## Facts

- Paul S. Davis, a Michigan resident and former federal employee, received federal civil service retirement benefits.
- From 1979 to 1984, Michigan taxed Davis’s federal retirement benefits under the Michigan Income Tax Act.
- Michigan law exempted from state income tax all retirement benefits paid by the State or its political subdivisions, but taxed retirement benefits paid by other employers, including the federal government.
- Davis sought refunds, alleging the tax scheme violated 4 U.S.C. § 111, which permits state taxation of federal pay or compensation only if it does not discriminate based on the source of the pay.
- Michigan courts denied relief, reasoning that § 111 did not cover retirees and that any differential treatment was justified by Michigan’s interest in attracting and retaining qualified state employees.
- The U.S. Supreme Court noted probable jurisdiction and reversed.

## Issues

1. Whether federal retirement benefits constitute “pay or compensation for personal services as an officer or employee” within the meaning of 4 U.S.C. § 111.
2. Whether Michigan violates 4 U.S.C. § 111 and intergovernmental tax immunity by exempting state and local pensions while taxing federal pensions.

## Decision

- The Court reversed, holding (8–1) that § 111 applies to federal retirees’ civil service pensions.
- The Court held that Michigan’s tax scheme unlawfully discriminated against federal retirees because of the source of their pay.
- The Court rejected Michigan’s asserted justification that preferential treatment for state pensions furthered recruitment and retention goals, concluding such policy interests cannot override § 111’s nondiscrimination condition.

## Legal Principles

- Federal civil service retirement benefits are deferred compensation for prior federal service and therefore fall within “pay or compensation” protected by 4 U.S.C. § 111.
- Under 4 U.S.C. § 111, a state may tax federal compensation only if the taxation does not discriminate against federal officers or employees because of the source of the pay.
- A state violates § 111 and the modern doctrine of intergovernmental tax immunity when it taxes federal pensions while exempting comparable state and local government pensions without significant differences justifying the distinction.

## Conclusion

The Court held that 4 U.S.C. § 111 bars Michigan from taxing federal retirement benefits while exempting state and local government retirement benefits, because the differential tax treatment discriminates against federal retirees based solely on the source of their compensation.


Davis v. Mich. Dep’t of Treasury, 489 U.S. 803 (1989)