 by its terms
applies to "the taxation of pay or
compensation for personal
services as an officer or employee of the United States."
(Emphasis added). While retirement pay is not actually disbursed
during the time an individual is working for the Government, the
amount of benefits to be received in retirement is based and
computed upon the individual's salary and years of service. 5
U.S.C. § 8339(a). We have no difficulty concluding that civil
service retirement benefits are deferred compensation for past
years of service rendered to the Government.
See, e.g., Zucker
v. United States, 758 F.2d 637, 639 (CA Fed.),
cert.
denied, 474 U.S. 842 (1985);
Kizas v. Webster, 227
U.S.App.D.C. 327, 339, 707 F.2d 524, 536, (1983),
cert.
denied, 464 U.S. 1042 (1984);
Clark v. United States,
691 F.2d 837, 842 (CA7 1982). And because these benefits accrue to
employees on account of their service to the Government, they fall
squarely within the category of compensation for services rendered
"as an officer or employee of the United States." Appellant's
federal retirement benefits are deferred compensation earned "as" a
federal employee, and so are subject to § 111. [
Footnote 3]
Page 489 U. S. 809
The State points out, however, that the reference to
"compensation for personal services as an officer or employee"
occurs in the first part of § 111, which defines the extent of
Congress' consent to state taxation, and not in the latter part of
the section, which provides that the consent does not extend to
taxes that discriminate against federal employees. Instead, the
nondiscrimination clause speaks only in terms of "discriminat[ion]
against the officer or employee because of the source of the pay or
compensation." From this, the State concludes that, whatever the
scope of Congress' consent to taxation in the first portion of §
111, the nondiscrimination clause applies only to current federal
employees.
Although the State's hypertechnical reading of the
nondiscrimination clause is not inconsistent with the language of
that provision, examined in isolation, statutory language cannot be
construed in a vacuum. It is a fundamental canon of statutory
construction that the words of a statute must be read in their
context, and with a view to their place in the overall statutory
scheme.
See United States v. Morton, 467 U.
S. 822,
467 U. S. 828
(1984). When the first part of § 111 is read together with the
nondiscrimination clause, the operative words of the statute are as
follows:
"The United States consents to the taxation of pay or
compensation . . . if the taxation does not discriminate . . .
because of the source of the pay or compensation."
The reference to "
the pay or compensation" in the last
clause of § 111 must, in context, mean the same "pay or
compensation" defined in the first part of the section. Since that
"pay or compensation" includes retirement benefits, the
nondiscrimination clause must include them as well.
Page 489 U. S. 810
Any other interpretation of the nondiscrimination clause would
be implausible, at best. It is difficult to imagine that Congress
consented to discriminatory taxation of the pensions of retired
federal civil servants while refusing to permit such taxation of
current employees, and nothing in the statutory language or even in
the legislative history suggests this result. While Congress could
perhaps have used more precise language, the overall meaning of §
111 is unmistakable: it waives whatever immunity past and present
federal employees would otherwise enjoy from state taxation of
salaries, retirement benefits, and other forms of compensation paid
on account of their employment with the Federal Government, except
to the extent that such taxation discriminates on account of the
source of the compensation.
III
Section 111 was enacted as part of the Public Salary Tax Act of
1939, the primary purpose of which was to impose federal income tax
on the salaries of all state and local government employees. Prior
to adoption of the Act, salaries of most government employees, both
state and federal, generally were thought to be exempt from
taxation by another sovereign under the doctrine of
intergovernmental tax immunity. This doctrine had its genesis in
McCulloch v.
Maryland, 4 Wheat. 316 (1819), which held that the
State of Maryland could not impose a discriminatory tax on the Bank
of the United States. Chief Justice Marshall's opinion for the
Court reasoned that the Bank was an instrumentality of the Federal
Government used to carry into effect the Government's delegated
powers, and taxation by the State would unconstitutionally
interfere with the exercise of those powers.
Id. at
17 U. S.
425-437.
For a time,
McCulloch was read broadly to bar most
taxation by one sovereign of the employees of another.
See Collector v.
Day, 11 Wall. 113,
78 U. S.
124-128 (1871) (invalidating federal income tax on
salary of state judge);
Dobbins v.
Commissioners
Page 489 U. S. 811
of Erie County, 16 Pet. 435 (1842) (invalidating state
tax on federal officer). This rule
"was based on the rationale that any tax on income a party
received under a contract with the government was a tax on the
contract, and thus a tax 'on' the government, because it burdened
the government's power to enter into the contract."
South Carolina v. Baker, 485 U.
S. 505,
485 U. S. 518
(1988).
In subsequent cases, however, the Court began to turn away from
its more expansive applications of the immunity doctrine. Thus, in
Helvering v. Gerhardt, 304 U. S. 405
(1938), the Court held that the Federal Government could levy
nondiscriminatory taxes on the incomes of most state employees. The
following year,
Graves v. New York ex rel. O'Keefe,
306 U. S. 466,
306 U. S.
486-487 (1939), overruled the
Day-Dobbins line
of cases that had exempted government employees from
nondiscriminatory taxation. After
Graves, therefore,
intergovernmental tax immunity barred only those taxes that were
imposed directly on one sovereign by the other or that
discriminated against a sovereign or those with whom it dealt.
It was in the midst of this judicial revision of the immunity
doctrine that Congress decided to extend the federal income tax to
state and local government employees. The Public Salary Tax Act was
enacted after
Helvering v. Gerhardt, supra, had upheld the
imposition of federal income taxes on state civil servants, and
Congress relied on that decision as support for its broad assertion
of federal taxing authority. S.Rep. No. 112, 76th Cong., 1st Sess.,
5-9 (1939); H.R.Rep. No. 26, 76th Cong., 1st Sess., 2-3 (1939).
However, the Act was drafted, considered in Committee, and passed
by the House of Representatives before the announcement of the
decision in
Graves v. New York ex rel. O'Keefe, supra,
which, for the first time, permitted state taxation of federal
employees. As a result, during most of the legislative process
leading to adoption of the Act, it was unclear whether state
taxation of federal employees was still barred by
intergovernmental
Page 489 U. S. 812
tax immunity despite the abrogation of state employees' immunity
from federal taxation.
See H.R.Rep. No. 26,
supra, at 2 ("There are certain indications in the case of
McCulloch v.
Maryland, 4 Wheat. 316 (1819), . . . that . . .
Federal officers and employees may not, without the consent of the
United States, be subjected to income taxation under the authority
of the various States").
Dissatisfied with this uncertain state of affairs, and concerned
that considerations of fairness demanded equal tax treatment for
state and federal employees, Congress decided to ensure that
federal employees would not remain immune from state taxation at
the same time that state government employees were being required
to pay federal income taxes.
See S.Rep. No. 112,
supra, at 4; H.R.Rep. No. 26,
supra, at 2.
Accordingly, § 4 of the proposed Act (now § 111) expressly waived
whatever immunity would have otherwise shielded federal employees
from nondiscriminatory state taxes.
By the time the statute was enacted, of course, the decision in
Graves had been announced, so the constitutional immunity
doctrine no longer proscribed nondiscriminatory state taxation of
federal employees. In effect, § 111 simply codified the result in
Graves, and foreclosed the possibility that subsequent
judicial reconsideration of that case might reestablish the broader
interpretation of the immunity doctrine.
Section 111 did not waive all aspects of intergovernmental tax
immunity, however. The final clause of the section contains an
exception for state taxes that discriminate against federal
employees on the basis of the source of their compensation. This
nondiscrimination clause closely parallels the nondiscrimination
component of the constitutional immunity doctrine which has, from
the time of
McCulloch v. Maryland, barred taxes that
"operat[e] so as to discriminate against the Government or those
with whom it deals."
United States v. City of Detroit,
355 U. S. 466,
355 U. S. 473
(1958).
See also McCulloch v. Maryland, supra, at
17 U. S.
436-437;
Miller
Page 489 U. S. 813
v. Milwaukee, 272 U. S. 713,
272 U. S.
714-715 (1927);
Helvering v. Gerhardt, supra,
at
304 U. S. 413;
Phillips Chemical Co. v. Dumas Independent School Dist.,
361 U. S. 376,
361 U. S. 385
(1960);
Memphis Bank & Trust Co. v. Garner,
459 U. S. 392,
459 U. S. 397,
and n. 7 (1983).
In view of the similarity of language and purpose between the
constitutional principle of nondiscrimination and the statutory
nondiscrimination clause, and given that § 111 was consciously
drafted against the background of the Court's tax immunity cases,
it is reasonable to conclude that Congress drew upon the
constitutional doctrine in defining the scope of the immunity
retained in § 111. When Congress codifies a judicially defined
concept, it is presumed, absent an express statement to the
contrary, that Congress intended to adopt the interpretation placed
on that concept by the courts.
See Midlantic National Bank v.
New Jersey Dept. of Environmental Protection, 474 U.
S. 494,
474 U. S. 501
(1986);
Morissette v. United States, 342 U.
S. 246,
342 U. S. 263
(1952). Hence, we conclude that the retention of immunity in § 111
is coextensive with the prohibition against discriminatory taxes
embodied in the modern constitutional doctrine of intergovernmental
tax immunity.
Cf. Memphis Bank & Trust, supra, at
459 U. S.
396-397 (construing 31 U.S.C. § 742, which permits only
"
nondiscriminatory'" state taxation of interest on federal
obligations, as "principally a restatement of the constitutional
rule").
On its face, § 111 purports to be nothing more than a partial
congressional consent to nondiscriminatory state taxation of
federal employees. It can be argued, however, that, by negative
implication, § 111 also constitutes an affirmative statutory grant
of immunity from discriminatory state taxation in addition to, and
coextensive with, the preexisting protection afforded by the
constitutional doctrine. Regardless of whether § 111 provides an
independent basis for finding immunity or merely preserves the
traditional constitutional prohibition against discriminatory
taxes, however, the inquiry
Page 489 U. S. 814
is the same. In either case, the scope of the immunity granted
or retained by the nondiscrimination clause is to be determined by
reference to the constitutional doctrine. Thus, the dispositive
question in this case is whether the tax imposed on appellant is
barred by the doctrine of intergovernmental tax immunity.
IV
It is undisputed that Michigan's tax system discriminates in
favor of retired state employees and against retired federal
employees. The State argues, however, that appellant is not
entitled to claim the protection of the immunity doctrine, and
that, in any event, the State's inconsistent treatment of Federal
and State Government retirees is justified by meaningful
differences between the two classes.
A
In support of its first contention, the State points out that
the purpose of the immunity doctrine is to protect governments, and
not private entities or individuals. As a result, so long as the
challenged tax does not interfere with the Federal Government's
ability to perform its governmental functions, the constitutional
doctrine has not been violated.
It is true that intergovernmental tax immunity is based on the
need to protect each sovereign's governmental operations from undue
interference by the other.
Graves, 306 U.S. at
306 U. S. 481;
McCulloch v. Maryland, 4 Wheat. at
17 U. S.
435-436. But it does not follow that private entities or
individuals who are subjected to discriminatory taxation on account
of their dealings with a sovereign cannot themselves receive the
protection of the constitutional doctrine. Indeed, all precedent is
to the contrary. In
Phillips Chemical Co., supra, for
example, we considered a private corporation's claim that a state
tax discriminated against private lessees of federal land. We
concluded that the tax "discriminate[d] unconstitutionally against
the United States
and its lessee," and accordingly held
that the tax could not be exacted. 361 U.S. at
361 U. S.
387
Page 489 U. S. 815
(emphasis added).
See also Memphis Bank & Trust, supra;
Moses Lake Homes, Inc. v. Grant County, 365 U.
S. 744 (1961);
Collector v.
Day, 11 Wall. 113 (1871);
Dobbins v.
Commissioners of Erie County, 16 Pet. 435 (1842).
The State offers no reasons for departing from this settled rule,
and we decline to do so. [
Footnote
4]
B
Under our precedents,
"[t]he imposition of a heavier tax burden on [those who deal
with one sovereign] than is imposed
Page 489 U. S. 816
on [those who deal with the other] must be justified by
significant differences between the two classes."
Phillips Chemical Co. v. Dumas Independent School
Dist., 361 U.S. at
361 U. S. 383.
In determining whether this standard of justification has been met,
it is inappropriate to rely solely on the mode of analysis
developed in our equal protection cases. We have previously
observed that
"our decisions in [the equal protection] field are not
necessarily controlling where problems of intergovernmental tax
immunity are involved,"
because "the Government's interests must be weighed in the
balance."
Id. at
361 U. S. 385.
Instead, the relevant inquiry is whether the inconsistent tax
treatment is directly related to, and justified by, "significant
differences between the two classes."
Id. at
361 U. S.
383-385.
The State points to two allegedly significant differences
between federal and state retirees. First, the State suggests that
its interest in hiring and retaining qualified civil servants
through the inducement of a tax exemption for retirement benefits
is sufficient to justify the preferential treatment of its retired
employees. This argument is wholly beside the point, however, for
it does nothing to demonstrate that there are "significant
differences between the two classes" themselves; rather, it merely
demonstrates that the State has a rational reason for
discriminating between two similar groups of retirees. The State's
interest in adopting the discriminatory tax, no matter how
substantial, is simply irrelevant to an inquiry into the nature of
the two classes receiving inconsistent treatment.
See id.
at
363 U. S.
384.
Second, the State argues that its retirement benefits are
significantly less munificent than those offered by the Federal
Government, in terms of vesting requirements, rate of accrual, and
computation of benefit amounts. The substantial differences in the
value of the retirement benefits paid the two classes should, in
the State's view, justify the inconsistent tax treatment.
Page 489 U. S. 817
Even assuming the State's estimate of the relative value of
state and federal retirement benefits is generally correct, we do
not believe this difference suffices to justify the type of blanket
exemption at issue in this case. While the average retired federal
civil servant receives a larger pension than his state counterpart,
there are undoubtedly many individual instances in which the
opposite holds true. A tax exemption truly intended to account for
differences in retirement benefits would not discriminate on the
basis of the source of those benefits, as Michigan's statute does;
rather, it would discriminate on the basis of the amount of
benefits received by individual retirees.
Cf. Phillips Chemical
Co., supra, at
361 U. S.
384-385 (rejecting proffered rationale for State's
unfavorable tax treatment of lessees of federal property, because
an evenhanded application of the rationale would have resulted in
inclusion of some lessees of State property in the disfavored class
as well).
V
For these reasons, we conclude that the Michigan Income Tax Act
violates principles of intergovernmental tax immunity by favoring
retired state and local government employees over retired federal
employees. The State having conceded that a refund is appropriate
in these circumstances,
see Brief for Appellee 63, to the
extent appellant has paid taxes pursuant to this invalid tax
scheme, he is entitled to a refund.
See Iowa-Des Moines Bank v.
Bennett, 284 U. S. 239, 247
(1931).
Appellant also seeks prospective relief from discriminatory
taxation. With respect to this claim, however, we are not in the
best position to ascertain the appropriate remedy. While
invalidation of Michigan's income tax law in its entirety obviously
would eliminate the constitutional violation, the Constitution does
not require such a drastic solution. We have recognized, in cases
involving invalid classifications in the distribution of government
benefits, that the appropriate remedy
"is a
mandate of equal treatment, a result that can
be
Page 489 U. S. 818
accomplished by withdrawal of benefits from the favored class,
as well as by extension of benefits to the excluded class."
Heckler v. Mathews, 465 U. S. 728,
465 U. S. 740
(1984).
See Iowa-Des Moines Bank, supra, at
284 U. S. 247;
see also Welsh v. United States, 398 U.
S. 333,
398 U. S. 361
(1970) (Harlan, J., concurring in judgment).
In this case, appellant's claim could be resolved either by
extending the tax exemption to retired federal employees (or to all
retired employees) or by eliminating the exemption for retired
state and local government employees. The latter approach, of
course, could be construed as the direct imposition of a state tax,
a remedy beyond the power of a federal court.
See Moses Lake
Homes, Inc. v. Grant County, 365 U.S. at
365 U. S. 752
("Federal courts may not assess or levy taxes"). The permissibility
of either approach, moreover, depends in part on the severability
of a portion of § 206.30(1)(f) from the remainder of the Michigan
Income Tax Act, a question of state law within the special
expertise of the Michigan courts.
See Louis K. Liggett Co. v.
Lee, 288 U. S. 517,
288 U. S.
540-541 (1933). It follows that the Michigan courts are
in the best position to determine how to comply with the mandate of
equal treatment. The judgment of the Court of Appeals is reversed,
and the case is remanded for further proceedings not inconsistent
with this opinion.
It is so ordered.
[
Footnote 1]
As a result of a series of amendments, this subsection has been
variously designated as (1)(f), (1)(g), and (1)(h) at times
relevant to this litigation. This opinion will refer only to the
current statutory designation, § 206.30(1)(f).
[
Footnote 2]
In pertinent part, the statute provides:
"(1) 'Taxable income' . . . means adjusted gross income as
defined in the internal revenue code subject to the following
adjustments:"
"
* * * *"
"(f) Deduct to the extent included in adjusted gross
income:"
"(i) Retirement or pension benefits received from a public
retirement system of or created by an act of this state or a
political subdivision of this state."
"
* * * *"
"(iv) Retirement or pension benefits from any other retirement
or pension system as follows:"
"(A) For a single return, the sum of not more than
$7,500.00."
"(B) For a joint return, the sum of not more than
$10,000.00."
Mich.Comp.Laws Ann. § 206.30(1)(f) (Supp.1988). Subsection
(f)(iv) of this provision exempts a portion of otherwise taxable
retirement benefits from taxable income, but appellant's retirement
pay from all nonstate sources exceeded the applicable exemption
amount in each of the tax years relevant to this case.
[
Footnote 3]
The State suggests that the legislative history does not support
this interpretation of § 111, pointing to statements in the
Committee Reports that describe the scope of § 111 without using
the phrase "service as an officer or employee." The language of the
statute leaves no room for doubt on this point, however, so the
State's attempt to establish a minor inconsistency with the
legislative history need not detain us. Legislative history is
irrelevant to the interpretation of an unambiguous statute.
United Air Lines, Inc. v. McMann, 434 U.
S. 192,
434 U. S. 199
(1977).
[
Footnote 4]
The dissent argues that this tax is nondiscriminatory, and thus
constitutional, because it "draws no distinction between the
federal employees or retirees and the vast majority of voters in
the State."
Post at
489 U. S. 823.
In
Phillips Chemical Co., however, we faced that precise
situation: an equal tax burden was imposed on lessees of private,
tax-exempt property and lessees of federal property, while lessees
of state property paid a lesser tax, or, in some circumstances,
none at all. Although we concluded that, "[u]nder these
circumstances, there appears to be no discrimination between the
Government's lessees and lessees of private property," 361 U.S. at
361 U. S. 381,
we nonetheless invalidated the State's tax. This result is
consistent with the underlying rationale for the doctrine of
intergovernmental tax immunity. The danger that a State is engaging
in impermissible discrimination against the Federal Government is
greatest when the State acts to benefit itself and those in privity
with it. As we observed in
Phillips Chemical Co.,
"it does not seem too much to require that the State treat those
who deal with the Government as well as it treats those with whom
it deals itself."
Id. at
361 U. S.
385.
We also take issue with the dissent's assertion that "it is
peculiarly inappropriate to focus solely on the treatment of state
governmental employees" because "[t]he State may always compensate
in pay or salary for what it assesses in taxes."
Post at
489 U. S. 824.
In order to provide the same after-tax benefits to all retired
state employees by means of increased salaries or benefit payments
instead of a tax exemption, the State would have to increase its
outlays by more than the cost of the current tax exemption, since
the increased payments to retirees would result in higher federal
income tax payments in some circumstances. This fact serves to
illustrate the impact on the Federal Government of the State's
discriminatory tax exemption for state retirees. Taxes enacted to
reduce the State's employment costs at the expense of the federal
treasury are the type of discriminatory legislation that the
doctrine of intergovernmental tax immunity is intended to bar.
JUSTICE STEVENS, dissenting.
The States can tax federal employees or private parties who do
business with the United States so long as the tax does not
discriminate against the United States.
South Carolina v.
Baker, 485 U. S. 505,
485 U. S. 523
(1988);
United States v. County of Fresno, 429 U.
S. 452,
429 U. S. 462
(1977). The Court today strikes down a state tax that applies
equally to the vast majority of Michigan residents, including
federal employees, because it treats retired state employees
differently from retired federal employees. The Court's holding is
not supported by the rationale for the intergovernmental
immunity
Page 489 U. S. 819
doctrine and is not compelled by our previous decisions. I
cannot join the unjustified, court-imposed restriction on a State's
power to administer its own affairs.
The constitutional doctrine of intergovernmental immunity,
Justice Frankfurter explained,
"finds its explanation and justification . . . in avoiding the
potentialities of friction and furthering the smooth operation of
complicated governmental machinery."
City of Detroit v. Murray Corp., 355 U.
S. 489,
355 U. S. 504
(1958). To protect the smooth operation of dual governments in a
federal system, it was at one time thought necessary to prohibit
state taxation of the salaries of officers and employees of the
United States,
Dobbins v. Commissioners of
Erie County, 16 Pet. 435 (1842), as well as federal
taxation of the salaries of state officials.
Collector
v. Day, 11 Wall. 113 (1871). The Court has since
forsworn such "wooden formalism."
Washington v. United
States, 460 U. S. 536,
460 U. S. 544
(1983).
The nondiscrimination rule recognizes the fact that the Federal
Government has no voice in the policy decisions made by the several
States. The Federal Government's protection against state taxation
that singles out federal agencies for special burdens is therefore
provided by the Supremacy Clause of the Federal Constitution, the
doctrine of intergovernmental tax immunity, and statutes such as 4
U.S.C. § 111. [
Footnote 2/1] When
the tax burden is shared equally by federal agents and the vast
majority of a State's citizens, however, the nondiscrimination
principle is not applicable, and constitutional protection is not
necessary. As the Court explained in
United States v. County of
Fresno:
Page 489 U. S. 820
"The rule to be derived from the Court's more recent decisions,
then, is that the economic burden on a federal function of a state
tax imposed on those who deal with the Federal Government does not
render the tax unconstitutional so long as the tax is imposed
equally on the other similarly situated constituents of the State.
This rule returns to the original intent of
M'Culloch v.
Maryland. The political check against abuse of the taxing
power found lacking in
M'Culloch, where the tax was
imposed solely on the Bank of the United States, is present where
the State imposes a nondiscriminatory tax only on its constituents
or their artificially owned entities; and
M'Culloch
foresaw the unfairness in forcing a State to exempt private
individuals with beneficial interests in federal property from
taxes imposed on similar interests held by others in private
property. Accordingly,
M'Culloch expressly excluded from
its rule a tax on 'the interest which the citizens of Maryland may
hold [in a federal instrumentality] in common with other property
of the same description throughout the State.' 4 Wheat. at
17 U. S. 436."
429 U.S. at 462-464. [
Footnote
2/2]
Page 489 U. S. 821
If Michigan were to tax the income of federal employees without
imposing a like tax on others, the tax would be plainly
unconstitutional.
Cf. 17 U. S.
Maryland, 4 Wheat. 316,
17 U. S.
425-437 (1819). On the other hand, if the State taxes
the income of all its residents equally, federal employees must pay
the tax.
Graves v. New York ex rel. O'Keefe, 306 U.
S. 466 (1939).
See United States v. County of
Fresno, 429 U.S. at
429 U. S. 468
(STEVENS, J., dissenting). The Michigan tax here applies to
approximately 4 1/2 million individual taxpayers in the State,
including the 24,000 retired federal employees. It exempts only the
130,000 retired state employees. Tr. of Oral Arg. 35-36. Once one
understands the underlying reason for the
McCulloch
holding, it is plain that this tax does not unconstitutionally
discriminate against federal employees.
The Court reaches the opposite result only by examining whether
the tax treatment of federal employees is equal to that of one
discrete group of Michigan residents -- retired state employees. It
states: "It is undisputed that Michigan's tax system discriminates
in favor of retired state employees and against retired federal
employees."
Ante at
489 U. S. 814.
But it does not necessarily follow that such a tax "discriminate[s]
against the [federal] officer or employee because of the source of
the pay or compensation." 4 U.S.C. § 111. The fact that a State may
elect to grant a preference, or an exemption, to a small percentage
of its residents does not make the tax discriminatory in any sense
that is relevant to the doctrine of intergovernmental tax immunity.
The obligation of a federal judge to pay the same tax that is
imposed on the
Page 489 U. S. 822
income of similarly situated citizens in the State should not be
affected by the fact that the State might choose to grant an
exemption to a few of its taxpayers -- whether they be state
judges, other state employees, or perhaps a select group of private
citizens. Such an exemption might be granted "in spite of," and not
necessarily "because of," its adverse effect on federal employees.
Cf. Personnel Administrator of Massachusetts v. Feeney,
442 U. S. 256,
442 U. S. 279
(1979). Indeed, at least 14 other States grant special tax
exemptions for retirement income to state and local government
employees that they do not grant to federal employees. [
Footnote 2/3] As long as a state
Page 489 U. S. 823
income tax draws no distinction between the federal employees or
retirees and the vast majority of voters in the State, I see no
reason for concern about the kind of "discrimination" that these
provisions make. The intergovernmental immunity doctrine simply
does not constitute a most favored nation provision requiring the
States to accord federal employees and federal contractors the
greatest tax benefits that they give any other group subject to
their jurisdiction.
To be sure, there is discrimination against federal employees --
and all other Michigan taxpayers -- if a small group of residents
is granted an exemption. If the size of the exempt group remains
the same -- say, no more than 10% of the populace -- the burden on
federal interests also remains the same, regardless of how the
exempt class is defined. Whether it includes schoolteachers, church
employees, state judges, or perhaps handicapped persons, is a
matter of indifference to the Federal Government as long as it can
fairly be said that
Page 489 U. S. 824
federal employees are treated like other ordinary residents of
the State.
Even if it were appropriate to determine the discriminatory
nature of a tax system by comparing the treatment of federal
employees with the treatment of another discrete group of persons,
it is peculiarly inappropriate to focus solely on the treatment of
state governmental employees. The State may always compensate in
pay or salary for what it assesses in taxes. Thus, a special tax
imposed only on federal and state employees nonetheless may reflect
the type of disparate treatment that the intergovernmental tax
immunity forbids because of the ability of the State to adjust the
compensation of its employees to avoid any special tax burden on
them.
United States v. County of Fresno, 429 U.S. at
429 U. S.
468-469 (STEVENS, J., dissenting). It trivializes the
Supremacy Clause to interpret it as prohibiting the States from
providing through this limited tax exemption what the State has an
unquestionable right to provide through increased retirement
benefits. [
Footnote 2/4]
Arguably, the Court's holding today is merely a logical
extension of our decisions in
Phillips Chemical Co. v. Dumas
Independent School Dist., 361 U. S. 376
(1960), and
Memphis Bank & Trust Co. v. Garner,
459 U. S. 392
(1983). Even if it were, I would disagree with it. Those cases are,
however, significantly different.
Page 489 U. S. 825
Phillips involved a tax that applied only to lessees of
federal property. Article 5248 of the Texas Code imposed a tax on
lessees of federal lands measured by the value of the fee held by
the United States. Article 7173 of the Code, the only other
provision that authorized a tax on lessees, either granted an
exemption to lessees of other public lands or taxed them at a lower
rate. Lessees of privately owned property paid no tax at all.
[
Footnote 2/5] The company argued
that, "because Article 5248 applies only to private users of
federal property, it is invalid for that reason, without more." 361
U.S. at
361 U. S. 382.
The Court rejected that argument, reasoning that it was "necessary
to determine how other taxpayers similarly situated are treated."
Id. at
361 U. S. 383.
It then defined the relevant classes of "similarly situated"
taxpayers as the federal lessees who were taxed under Article 5248
and the lessees of other public property taxed under Article 7173.
Within that narrow focus, the Court rejected the school district's
argument that the discrimination between the two classes could be
justified. Because the Court confined its analysis to the two state
taxes that applied to lessees of public property, its reasoning
would be controlling in the case before us today if Michigan's
income tax applied only to public employees; on that hypothesis, if
state employees were exempted, the tax would obviously discriminate
against federal employees.
The troublesome aspect of the Court's opinion in
Phillips is its failure to attach any significance to the
fact that the tax on private landlords presumably imposed an
indirect burden on
Page 489 U. S. 826
their lessees that was as heavy as the direct burden on federal
lessees imposed by Article 5248. The Court did note that "[u]nder
these circumstances, there appears to be no discrimination between
the Government's lessees and lessees of private property."
Id. at
361 U. S. 381.
But -- possibly because of the School District's rather unwise
reliance on an equal protection analysis of the case [
Footnote 2/6] -- the Court never even
considered the question whether the political check provided by
private property owners was sufficient to save that tax from the
claim that it singled out federal lessees for an unconstitutional
tax burden. [
Footnote 2/7]
In
Memphis Bank & Trust Co., the question presented
was the lawfulness of a Tennessee tax on the net earnings of
Page 489 U. S. 827
banks doing business in the State that defined net earnings
to
"include interest received by the bank on the obligations of the
United States and its instrumentalities, as well as interest on
bonds and other obligations of States other than Tennessee, but
[to] exclude interest on obligations of Tennessee and its political
subdivisions."
459 U.S. at
459 U. S. 394.
Although the federal obligations were part of a large class, and
the tax therefore did not discriminate only against the income
derived from a federal source, all other members of the disfavored
class were also unrepresented in the Tennessee Legislature. There
was, therefore, no political check to protect the out-of-state
issuers, including the federal instrumentalities, from precisely
the same kind of discrimination involved in
McCulloch v.
Maryland. Indeed, in the
McCulloch case itself, the
taxing statute did not, in terms, single out the National Bank for
disfavored treatment; the tax was imposed on "all Banks, or
branches thereof, in the State of Maryland, not chartered by the
legislature." 4 Wheat. at 317-318. A tax that discriminates against
a class of nonresidents, including federal instrumentalities,
clearly is not protected by the political check that saved the
state taxes in cases like
United States v. County of
Fresno, 429 U. S. 452
(1977), and
City of Detroit v. Murray Corp., 355 U.
S. 489 (1958).
When the Court rejected the claim that a federal employee's
income is immune from state taxation in
Graves v. New York ex
rel. O'Keefe, 306 U. S. 466
(1939), Justice Frankfurter wrote separately to explain how a
"seductive cliche" had infected the doctrine of intergovernmental
immunity, which had been "moving in the realm of what Lincoln
called
pernicious abstractions.'" He correctly noted that only
a "web of unreality" could explain how the
"[f]ailure to exempt public functionaries from the universal
duties of citizenship to pay for the costs of government was
hypothetically transmuted into hostile action of one government
against the other."
Id. at
306 U. S.
489-490.
Page 489 U. S. 828
Today, it is not the great Chief Justice's dictum about how the
power to tax includes the power to destroy that obscures the issue
in a web of unreality; it is the virtually automatic rejection of
anything that can be labeled "discriminatory." The question in this
case deserves more careful consideration than is provided by the
mere use of that label. It should be answered by considering
whether the
ratio decidendi of our holding in
McCulloch v. Maryland is applicable to this quite
different case. It is not. I, therefore, respectfully dissent.
[
Footnote 2/1]
The legislative history of 4 U.S.C. § 111 correctly describes
the purpose of the nondiscrimination principle as
"[t]o 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."
H.R.Rep. No. 26, 76th Cong., 1st Sess., 5 (1939); S.Rep. No.
112, 76th Cong., 1st Sess., 12 (1939).
[
Footnote 2/2]
The quotation in the text omits one footnote, but this footnote
is relevant:
"11. A tax on the income of federal employees, or a tax on the
possessory interest of federal employees in Government houses, if
imposed only on them, could be escalated by a State so as to
destroy the federal function performed by them either by making the
Federal Government unable to hire anyone or by causing the Federal
Government to pay prohibitively high salaries. This danger would
never arise, however, if the tax is also imposed on the income and
property interests of all other residents and voters of the
State."
429 U.S. at
429 U. S. 463.
The Court has repeatedly emphasized that the rationale of the
nondiscrimination rule is met when there is a political check
against excessive taxation.
See South Carolina v. Baker,
485 U. S. 505,
485 U. S. 526,
n. 15 (1988) ("[T]he best safeguard against excessive taxation (and
the most judicially manageable) is the requirement that the
government tax in a nondiscriminatory fashion. For where a
government imposes a nondiscriminatory tax, judges can term the tax
excessive' only by second-guessing the extent to which the
taxing government and its people have taxed themselves, and the
threat of destroying another government can be realized only if the
taxing government is willing to impose taxes that will also destroy
itself or its constituents"); Washington v. United States,
460 U. S. 536,
460 U. S. 545
(1983) ("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. It has
been thought necessary because the United States does not have a
direct voice in the state legislatures").
[
Footnote 2/3]
See Ariz.Rev.Stat.Ann. §§ 43-1022(3) and (4)
(Supp.1988) (benefits, annuities, and pensions received from the
state retirement system, the state retirement plan, the judges'
retirement fund, the public safety personnel retirement system, or
a county or city retirement plan exempt in their entirety; income
received from the United States civil service retirement system
exempt only up to $2,500); Colo.Rev.Stat. §§ 39-22-104(4)(f) and
(g) (Supp.1988) (amounts received as pensions or annuities from any
source exempt up to $20,000, but amounts received from Federal
Government as retirement pay by retired member of Armed Forces less
than 55 years of age exempt only up to $2,000); Ga.Code Ann. §
48-7-27(a)(4)(A) (Supp.1988) (income from employees' retirement
system exempt); La.Rev.Stat.Ann. §§ 42:545, 47:44.1 (West
Supp.1989) (annuities, retirement allowances and benefits paid
under the state employee retirement system exempt from state or
municipal taxation in their entirety, but other annuities exempt
only up to $6,000); Md.Tax-Gen. Code Ann. § 10-207(o) (1988) (fire,
rescue, or ambulance personnel length of service award funded by
any county or municipal corporation of State exempt); Mo.Rev.Stat.
§ 169.587 (Supp.1989) (retirement allowance, benefit, funds,
property, or rights under public school retirement system exempt);
Mont.Code Ann. §§ 15-30-111(2)(c)-(f) (1987) (benefits under
teachers retirement law, public employees retirement system, and
highway patrol law exempt in their entirety; benefits under Federal
Employees Retirement Act exempt only up to $3,600); N.Y.Tax Law §
612(c)(3) (McKinney 1987) (pensions to officers and employees of
State, its subdivisions and agencies exempt); N.C.Gen.Stat. §§
105-141(b)(13) and (14) (Supp.1988) (amounts received from
retirement and pension funds established for firemen and law
enforcement officers exempt in their entirety, but amounts received
from federal employee retirement program exempt only up to $4,000);
Ore.Rev.Stat. §§ 316.680(1)(c) and (d) (1987) (payments from Public
Employes Retirement Fund exempt in their entirety, but payments
under public retirement system established by United States exempt
only up to $5,000); S.C.Code §§ 12-7-435(a), (d), (e) (Supp.1988)
(amounts received from state retirement systems and retirement pay
received by police officers and firemen from municipal or county
retirement plans exempt in their entirety; federal civil service
retirement annuity exempt only up to $3,000); Va.Code §
58.1-322(C)(3) (Supp.1988) (pensions or retirement income to
officers or employees of Commonwealth, its subdivisions and
agencies, or surviving spouses of such officers or employees paid
by the Commonwealth or an agency or subdivision thereof exempt);
W.Va.Code §§ 11-21-12(c)(5) and (6) (Supp.1988) (annuities,
retirement allowances, returns of contributions or any other
benefit received under the public employees retirement system, the
department of public safety death, disability, and retirement fund,
the state teachers' retirement system, pensions and annuities under
any police or firemen's retirement system exempt); Wis.Stat. §
71.05(1)(a) (Supp.1988-1989) (payments received from the employees'
retirement system of city of Milwaukee, Milwaukee city employees'
retirement system, sheriff's retirement and benefit fund of
Milwaukee, firefighters' annuity and benefit fund of Milwaukee, the
public employee trust fund, and the state teachers' retirement
system exempt).
[
Footnote 2/4]
The Court also suggests that compensating state employees
through tax exemptions, rather than through increased pension
benefits, discriminates against federal taxpayers by reducing the
pension income subject to federal taxation.
See ante at
489 U. S. 815,
n. 4. But retired state employees are not alone in receiving a
subsidy through a tax exemption. Michigan, like most States,
provides tax exemptions to select industries and groups.
See,
e.g., Mich.Comp.Laws Ann. § 205.54a(g) (West 1986 and
Supp.1988) (industrial processing), and § 205.54a(p) (1986)
(pollution control). That the State chooses to proceed by indirect
subsidy, rather than direct subsidy, however, should not render the
tax invalid under the Supremacy Clause.
[
Footnote 2/5]
"Although Article 7173 is, in terms, applicable to all lessees
who hold tax-exempt property under a lease for a term of three
years or more, it appears that only lessees of
public
property fall within this class in Texas. Tax exemptions for real
property owned by private organizations -- charities, churches, and
similar entities -- do not survive a lease to a business lessee.
The full value of the leased property becomes taxable to the owner,
and the lessee's indirect burden consequently is as heavy as the
burden imposed directly on federal lessees by Article 5248."
361 U.S. at
361 U. S.
380-381 (emphasis in original; footnote omitted).
[
Footnote 2/6]
"The School District addresses this problem, essentially, as one
of equal protection, and argues that we must uphold the
classification, though apparently discriminatory, 'if any state of
facts reasonably can be conceived that would sustain it.'
Allied Stores v. Bowers, 358 U. S. 522,
358 U. S.
528."
Id. at 383.
[
Footnote 2/7]
An interesting feature of the
Phillips opinion is its
reference to the fact that the tax upheld in
United States v.
City of Detroit, 355 U. S. 466
(1958), had actually included an exemption for school-owned
property -- and therefore discriminated "against" federal property
in the same way the tax involved in this case discriminates
"against" federal employees.
"This argument misconceives the scope of the Michigan decisions.
In those cases, we did not decide -- in fact, we were not asked to
decide -- whether the exemption of school-owned property rendered
the statute discriminatory. Neither the Government nor its lessees,
to whom the statute was applicable, claimed discrimination of this
character."
Phillips Chemical Co. v. Dumas Independent School
Dist., 361 U.S. at
361 U. S. 386.
The Court's description of the relevant class of property subject
to tax in the
Detroit case obviously would have provided
the same political check against discrimination regardless of how
the school property might have been classified. In
Detroit, Justice Black described that class as
follows:
"But here the tax applies to every private party who uses exempt
property in Michigan in connection with a business conducted for
private gain. Under Michigan law, this means persons who use
property owned by the Federal Government, the State, its political
subdivisions, churches, charitable organizations and a great host
of other entities. The class defined is not an arbitrary or
invidiously discriminatory one."
355 U.S. at
355 U. S.
473.