In a rare case involving federal employee benefits that reached the U.S. Supreme Court, the court has found that for tax purposes, a state must treat federal employee retirement benefits in the same way it treats benefits to its own employees who retired from equivalent positions.
The court in Dawson v. Steager agreed with a retired deputy U.S. Marshal who argued that a West Virginia policy was discriminatory because it fully exempted from taxes the annuity benefits of retired state law enforcement officers but allowed only a partial exemption for those retired from the federal government.
The NARFE organization said the decision “prevents states from carving out one exemption after another for its own employees, only to shift that tax burden to federal employees and retirees. It sends a strong signal to state governments that discriminatory tax treatment of federal employees and retirees is not permitted.”