Court Weighs Whether States Should Refund Pension Taxes

By Mark Walsh — December 09, 1992 2 min read

WASHINGTON--The U.S. Supreme Court heard arguments last week in a Virginia case that will determine whether states must provide refunds to federal retirees for unlawfully collected taxes on their pension income.

The case is a cause for concern for states because they would be forced to pay out as much as $2 billion if the High Court rules that the illegally collected taxes must be refunded.

Harper v. Virginia Department of Taxation (Case No. 91-794) is one of several cases considered by the Justices in recent years that have held major budget implications for the states. (See Education Week, April 29, 1992.)

The case heard last week stems from Virginia’s former practice of taxing the pension income of federal retirees while exempting its own state retirees’ pensions. Some 20 other states had similar tax laws before the High Court ruled in 1989, in Davis v. Michigan Department of Treasury, that the practice violated a 50-year-old federal law.

However, the Court did not rule in Davis whether its decision should be made retroactive and thus require refunds to federal retirees.

In addition to Virginia, 15 other states would be affected by the ruling--Alabama, Arizona, Arkansas, Georgia, Iowa, Kansas, Kentucky, Mississippi, Montana, New York, North Carolina, Oklahoma, South Carolina, Utah, and Wisconsin.

Greatest Hardship

Virginia, with more federal retirees--some 200,000--than any other state, would face the greatest hardship. It would have to refund a potential $467 million to its federal retirees for the tax years 1985 through 1988, the only ones covered under a statute of limitations.

In papers filed with the High Court, the state notes that the projected amount surpasses its annual appropriation for its three largest state universities.

Gail S. Marshall, a state deputy attorney general, told the Justices during arguments on Dec. 2 that the state should not be held liable for tax refunds. She said that there would be “no federal interest advanced’’ by requiring all the taxpayers of Virginia to divert a “massive amount’’ of state funding from other services to provide refunds to federal retirees.

Michael J. Kator, a lawyer representing the more than 400 federal retirees in the case, argued that High Court precedents and the 14th Amendment’s guarantee of due process of law required Virginia to provide the refunds.

A decision in the case is expected by early July.

Suit Over McMartin Case

In separate action last week, the High Court declined to review a federal appeals-court ruling that allows the acquitted defendants in the McMartin Preschool child-molestation case to sue prosecutors.

After a highly publicized trial that lasted nearly three years, Peggy McMartin Buckey was acquitted in 1990 of charges she molested children at her Manhattan Beach, Calif., preschool.

Ms. Buckey filed suit against local agencies, prosecutors, and others, alleging they conspired to violate her civil rights by “conspiring’’ to try her and her son on unwarranted charges.

Her suit was thrown out of state and federal trial courts. Earlier this year, however, a panel of the U.S. Court of Appeals for the Ninth Circuit ruled there was the “possibility’’ of a conspiracy against Ms. Buckey and that her suit for damages should be allowed.

The defendants in the lawsuits appealed that ruling to the High Court, which last week declined to review it. The cases are Manhattan Beach v. Buckey (No. 92-560) and Children’s Institute International v. Buckey (No. 92-628).

A version of this article appeared in the December 09, 1992 edition of Education Week as Court Weighs Whether States Should Refund Pension Taxes