BARKER v. KANSAS
Legal provision: 4 U.S.C. 111
Argument of Kevin M. Fowler
Chief Justice Rehnquist: We'll hear argument next in No. 91-611, Keyton Barker and Pauline Barker v. Kansas.
Mr. Fowler, you may proceed.
Mr. Fowler: Thank you, Mr. Chief Justice Rehnquist, and may it please the Court:
The question presented for decision in this case is whether the Kansas Income Tax Act violates controlling principles of intergovernmental tax immunity by favoring retired employees of the State and its political subdivisions over retired members of the United States Armed Forces.
Just three terms ago, in the case of Davis v. Michigan Department of Treasury, this Court applied settled principles of intergovernmental tax immunity to strike down Michigan's differential income-tax deduction scheme because it uniformly favored all retired State or local government retirees.
Unknown Speaker: The Court also construed a statute, didn't it?
Mr. Fowler: That is correct, Your Honor, it construed a statute which this Court--
Unknown Speaker: And just said that that incorporates the intergovernmental rules.
Mr. Fowler: --Your Honor, I believe in the Davis case the Court said that 4 U.S.C., section 111 is coextensive with, and thus fully preserves the modern doctrine of intergovernmental tax immunity.
Unknown Speaker: So all you need is the statute?
Mr. Fowler: Your Honor, perhaps the statute is sufficient in and of itself because it plainly prohibits discrimination against Federal officers or employees because of the Federal source of their pay or compensation.
And that is precisely what the Kansas Supreme Court has endorsed here under State standards of review.
For the reasons set forth in our briefs, which I will attempt to elaborate on here, we respectfully submit that the decision below should be reversed, because the Kansas income tax structure plainly discriminates in favor of all retired employees of the States and its political subdivisions over retired members of the United States Armed Forces in Kansas.
Petitioners represent a class of approximately 14,000 retired members of the Armed Forces in Kansas, and their joint taxpayer spouses were applicable, who have been subject to disparate income tax treatment by the State of Kansas from at least tax year 1984 through tax year 1989.
Several named petitioners brought suit in 1989 challenging that disparate tax treatment in the wake of Davis v. Michigan Department of Treasury, on the basis that the Kansas income tax structure, on its face and as applied, violates governing principles of intergovernmental tax immunity.
Notwithstanding the arguments raised below, the Kansas Supreme Court held that differential tax treatment of military retirement income by the State of Kansas was constitutionally permissible, because it was directly related to and justified by significant differences between the classes of retirees.
However, in route to its decision, the Kansas supreme court violated several cardinal principles of law that this Court has recognized since at least 1960.
Those principles are as follows.
Because the Federal Government's interest must weigh in the balance whenever intergovernmental tax immunity is at issue, the reviewing court must examine the applicable tax structure as a whole, and must focus on the nature of the classification erected by statute to determine whether the proffered reasons for discrimination furnish the actual basis for differential treatment, and if so, whether those differences furnish an adequate justification for differential treatment.
The Kansas income tax structure utilizes Federal adjusted gross income as the starting point for determining an individual taxpayer's Kansas taxable income.
Because Federal adjusted gross income incorporates and includes all forms of retirement income... from whatever source derived... Kansas, one would think, should uniformly tax all forms of nondisability government retirement income.
But it does not.
Because of a specific, statutory exemption scheme adopted by the Kansas legislature and in effect for more than 30 years, Kansas exempts from State income taxation all retirement benefits paid by the State and its political subdivisions to their respective retirees.
Unknown Speaker: Well, did Kansas rely on some Federal cases that hold that military retirement benefits are not deferred compensation, but instead are reduced pay for current services?
Mr. Fowler: That is correct, Your Honor.
The Kansas Supreme--
Unknown Speaker: Are those cases wrong?
Mr. Fowler: --Your Honor, those cases are not wrong for what they stand for.
Those cases did not involve taxation, they did not involve discrimination against Federal military retirees, and they did not involve 4 U.S.C. section 111 or the doctrine of intergovernmental tax immunity.
For tax purposes, military retired pay is substantially analogous to all other forms of pension or annuity income.
And that is a point that has been expressly recognized by Congress.
Unknown Speaker: Well, I guess the answer to the question almost depends on the lens with which you're viewing it.
At what level of generality do we answer the question that you raise?
There are differences.
Mr. Fowler: Your Honor--
Unknown Speaker: When do we recognize them and when don't we?
Mr. Fowler: --Your Honor, there are differences between retired members of the military and other forms of government retirees.
The differences should be recognized only if they are significant, and only if they are directly related to the particular purpose and classification at issue.
In this case, Kansas does not draw distinctions based upon the characterization of retired income... retirement income as either deferred compensation or current compensation.
The tax structure does not draw that classification.
The purpose for the exemptions for State and local government retirement income is unquestionably to extend the value of that State and local retirement income, while reducing and minimizing the State's employment costs.
And that, of course, is a purpose that this Court recognized clearly in... Davis as being illegitimate.
Unknown Speaker: Now if you win here, the holding presumably would be retroactive?
Mr. Fowler: --Your Honor, under the general rule applicable in civil cases, I believe this Court has recognized, we would assume that it would be retroactive at least for the parties before the Court.
That issue, however, is not expressly presented by this case.
But moreover, we would submit that there is--
Unknown Speaker: Well, it's certainly lurking there.
What do you suppose we're calking about, looking at all 50 States here?
Mr. Fowler: --Your Honor, in our judgment, there is no retroactivity question presented by this case for the simple reason that reversal of the decision below simply requires application of 4 U.S.C. section 111.
Unknown Speaker: Well, but didn't the Jim Beam opinion indicate that if we don't say anything about it, then it is generally retroactive?
Mr. Fowler: That's correct.
Unknown Speaker: So you're saying don't say anything about it.
And isn't that the consequence?
Mr. Fowler: Well, Your Honor, that would suit just fine with me.
But there is no retroactivity issue in this case.
Because reversal of the judgment below simply requires application of section 111 of title 4 of the United States Code.
Unknown Speaker: Well, you don't think it's bad that if these retirees' money has been taken from them unconstitutionally it should be given back.
You're... you're not apologizing for that, are you?
Mr. Fowler: Absolutely not, Your Honor.
We believe it should be given back.
But as this Court has recognized previously, the remedial issues involved in this case, which have not yet been passed upon by the Kansas Supreme Court, are typically left to the State courts to pass on in the first instance.
But back to my other point, there is no retroactivity question in this case simply because it requires application of a statute, which this Court, just three terms ago, described as having unmistakable language and meaning, which has been on the books for more than 50 years.
In order to hold that a decision in this case is not retroactive, would in effect suspend the effective date of a controlling Federal statute which has been the supreme law of the land since 1939.
And I think Fleming v. Fleming certainly supports the proposition that that is something that would be inappropriate to do.
Unknown Speaker: May I ask--
Mr. Fowler: Now if this were an ambiguous statute, perhaps the conclusion might be different.
But this is a plain and unambiguous statute.
Unknown Speaker: --Of course, it's a statute that gives consent to tax.
It's not a prohibition, isn't it?
But let me ask you a question about your basic... one of the differences in this case is that there is... at least one or two categories of Federal retirees who are not taxed by Kansas.
Isn't that right?
Mr. Fowler: That's correct, Your Honor.
Unknown Speaker: Now, what if Kansas, in its retirement system, had several categories of State employees, and didn't tax... or did tax two or three of those categories.
Would that eliminate the discrimination?
Mr. Fowler: It wouldn't eliminate the discrimination, Your Honor.
In fact, that was precisely the case in Phillips Chemical Company v. Dumas Independent School District, where the State of Texas imposed a discriminatory tax which generally provided benefits to lessees of State and local property, but there were some lessees of State and local properties that didn't get the same benefits and were subject to the same tax treatment as the United States lessees.
The Court simply stated in passing that that may reduce the extent of the discrimination; it obviously does not eliminate it.
Unknown Speaker: Well, supposing the State gave a tax... tax-free retirement benefits to only 10 percent of its retirees, and Federal retirees, 90 percent were tax-free under the State but there were 10 percent that were taxed.
Would that 10 percent also be entitled to the benefit?
Mr. Fowler: Your Honor, I think that it would depend upon the purpose behind the exemptions, and the classification as it's drawn.
Unknown Speaker: Well, the purpose in the State exemptions is to increase... encourage people to work for the State.
It's a form of extra compensation.
That's perfectly clear.
Mr. Fowler: Your Honor, the Court recognized in Davis that simply relying upon that legitimate State purpose is not a basis for discrimination.
Because it says nothing about differences between the classes.
It needs to be kept in mind that in dealing with intergovernmental tax immunity, that sovereign Federal interest must be weighed in the balance.
And the only way that that can be accomplished is if the discriminatory classification is truly intended to account for significant differences between the classes, and it furthers a legitimate State interest which does not trench upon the prerogatives of the national Government.
Now, if that--
Unknown Speaker: What all that boils down to is that if they give a tax-free retirement benefit to any State employees, they must give them to all Federal employees.
That's your position, I gather.
Mr. Fowler: --We're not suggesting that, Your Honor.
But certainly, if the... if preferential treatment is being given... especially to all State and local retirees... but if it is given to State and local retirees, one must look to the purpose for it and how the classification is drawn in order to properly evaluate it.
And that's all we're asking the Court to do here.
Because the Kansas Supreme Court failed to examine the applicable tax structure, as a whole, and it failed to focus on the nature of the statutory classification.
Unknown Speaker: Because if you examine it as a whole, the Federal employees are basically treated like everybody else in Kansas.
They're just not treated like this small group of people who get a special benefit.
Mr. Fowler: Well, Your Honor, this small group of people that get a special benefit, as this Court recognized in Davis, because they are in privity with the State, the danger that a State is violating the doctrine of intergovernmental tax immunity is greatest in this case.
Once a decision has been made to discriminate by giving exemptions to a favored class of State and local government employees, there is no political check in the system to turn back the clock.
And the reason for that is simple.
In order to provide the check, to provide equal treatment which is mandated under the nondiscrimination clause of section 111, that would either require an exemption for similarly situated Federal retirees, which would reduce tax revenue; or, if the tax were applied uniformly, as this Court recognized in Davis, in order to provide State and local retirees with the same level of benefits, benefits would have to be increased in fact beyond the level of that necessary by a tax exemption.
Which means once the decision to discriminate has been made, there is no political check because there are political, economic, and institutional forces against changing the status quo.
Because any way they turn, they are going to be losing revenue.
And it may result in a tax increase across the board.
And the vast majority of voters in the State will not stand for that, which is why we are here in Court.
Because military retirees in Kansas have been fighting for equal treatment in the legislature for over 20 years.
They haven't gotten it.
And we are now asking this Court to provide them with equal treatment, because they are substantially analogous to every State and local government retiree for all material purposes.
Military retirees must serve for at least 20 years in the Armed Forces before they are eligible for retirement.
They must meet statutory criteria before they are eligible for retirement; when members of the military retire, they lose their entitlement to active duty pay and allowances and instead receive retired pay.
That retired pay is calculated based upon past years of service.
It's calculated in accordance with their highest rank of paid rate held.
While in retirement... retired members of the Armed Forces are not required to perform any active, service, or affirmative duties to receive military retired pay.
For these reasons, it isn't surprising that under the Internal Revenue Code Congress has determined that these military retired folks are entitled to the same tax treatment as all other Government retirees.
They're given equal treatment by Congress, and as we noted in our brief, Congress has expressly determined that there are no substantial grounds for distinguishing the tax treatment of the plan for the uniformed services from these other plans.
The States are not given the power or the authority to override or veto that authoritative determination.
There are no significant differences.
There is no justification for disparate treatment.
If there are no--
Unknown Speaker: Well, don't... don't the military get some benefit?
They get to go to the PX when they're retired; they get military medical treatment that perhaps Federal retirees, as a class, don't get?
Mr. Fowler: --That's correct, Your Honor.
And those types of benefits, which are also available to members of the military on active duty, are expressly exempt from taxation under the Internal Revenue Code.
Since the State of Kansas has adopted the piggy-back approach, those allowances or special entitlements don't qualify as income to a retired person.
But it would seem to me, Your Honor, that if Congress has decided to provide retired members of the military who have provided honorable service to the United States for 20 years or more with access to medical services, so that they might remain fit in retirement, with access to PX or commissary privileges, it's not a proper domestic concern of the State that the Federal Government has elected to provide these additional services to them.
Unknown Speaker: No, but it does tend to distinguish the military retirees from the Federal Government as a whole retirees that were involved in the Davis case.
Mr. Fowler: Your Honor, there may be distinguishing features.
We're not denying that.
But they must be relevant for tax purposes.
Military retirees can wear uniforms, too.
And although the State of Kansas is suggesting that that's another reason that they can tax them, it must be relevant to some legitimate aspect of tax policy.
Unknown Speaker: I must say it's hard to say what's relevant to a legitimate aspect of tax policy.
I assume it would be constitutional to impose a tax on uniforms.
I mean, I suppose you could... a State could... you know, we're going to... any uniform, nurses uniform, soldier's uniform.
Mr. Fowler: Your Honor, perhaps I misspoke.
Part of the State's argument in this case is not that they can tax retired members of the military because they... well, they're saying precisely that they can impose an income tax on retired members of the military in part because they can wear a uniform in retirement.
They're not suggesting that they can tax the uniforms... and perhaps they could tax the uniforms.
But certainly the fact that they can wear uniforms doesn't seem to us to be a legitimate justification for taxing the income received by those members of our retirement... retired community.
Unknown Speaker: Do you really want to rest on the question of what is a legitimate justification as opposed to what is a generally applicable distinction within the tax structure?
Mr. Fowler: Your Honor--
Unknown Speaker: If Kansas generally drew a distinction between the taxation of deferred income and reduced income for reduced services you wouldn't be here, would you?
Mr. Fowler: --That may or may not be true, Your Honor, because Kansas has not drawn that distinction.
But even if they were to do so, under the Davis and Phillips test, it still becomes necessary... even if one concludes that a direct relationship exists... whether that is constitutionally permissible under the second prong of the test, which is the ultimate standard of justification.
And in the event that Congress has foreclosed a State from relying upon a particular justification because it doesn't hinge upon a proper domestic concern and it trenches upon the prerogatives of Congress, then certainly further inquiry would be required.
Unknown Speaker: So you're saying we can't avoid the substantive inquiry, even though we would in a first-tier equal protection case?
Mr. Fowler: That's correct, Your Honor.
As the Court has noted in the past, equal protection analysis is not necessarily controlling here, because Federal sovereign interests must be weighed in the balance.
If there are no--
Unknown Speaker: Well, and because... because of the statute.
Mr. Fowler: --Because of 4 U.S.C. section 111.
Unknown Speaker: Yes.
Mr. Fowler: And the modern doctrine of intergovernmental tax immunity, the heart of which is nondiscrimination.
Unknown Speaker: Well, why do you need more than the statute?
Mr. Fowler: Your Honor, perhaps we don't need more than the statute.
We would like some relief either under the constitutional doctrine, or its statutory embodiment in 4 U.S.C. section 111.
If the Court chooses to give us relief under one, rather than the other, we will be just as happy.
Unknown Speaker: Mr. Manning, we'll hear from you.
Argument of John F. Manning
Mr. Manning: Thank you, Mr. Chief Justice, and may it please the Court:
I'd like to begin by addressing Justice O'Connor's question about the level of generality at which this issue must be addressed.
The statute prohibits taxation that discriminates against an officer or employee because of the source of the compensation.
In Davis, this Court defined that test as prohibiting discriminatory taxation between Federal and State retirees unless there were significant differences between the two classes of taxpayers.
Unknown Speaker: It really doesn't prohibit it.
It just doesn't extend the consent.
Mr. Manning: It does... by negative implication, I believe... in... this Court, in Davis held that by negative implication it also prohibits it and that it's coextensive with the constitutional doctrine of intergovernmental tax immunity.
But to return to the question of what a significant difference would be, for purposes of Davis, we believe that significance has to be assessed in terms of a legitimate tax purpose.
Now, there are many differences between Federal and State employees.
To give one example, Federal patent officers are different from any State or local government employees, because unlike State and local government employees, they're authorized to issue patents.
That is a significant difference between a Federal employee and a State and local government employee.
But it is not a difference that has any significance for tax purposes.
And we believe that this Court would invalidate a statute that taxed Federal patent officers more heavily than State and local government employees.
Unknown Speaker: Assuming the case in which a State made a difference between contributory and noncontributory plans for taxation or exemption of retirement benefits, and it just so happened that Federal employees were disadvantaged, would that be a legitimate tax distinction in your view?
Mr. Manning: We believe that a neutrally drawn classification that attempted to account for double taxation by reference to the manner of funding would be a legitimate classification and would survive scrutiny under section 111.
However, that is not that... the... what is going on in this case.
In this case, it is true that no part of the military retired pay is taxed before it is received because it is not funded by employee... in any part, by previous employee contributions.
It is also true that State and local government retirement benefits are funded in part through employee contributions that were previously taxed.
But Kansas also exempts that portion of State and local government retirement benefits that consist of employer contributions and accumulated interest which, like military retired pay, have never previously been taxed.
Now, we submit that a nondiscriminatory tax truly intended to avoid double taxation would not fully exempt State and local government retirement benefits based on their source, but would generally exempt retirement benefits to the extent they reflect previously taxed contributions.
And that, by the way, is the way in which the Federal Government taxes... benefits disbursed pursuant to qualified pension plans under section 72 and section 402 of the Internal Revenue Code.
So there is ample precedent for Kansas to draw a classification in a neutral way that accounted for the justification that they cite.
I would also like to address Justice O'Connor's point about the other Federal cases.
The legal conclusion that retired pay is current compensation in cases involving such matters as bankruptcy or laches does not necessarily govern the question in the context of section 111 and the doctrine of intergovernmental tax immunity.
As Mr. Fowler pointed out, Congress, in fact, treats military retired pay not as current pay in the Internal Revenue Code, but as deferred compensation in such statutes as the... as FICA, and in the individual retirement account statute.
So there is certainly a recognition in the Federal code that military retired pay can have aspects of deferred compensation.
And we believe--
Unknown Speaker: How many other States have a plan like Kansas that singles out retired military?
Mr. Manning: --Justice O'Connor, I'm not aware of the exact number.
I'm certain that there are at least three other States: Arkansas, Missouri, and Colorado; and that a number of other States raised... that the question is presented in a number of States because statutes were amended following this Court's decision in Davis to give exemptions of various degrees to Federal retirees.
Some of them extended them fully to civil servants and military retirees; some of them extended them only to civil servants.
But prior to Davis, a number of States taxed both in their refund claims pending, and in a number of States--
Unknown Speaker: But there've been amendments in some of those States since Davis?
Mr. Manning: --There have been... 19 States, I believe, have amended their statutes in the aftermath of Davis to--
Unknown Speaker: And three or four that have not?
Mr. Manning: --At least three or four have not taken into account the military retired... have not treated military retired pay the way they have treated Federal civil servants.
I believe there may be more than that, but I am not aware of the exact number, Your Honor.
We submit that the State mischaracterizes military retired pay in substance when it compares it to the salaries of current State and local government employees.
We believe that military retired pay is much more like the deferred compensation that's received by State retirees.
As this Court noted in Davis, the earmarks of deferred compensation are receipt of benefits based upon past years of service, and highest pay-rank achieved.
And that's precisely the system that's used by the Kansas retirement system, as well as the Federal military retirement system.
Unknown Speaker: Excuse me.
I didn't want to interrupt you if you weren't through with the point.
I was just wondering, in your view of Davis and the statute, supposing that Kansas taxed... did not have tax-free retirement benefits for its State Police and all its law enforcement officers.
Would they then be able to tax the military retirees?
Mr. Manning: --I'm... no, Your Honor, I don't believe that they would.
It would depend, of course, on the justification that was proffered by the State for granting the exemption.
Unknown Speaker: Say their reason for doing it was they wanted to treat all law enforcement and military people alike, figuring that they're somewhat... the most comparable State employees, and they wanted the tax.
They wanted to get this additional tax revenue, and then treat Federal military retirees just like other Kansas citizens.
Mr. Manning: --The assertion that military retirees are most like State and local police would not be sufficient to overcome the requirements of the quality that are imposed by section 111, which states that the State cannot discriminate against Federal employees... as extended to retirees in Davis, or as applied to retirees in Davis... because of the source of their compensation.
We believe that a conclusion that these are the closest categories is not sufficient to establish that the taxation of military retirees is not because of the Federal source of their compensation.
Rather, we submit that the State would have to come up with some substantive characteristic--
Unknown Speaker: So that if they grant any tax-free retirement benefits to even a tiny fraction of their retired work force, they must grant all Federal employees the tax-free--
Mr. Manning: --It would depend on whether they applied their classification in a neutral and even-handed way.
It might well be that if Kansas granted an exemption for schoolteachers because they wanted to encourage people to go and become schoolteachers that it might be a valid justification if it was applied even-handedly to cover schoolteachers on Indian reservations or schoolteachers who taught in schools on military bases.
As long as the classification is drawn in a neutral way and captures the policy that the State asserts as the basis for its tax, then it doesn't violate section 111's prohibition against taxation because of the source of the Federal compensation.
That would be taxation that was because of the social policy of encouraging people to become teachers.
Now that's not to say that the State might not draw a classification in that sort of circumstance that would run afoul of section 111.
For example, if the State drew a classification that was very general, but that burdened only a tiny, tiny percentage... an inconsequential percentage of State employees, but burdened a large number of Federal employees, this Court might well conclude that that was a pretext for discrimination.
Unknown Speaker: --That's your... that's your patent officer example.
That's why that was bad, really, because they picked out a category that just doesn't exist except at the Federal level.
Mr. Manning: That... that's right, Your Honor.
And the... we submit that that's exactly what they're doing in this case with military retirees.
The State has not indicate that there are any tax consequences that flow from the fact that military retirees are subject to recall or must comply with the Uniform Code of Military Justice.
All they have asserted is that these are characteristics that have substantial consequences, it's true.
But they have not suggested that there's any relationship between those consequences and any legitimate interest of the State in tax... in taxation, except that they want to get more money from military retirees and not from any State or local government retirees.
In addition, we believe that... we believe that the facial discrimination is sufficient to invalidate--
Unknown Speaker: Well, excuse me.
You wouldn't mind that if there were a sufficient number of State people who were also irrationally burdened in that way.
I mean, I don't know what is a rational tax.
If they... if they want to choose... if they want to tax medals they can tax medals, I presume, so long as... so long as it doesn't seem targeted at the Federal Government.
Mr. Manning: --You're absolutely right, Your Honor.
They could tax medals, as long as they did it in an even-handed and neutral way, and as long as the burden that fell on State employees as opposed to Federal employees was not so lopsided that it suggested that its irrationality was merely a show for discrimination.
If there are no further questions--
Unknown Speaker: Thank you, Mr. Manning.
Mr. Bartle, we will hear from you.
Argument of James A. D. Bartle
Mr. Bartle: Thank you, Mr. Chief Justice, and may it please the Court:
In Kansas, military retired pay is taxable, and State retirement benefits are not taxable.
And it's our position that this differential tax treatment is valid because it satisfies the test set out in Davis v. Michigan.
And that test requires that differential tax treatment must be directly related to and justified by significant differences between the two classes of taxpayers.
And our position is, very simply, that these two classes are taxed differently because they are different.
And the primary justification for different tax treatment is the fact that military retirees receive current pay for current services; and State retirees receive pension benefits... they receive deferred compensation for prior services.
The character of the compensation received by these two classes of taxpayers is fundamentally different.
And the different tax treatment is based on the nature... on the character of the income.
It is not based on the source of the income.
And taxation based on the source is the only type of discrimination that the statute prohibits.
The statute does not prohibit a State from drawing reasonable distinctions in its income tax structure where there's a legitimate reason for doing so.
The only prohibition is where it's discriminatory because the Federal Government is the source of the income.
Now there really is no question that this Court has characterized military retired pay as current pay for current services.
And in McCarty v. McCarty, this Court stated that military retired pay differs in some significant respects from a typical pension and retirement plan.
Unknown Speaker: But what indication is there that that's the distinction that the State was drawing?
The State also taxes retired pay of CIA employees, I gather.
Mr. Bartle: Well--
Unknown Speaker: And they are not in the same position that military retirees are, subject to recall.
Mr. Bartle: --First, I'm not sure that we have any CIA retirees in the State of Kansas.
And the record does not reflect that we do.
Unknown Speaker: What difference does that make?
Mr. Bartle: Yes, the CIA, that's secret.
Unknown Speaker: Yes, that's right.
Good point, good point.
If you had any--
If you had any, they would be taxed, wouldn't they?
Mr. Bartle: I believe that's correct, yes.
Unknown Speaker: Yes, now that has nothing to do with the distinction you're justifying the tax on the military retirees by.
I mean, I suppose you could also say military retirees have brown uniforms or, you know... it's a distinction, but we have no reason to believe that's the distinction that the State was using in creating the tax code.
Mr. Bartle: I wanted to get to--
Unknown Speaker: Good.
Mr. Bartle: --that question of uniforms in a minute.
As to the CIA retirees, I believe you're correct, that they are substantially different.
They're not similarly situated with military retirees, and the same set of justifications which would justify taxing the military retirees would not necessarily also justify taxing the CIA retirees.
Unknown Speaker: But you'd have another one for them, right?
Mr. Bartle: Perhaps we would.
Unknown Speaker: I see.
Mr. Bartle: Or, Your Honor, perhaps we wouldn't.
Perhaps it is the case that the taxation of certain Federal retirees, other than military retirees, does not measure up to the Davis standard.
Perhaps the State, if it had to, would be unable to justify that different tax treatment.
And perhaps, as to certain other Federal retirees, the tax might be unconstitutional.
But we don't believe that's the case here.
Unknown Speaker: So is it... is it your submission that under a properly drawn statute... and, of course, you would say that this is one... but under a properly drawn statute, the State of Kansas could say if any retiree has current obligations the payments received by him are taxable?
Is that the submission you're making?
Mr. Bartle: No, Your Honor.
Our primary justification is the distinction between current pay and deferred compensation.
Unknown Speaker: So it's not the obligations; it's the pay?
Mr. Bartle: --We make the point of the continuing obligations that the military retirees owe to the Federal Government, because that is characteristic of a class of people who are receiving current compensation.
They have ongoing duties and responsibilities.
Unknown Speaker: And so we know whether or not there's current versus... pay versus some other kind of pay because they have current obligations to perform.
Is that how we know that it's current pay?
Mr. Bartle: I think that is one indicia, yes.
Unknown Speaker: And what are those current obligations here?
Mr. Bartle: The current obligations are that military retirees are not retired from the military service.
They are placed on retired status.
But they remain in the military service of the United States.
They are not discharged from the military.
They are not civilians.
They can be recalled to active duty, and that's a recall on an involuntary basis.
And just last year there were many military retirees recalled and sent to the Persian Gulf.
And they're subject to the Uniform Code of Military Justice.
They're prohibited from engaging in certain employment and civilian occupations.
And there was some discussion earlier that, consistent with their status as employees of the Federal Government, they are entitled to various employee benefits and privileges that, of course, are not available to members of the general public.
We cite these things not because they, alone, are significant... not the fact that military retirees are authorized to wear their military uniforms.
But they can wear their uniforms because they have military status.
Unknown Speaker: But why do all of these factors you've just mentioned... how do they bear on any sort of tax policy the State might have?
Mr. Bartle: Well, I cite all those differences because I do believe they all go to our ultimate point: that military retirees are receiving current compensation, that they are current employees.
Unknown Speaker: Well, I have the same problem as the Chief Justice.
If you're a tax policy planner, what is the tax theory on which you justified this differential?
Why is it that the military person who receives current pay... and presumably, therefore, has more burdens... is not exempt from the tax?
Mr. Bartle: Well, the legislature, in drawing these distinctions... and, of course, our legislature is keenly aware of the military retirees and the fact that their retirement pay is taxable.
They have looked at a broad range of factors.
Unknown Speaker: But what is it that would motive the decision to tax, versus to exempt on this criterion?
Mr. Bartle: On the distinction between current pay--
Unknown Speaker: Yes.
Mr. Bartle: --versus deferred compensation?
Unknown Speaker: Yes.
Mr. Bartle: Well, that has traditionally been a very significant for... very significant difference for purposes of taxation on both the Federal and the State level.
Taxation by its very nature treats certain classes of income differently.
It treats current pay differently.
It treats deferred compensation differently.
It treats capital gains differently.
It's all income.
Unknown Speaker: Well, is the... is the theory that it... in the case of the military officer it's earned for current status?
Mr. Bartle: It is.
I believe that's--
Unknown Speaker: Is that the theoretical difference?
Mr. Bartle: --I believe it's correct that it is earned on an ongoing basis, that it's not a vested right, not an enforceable right to receive military retired pay.
So as long as you fulfill the conditions of your retirement, you are able to receive military retirement pay.
Unknown Speaker: Well, you can say that about some of your State employees who are disabled.
Don't you have restrictions on certain activities of State employees after they leave State service?
Mr. Bartle: I think there are very narrow restrictions.
Unknown Speaker: Well, whatever they are, if they violate those restrictions they can be deprived of their retirement income.
And yet you do not tax that retirement income.
Mr. Bartle: That point, Your Honor, I don't believe I could agree with.
At least I'm not aware.
The only exception I know of is that if a person retires from working for the State government and is receiving their retirement benefits, and then elects to become re-employed by the State, there is a limit on the amount of their retirement benefits they can receive.
That is the only instance that I'm aware of.
The military retirement system has always been regarded as unique.
And that is not simply just our contention.
That is clearly the petition of... the position of the Federal Government.
And on page 15 of our brief, we quote from a 1987 report by the United States Department of Defense.
And there they say that while there may be a superficial resemblance between the military retirement system and retirement systems that exist in the private sector, there are, in fact, substantial differences between the military retirement system and all other retirement systems.
Unknown Speaker: Here's one of the examples I was thinking of.
If a State employee... this is from the Government's brief... has participated in contracting with any person or business within the employee's last 2 years of public employment, the employee may not accept a job with that person or business for a year after the employee's public service terminates.
That's a restriction under the Kansas statutes.
And if he violates that, I gather that the retirement pay can be... can be terminated or withheld.
Mr. Bartle: --The retired State employees have a vested right to receive their retirement.
And I think there's very narrow limits on the extent to which the State can discontinue or modify their right to receive their retirement benefits.
I think Your Honor is correct in citing that proposition--
Unknown Speaker: Well, I must say... in fairness to you... the Government puts it in a footnote with a lot of other things where... the kind of things that you mention, if a State employee goes back to work for the State he would forfeit it.
This is also cited in the same footnote.
But I don't see a citation to the statute that says one of the consequences of violating that 1-year prohibition is that you lose your retirement pay.
It's the implication, but I don't see the statute cited.
Mr. Bartle: --Again, Your Honor, I'm not aware that that is the case.
Unknown Speaker: You may be right.
Mr. Bartle: I would like to focus, for a moment, on the Davis case.
And in Davis, the State of Michigan taxed Federal Civil Service retirement benefits, but it did not tax State retirement benefits.
And the Court recognized that there was different tax treatment here.
And if you'd like to call it discriminatory tax treatment, we can call it that.
But the Court conducted an inquiry to determine if this different tax treatment was justified.
And I think this demonstrates first it is not just the mere fact of discrimination, not the fact that Federal retirees receive less favorable treatment than retired State employees.
That is not conclusive.
And the Court proceeded to conduct this inquiry, and searched for significant differences between the two classes.
Now, in Davis, it happened that the Court found no such differences, and the conclusion therefore was that since there were no differences between the two classes themselves, no intrinsic differences, the taxation must be based on some other factor, some outside factor.
And, of course, in Davis, the Federal Civil Service retirees receive their pay from the Federal Government, and the State retirees were paid by the State.
So that was determined to be a tax that distinguished based on the source.
And that is why, I believe, the conclusion was that it was a violation of the statute.
Because it discriminated based on the source.
Now, there were many States just like Michigan that taxed Federal Civil Service retirement benefits, but did not tax State retirement benefits.
But Kansas was not one of those States.
Kansas did not have to go back and modify its Income Tax Act to conform with the Davis decision.
At this point, I would like to mention a point that was raised earlier, as to what would be the effect upon the State if the law was struck down, and retroactively... retroactive relief was required.
That would be approximately $91 million that we would be required to refund to the Federal military retirees.
Unknown Speaker: What fiscal period does that cover?
Is it 2 years?
Mr. Bartle: That covers the tax year 1988 and all years forward, together with interest calculated at the statutory rate on the tax refunds.
Unknown Speaker: And why do you cut it off at 1988?
Because of the State statute of limitations, or--
Mr. Bartle: Your Honor, did I say 1988?
Unknown Speaker: --Yes.
Mr. Bartle: Well, what I meant to say was from tax year 1984 and all years forward.
Unknown Speaker: '84.
And why do you cut it off at 1984?
Mr. Bartle: That is the... earliest year under our statute of limitations that the taxpayers could claim income tax refunds.
Unknown Speaker: You mean anyone can come forward now... not merely the parties to this case... but anyone can come forward now and still file a timely claim as to 1984?
Mr. Bartle: Your Honor, this matter has been certified as a class action.
And the class embraces--
Unknown Speaker: I see.
Mr. Bartle: --all military retirees in the State.
So we would regard them--
Unknown Speaker: I see.
Mr. Bartle: --as covered by the outcome of this litigation.
Unknown Speaker: I take it Kansas does not have a requirement to pay under protest, or to raise a protest in payment in order to go after a refund later?
Mr. Bartle: That is not a requirement.
Unknown Speaker: I don't... most of the times when we have objections to retroactivity we're talking about a change in the law.
We wouldn't be... in finding against you... we wouldn't be reversing any decision of cours, would we?
I mean, as far as I know, this is a... this is a new issue.
What is the great unfairness in finding a new issue against you?
And you say gee, I have to pay back the money I wrongly took.
I mean, that always happens, doesn't it?
Mr. Bartle: I think the point, Your Honor, this case is, of course, derived from the Davis case.
And Davis was a case of first impression.
But there has been considerable controversy over what was the effect of this Court's decision in Davis.
Does it have retroactive or prospective effect?
That is of great concern to the States that have this issue.
Unknown Speaker: Davis wasn't a constitutional case, really.
It was just interpreting 4 U.S.C. section 111.
Mr. Bartle: --It was, Your Honor.
But Mr. Fowler stated earlier that that statute is regarded as co-extensive with the constitutional doctrine.
So the two seem to go hand in hand.
Unknown Speaker: Well, it... I'm not sure whether that's in your favor or not.
Mr. Bartle: Well, I'm just trying to say what I believe is the case.
Unknown Speaker: And 111 has been on the books quite awhile.
Mr. Bartle: It has, Your Honor, over 50 years.
If there is any great unfairness here... and, of course, this is speaking to remedial issues which is not presented in this case, but, of course, hang over it like a black cloud.
Davis, to the States, was just like a bolt out of the blue.
States had always believed that they could engage in this practice of exempting their own retirees and taxing Federal retirees, just as they taxed all other retirees from private sector retirement and other ordinary income in the State.
And it was--
Unknown Speaker: The special class as viewed by the States was really their own retirees, wasn't it?
Everybody else was treated differently.
Mr. Bartle: --I think the States operated on the assumption that there was nothing impermissible about them according some favorable tax treatment to its own employees and retirees.
Unknown Speaker: Well, of course, you aren't arguing here... you aren't arguing to sustain that broad notion that the States had.
You don't defend that in this case.
You're just... you just zero in on the military now.
Mr. Bartle: Yes, Your Honor.
There are several classes of Federal retirees who we do not tax.
Unknown Speaker: And you're saying that... awhile ago you said well, maybe we're in trouble with respect to other types of Government employees who might be taxed.
Mr. Bartle: I'm afraid I don't understand Your Honor's question.
Unknown Speaker: Well, I'm going back to the CIA example.
You went on to say that except for the military, which you certainly try to justify, you might be in trouble if you tried to tax other kinds of Government employees.
Mr. Bartle: I believe that's true, Your Honor.
And I mentioned earlier that we do not necessarily contend that the justifications for taxing the military retirees would also justify taxing other retirees.
Unknown Speaker: And yet you say the States, up until the time of Davis, thought that they could tax all Government retirees... United States retirees... including Kansas.
Mr. Bartle: --While exempting... while exempting their own retirees?
Unknown Speaker: Yes.
Mr. Bartle: Your Honor, Kansas was not directly affected by the Davis decision because Kansas does not tax Federal Civil Service retirees, and it hasn't taxed them for more than 30 years.
Unknown Speaker: I know.
But a lot of other States did.
Mr. Bartle: Correct, correct.
At the time the Kansas legislature created the Kansas Public Employees Retirement System, they provided that the benefits paid from that system would be exempt from State income tax.
And in that same legislative session, they also enacted an exemption for Federal Civil Service retirement benefits.
Unknown Speaker: Why did they do that?
Do you know?
Mr. Bartle: I can't tell you precisely, Your Honor.
But we would contend that it certainly is evidence of an appreciation that similarly situated State and Federal retirees should be treated equal... equally.
Unknown Speaker: Well, Mr. Bartle, there are, though, some other classifications of Federal retired people who are subject to the Kansas tax, in addition to the military retirees.
Mr. Bartle: Correct.
Unknown Speaker: And as to those other classifications, Kansas does not have and does not purport to rely on the differences that it's trying to articulate with regard to military.
Mr. Bartle: Precisely.
And that is because military retirees are unique.
They are different than State retirees, and they are different than all other classes of Federal retirees.
Unknown Speaker: Well, the problem is, we have to look at all of the classes of Federal employees, I suppose, that Kansas says we can tax, and try to figure out if there's some legitimate State policy being implemented.
And so it would clearly be easier to do if the reasons extended across the board to all the classes that Kansas purports to tax.
Mr. Bartle: It certainly would make the Court's task much easier.
Unknown Speaker: Well, at least the fact that you tax some other classes of Federal employees for which you don't have the military argument sort of impugns the State's submission that you are not taxing military just because of the source.
Mr. Bartle: I can see Your Honor's point.
I'd like to point out that in Kansas, we have three large classes of Federal retirees: Federal Civil Service retirees... there are about 20,000 of them; railroad retirees... and there's almost 20,000 of them; and military retirees... between 14 and 15,000.
These other classes of retirees that we discussed today and that are mentioned in the briefs, may be classes of one, two, or three.
I know we have one lady who's retired from the Federal Foreign Service.
I know we have less than half a dozen retired Federal judges.
Some of these other classes, I don't know whether we have any of those people residing in the State or not.
Unknown Speaker: What is the explanation for that, if it's not too indelicate to inquire?
You exempt the retirement of State judges, but not the retirement of Federal judges.
It seems like a very bad idea.
Mr. Bartle: --I can see Your Honor's point.
But suppose we were called upon to defend that position.
What would we do?
We would search... first for what the legislature has done.
We would try to see if there were concrete differences between these two classes.
For example, Federal judges, as I understand it, have a lifetime appointment, and their compensation cannot be reduced at any point.
Maybe this is a significant difference.
Maybe State judges are treated differently.
That is the sort of thing we would look to to see if there were legitimate differences between the two classes.
As to these other classes of Federal retirees, I'm saying that perhaps there are justifications which would permit us to tax them in the manner that we do.
And we would look to what they do, and what is the character of their income, and how do they compare with similarly situated State retirees.
That is, we are just simply applying the rationale and the analysis that this Court set out in Davis.
Unknown Speaker: Now, would you refresh my recollection?
Are there some classes of State employees, State retirees that you do tax?
Mr. Bartle: Virtually all State and local government retirees are all exempt.
Unknown Speaker: They're all exempt.
Mr. Bartle: I think that comparing the facts in Davis to the facts of this case... as I said, Davis involved Federal Civil Service retirees and retired State employees.
And those two groups were both fully, and unconditionally retired from Government service.
They both participated in contributory retirement plans.
They both received deferred compensation for prior services.
Now, of course, those differences simply don't... those similarities simply don't exist in this case.
Military retirees continue to remain in the military service.
State employees are completely severed from employment.
State retirees contribute to their retirement program, and they pay tax on those contributions.
Unknown Speaker: Mr. Bartle, as a practical matter, you know, how often are military retirees called up, do you think?
Mr. Bartle: I mentioned earlier that there was quite a few retirees recalled to serve in the Persian Gulf.
And, of course, how often they are recalled--
Unknown Speaker: Now, was that a call-up of retirees who put in 20 years, rather than National Guard or Reserves?
Mr. Bartle: --There were Reserves called up; there were National Guard called up.
There were also military retirees called up.
Unknown Speaker: Do you have any idea how many?
Mr. Bartle: I believe the number runs into the thousands, Your Honor.
Unknown Speaker: Throughout the country?
Mr. Bartle: Yes, they were assigned to both foreign posts and posts here in the United States.
I'm looking right now at a press release that was issued by the Pentagon.
They said retirees are needed to fill critical requirements as doctors, nurses, linguists, aviators, water purification specialists.
Unknown Speaker: But of course, when they were called up, I suppose they got their regular pay, and not just their retirement, for retired service.
Mr. Bartle: That's correct, Your Honor.
I think the point is that particularly now that it appears to be the future policy of the Government to downsize the active-duty forces, there is going to be an increasing reliance on reserve and retirement personnel to fill the need when the need arises.
At any rate in Davis, the State of Michigan came forward and tried to justify their different... differential tax treatment.
And they said that on the average, Federal Civil Service retirement benefits are higher than the benefits that we pay to our State retirees.
And because of this disparity in the amounts, we feel that there's a justification for according this tax benefit to the State retirees, whereas we would not give such a benefit to the Federal retirees.
But this Court rejected that justification because, while it might have been true on the average... as a general proposition... it certainly wasn't true in every instance.
There were, of course, some State retirees who had a higher pension than the Federal Civil Service retirees.
And the Court said that this justification is not directly related to the differences.
It does not apply in each instance.
But, of course, the justifications that we are putting forward today, do apply across the board.
An even-handed application of the rationale that we advance for justifying different tax treatment results in the taxation of all military retirees, but it does not result in the taxation of any State retirees.
Unknown Speaker: Is there any indication of that rationale in the history of this statute... I mean, in the legislative debates or anything else?
What I'm worried about is, it seems to me, as far as I can tell, it's just an invented justification.
Had the Kansas statute said a tax shall be imposed... despite the exemption for everybody else, shall be imposed upon all retirees who have an obligation to return to their former employee's service upon call.
Then I think you... you know, I'd feel quite differently about this statute.
But it doesn't say that.
It just says a tax shall be imposed on military retirees.
And then you come in and say well, this is why they are different.
But do we know that that's why the State made the distinction?
Mr. Bartle: Your Honor, out statutes do not state that a tax shall be imposed on military retirees.
Military retired pay is included in Federal adjusted gross income, which is the basis that the tax is imposed at the State level.
So it's... it is not singled out in any statutory manner.
Unknown Speaker: It is not given the same exemption that other retirement pay is.
Mr. Bartle: That is correct, yes.
Unknown Speaker: That's singled out, I think.
Mr. Bartle: It's not singled out in the same manner that there is a specific provision that says we are setting aside this discrete group of taxpayers.
We are subjecting them to unusual tax burdens that do not apply, as a general proposition, to other taxpayers of the State.
I believe I understood the Solicitor General earlier to say that if Kansas had statutory provision that said deferred compensation shall be exempt, and current pay for current services shall be taxable, that they would feel that would pass muster.
Unknown Speaker: Well, I don't think he conceded that.
I think he conceded they would then look to the... I think he referred to the degree of lopsidedness, to see whether there was still a whiff of the pretextual about it.
So I don't think he was precluding a further substantive examination.
Mr. Bartle: Well, I took his comments to mean that if the statute set out, in specific terms, a neutral classification, a neutral basis for different tax treatment, that that would be permissible.
For example, there are other States that have such provisions.
They say benefits reserved... received from contributory retirement programs shall be exempt, and noncontributory retirement programs shall be taxable.
And, of course, that is what we have here in Kansas.
It's simply that our statute is not framed in that manner.
And I think the Court ought to look to the practical effect of this tax, rather than the form in which the statutory language appears.
I'd like to turn to the policy reasons that underlie the doctrine of intergovernmental tax immunity.
And, of course, the principle that the Federal Government is immune from certain State taxes does not arise from the actual text of the Constitution.
It's implied from the supremacy clause.
It's deemed to be necessary to protect the operations of the Federal Government from interference by the State.
And here, it is not alleged that the tax results in any... any interference to any Federal function.
And, of course, that is the purpose of this constitutional doctrine.
It does not exist for the benefit of individual taxpayers, such as the petitioners.
Unknown Speaker: Well, do you think the statute, section 111, requires some sort of interference with the Federal operations before it can be applied?
Mr. Bartle: I think the statute prohibits a tax that discriminates because the Federal Government is the source of the pay of compensation.
And we believe that that is Congress' way of prohibiting a tax that is trying to reach out and interfere with, or hinder, a Federal function.
That if a tax is using its sovereign taxing authority to interfere with Federal operations, that that ought to be permitted.
Unknown Speaker: Well, the statute certainly doesn't contain that additional language.
But you say that was Congress' purpose in passing it?
Mr. Bartle: That's what I believe arises out of the principle that they are prohibiting a tax that discriminates based on the source.
Taxes will no be prohibited if it discriminates for any other legitimate basis.
It is only the source-based taxation that is prohibited.
Now, this Court is not the petitioners' only source for relief.
And they can... ought to seek relief from Congress in the first instance.
And if Congress actually perceived that its interests were being threatened by this State tax, why, you'd think that they would do something about it.
Congress could pass a law--
Unknown Speaker: Would that be under its power to enforce sovereign immunity?
Mr. Bartle: --Yes, Congress may, by statute--
Unknown Speaker: Well, but that... but I thought you agreed that the Constitution and the statute here are coterminous, so far as... so far as the doctrine of governmental Immunity is concerned.
Mr. Bartle: --Yes, I did say that... the current statute.
And what I'm saying is that Congress--
Unknown Speaker: But if... but if it fails under the current statute, the Congress would have no constitutional power to do that.
Mr. Bartle: --Correct.
Unknown Speaker: Unless it's under some other clause.
Mr. Bartle: Correct.
But, of course, it's our position that the tax does not violate the current statutory provision.
Congress could always step into this field and extend Federal tax immunity by statute beyond the limit that the Constitution would otherwise establish.
Chief Justice Rehnquist: Thank you, Mr. Bartle.
The case is submitted.
Argument of Speaker
Mr. Speaker: The opinions of the Court in two cases will be announced by Justice White.
Argument of Justice White
Mr. White: The first case is Barker against Kansas, No. 91-611, and for the reasons stated in an opinion on file with the Clerk, the judgment of the Kansas Supreme Court is reversed and the case is remanded.
Justice Stevens has filed a concurring opinion in which Justice Thomas has joined.