Davis v. Michigan Department of Treasury

489 U.S. 803

Case Year: 1989

Case Ruling: 8-1, Reversed and Remanded

Opinion Justice: Kennedy

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Concurring Opinions

Dissenting Opinions

Court Opinion Joiner(s):

Blackmun, Brennan, Marshall, O'Connor, Rehnquist, Scalia, White


1st Concurring Opinion



1st Dissenting Opinion

Author: Stevens


2nd Concurring Opinion



2nd Dissenting Opinion



3rd Concurring Opinion



3rd Dissenting Opinion



Other Concurring Opinions:



Michigan's revenue code provided that retirement benefits paid to individuals by the state or any of its political subdivisions were exempt from state income taxes. Retirement benefits from any other source, including federal retirement income, were subject to the tax. Paul S. Davis spent his career in federal service, as a lawyer for the Securities and Exchange Commission and then as an administrative law judge. As a Michigan resident, he paid state income taxes on his federal retirement benefits. In 1984, however, Davis petitioned the state for a refund of taxes paid on his federal benefits for the 1979–1984 tax years.

He based his case on a federal statute (4 U.S.C. §111) passed in 1939 to clarify the doctrine of intergovernmental tax immunity. The law provided:

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.


Davis's claim was rejected by state revenue authorities and in the state courts. The state argued that Davis was not covered by the act because he was no longer an "employee" of the federal government but simply a receiver of annuity benefits. Further, Michigan claimed that the state law did not discriminate against federal employees but only provided a special exemption for state retirees, a reasonable incentive to attract and keep qualified people in state government service.

Davis appealed to the U.S. Supreme Court, and, in fact, personally argued his case before the justices. He enjoyed the help of a powerful ally, however, when the U.S. government supported his claim as a friend of the court.



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 the 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 (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.

For a time, McCulloch was read broadly to bar most taxation by one sovereign of the employees of another. See Collector v. Day (1871) (invalidating federal income tax on salary of state judge); Dobbins v. Commissioners of Erie County (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 (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 (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 (1939) overruled theDay-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 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. 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, 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 tax immunity despite the abrogation of state employees' immunity from federal taxation. . . .

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. Accordingly, section 4 of the proposed Act (now section 111) expressly waived whatever immunity would have otherwise shielded federal employees from nondiscriminatory state taxes. . . .

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 of those with whom it deals."

. . . 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. Hence, we conclude that the retention of immunity in section 111 is coextensive with the prohibition against discriminatory taxes embodied in the modern constitutional doctrine of intergovernmental tax immunity.

. . . Thus, the dispositive question in this case is whether the tax imposed on appellant is barred by the doctrine of intergovernmental tax immunity.

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.

In support of its first contention, the State points out that the purpose of the immunity doctrine is to protect the 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. 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. . . .

Under our precedents, "[t]he imposition of a heavier tax burden on [those who deal with one sovereign] than is imposed on [those who deal with the other] must be justified by significant differences between the two classes." Phillips Chemical Co. v. Dumas Independent School District [1960]. . . .

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.

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.

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. . . .

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 judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings not inconsistent with this opinion.


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 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. . . .

If Michigan were to tax the income of federal employees without imposing a like tax on others, the tax would be plainly unconstitutional. Cf. McCulloch v. Maryland (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 (1939). 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. Once one understands the underlying reason for the McCulloch holding [the immunity doctrine is a check against the abusive use of the taxing power by one sovereign against the other], it is plain that this tax does not unconstitutionally discriminate against federal employees. . . .

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.