# Davis v. Michigan Department of the Treasury

> Supreme Court of the United States · March 28, 1989 · 489 U.S. 803

URL: https://www.frixlaw.com/law-library/cases/9431622

## Case

- **Full name:** Davis v. Michigan Department of the Treasury
- **Court:** Supreme Court of the United States
- **Decided:** March 28, 1989
- **Citations:** 489 U.S. 803; 10 Employee Benefits Cas. (BNA) 2097; 57 U.S.L.W. 4389; 63 A.F.T.R.2d (RIA) 1174; 109 S. Ct. 1500; 103 L. Ed. 2d 891; 1989 U.S. LEXIS 1667
- **Precedential status:** Published
- **Opinion:** Dissent by Stevens
- **Judges:** Kennedy, Rehnquist, Brennan, White, Marshall, Blackmun, O'Connor, Scalia, Stevens
- **Cited by:** 1,072 later opinions in the Frix Law Library

## Citator (automated)

- **Yellow flag:** Questioned by Brown v. Mierke, 191 W. Va. 120 (1994).
- Negative treatments: 1
- Distinguished by: 1
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9431622

## How later opinions describe it (automated extraction)

- recognizing that courts must "construe th[e] provision [at issue] with the statutory scheme in which it is embedded"
- finding a state tax system that favored state retirees over federal retirees violated intergovernmental immunity even though the tax arguably did not interfere with the Federal Government's ability to perform its governmental functions
- holding that private entities or individuals who are subjected to discriminatory taxation 3 on account of their dealings with the federal government can receive the protection of the 4 intergovernmental immunity doctrine
- explaining that “[i]t 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.”
- recognizing that 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.”

## Opinion text

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, 523 (1988); United States v. County of Fresno, 429 U. S. 452, 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 immu *819 nity 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 Cory., 355 U. S. 489, 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, 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 . 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 :
*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 MVulloch 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, MVulloch 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 436.” 429 U. S., at 462-464 . 2
*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. McCulloch v. Maryland, 4 Wheat. 316, 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 468 (Stevens, J., dissenting). The Michigan tax here applies to approximately Alk 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 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 *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, 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. 3 As long as a state *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 *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 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. 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.
*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. 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 382 . The Court rejected that argument, reasoning that it was “necessary to determine how other taxpayers similarly situated are treated.” Id., at 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 *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 881. But — possibly because of the school district’s rather unwise reliance on an equal protection analysis of the case 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. 7
In Memphis Bank & Trust Co., the question presented was the lawfulness of a Tennessee tax on the net earnings of *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 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 instrumental-ities, 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 cliché” 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 489-490 .
*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.
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).
The quotation in the text omits one footnote, but this footnote is relevant:
“ “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 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, 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 *821 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, 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”).
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 $2500); 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 $2000); 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 $6000); 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. §§ 15-30-1 ll(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 $3600); 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 $4000); Ore. Rev. Stat. §§316.680(l)(c) and (d) (1987) (payments from Public Employes Retire *823 ment Fund exempt in their entirety, but payments under public retirement system established by United States exempt only up to $5000); 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 $3000); Va. Code § 58.1-322(0(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 §§ ll-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 (l)(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).
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 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.
“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 380-381 (emphasis in original; footnote omitted).
“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, 528 .” Id., at 383.
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 386 .
The Court’s description of the relevant class of property subject to tax in the Detroit ease 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 473.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9431622. Public record. Not legal advice.