PAUL S. DAVIS, APPELLANT V. STATE OF MICHIGAN

   No. 87-1020

   In the Supreme Court of the United States

   October Term, 1988

   On Appeal from the Michigan Court of Appeals

   Brief for the United States as Amicus Curiae

            TABLE OF CONTENTS
   Question Presented
   Interest of the United States
   Statement
   Summary of argument
   Argument:
      The doctrine of intergovernmental tax immunity as embodied
      in 4 U.S.C. 111, prevents the State of Michigan from taxing
      the retirement benefits of former federal employees while
      exempting from taxation retirement benefits paid by the
      State and its political subdivisions
   Conclusion

                          QUESTION PRESENTED

   Whether the doctrine of intergovernmental tax immunity, as embodied
in 4 U.S.C. 111, prevents the State of Michigan from taxing the
retirement benefits of former federal employees while exempting from
taxation retirement benefits paid by the State and its political
subdivisions.

                     INTEREST OF THE UNITED STATES

   The State of Michigan exempts from taxation all pensions paid to
retired employees of the State of Michigan and its political
subdivisions.  Pensions received from other sources, including the
federal government, are taxed when they exceed certain limits.  This
disparate treatment afforded to state and federal pensions harms the
United States in two respects.  First, the United States is put at a
competitive disadvantage in hiring qualified employees.  In order to
provide its retirees with the same net after-tax benefit as state
retirees -- and, hence, in order to attract the same quality of
employee -- the United States must pay out more money in pension
benefits than the State.

   Second, through the use of its discriminatory tax scheme, the State
is indirectly forcing the United States to subsidize the pensions of
state retirees through lower federal tax revenues.  If the State taxed
its own pension benefits, and increased pensions to offset that tax,
the increase in pensions would in turn increase the federal tax
liability of state retirees.  Thus, in order to confer the same
monetary advantage upon state retirees, the State would have to pay
out more in additional benefits than it foregoes in lost tax receipts.
 At bottom, therefore, the special tax exemption for state retirement
benefits amounts to an effort to increase the net after-tax benefit
received by retired state employees at the expense of federal
taxpayers.

   Under the nondiscrimination principle, which is part of the
doctrine of intergovernmental tax immunity, the State must make a
choice.  It can impose a tax on both state and federal pensions
(thereby increasing the costs of both the federal and state
governments) or it can make both federal and state pensions nontaxable
(thereby decreasing the revenues of both federal and state
governments).  But it cannot impose a tax on federal pensions that
does not apply to state pensions;  such a tax increases the costs and
decreases the revenues of the federal government while simultaneously
decreasing the costs and increasing the revenues of the state
government.

                               STATEMENT

   1. The State of Michigan exempts from taxation all pensions and
retirement benefits paid to retired employees of the State of Michigan
and its political subdivisions.  Pensions and retirement benefits
received from other sources, including federal retirement benefits,
are deductible only up to $7,500 for a single return and $10,000 for a
joint return.  See Mich. Comp. Laws Ann. Section 206.30(1)(f) (West
1986 & Supp. 1988);  Mich. Stat. Ann. Section 7.557 (130) (Callaghan
1984).  /1/

   Appellant is a retired federal employee living in Michigan.  After
paying state income tax on his federal pension for a number of years,
appellant filed a complaint in the Michigan Court of Claims seeking a
refund.  He alleged that the Michigan Income Tax Act discriminated in
favor of state retirement benefits and against federal retirement
benefits in violation of 4 U.S.C. 111.  /2/

   2. On cross-motions for summary judgment, the Michigan Court of
Claims concluded in an oral opinion that the Michigan Income Tax Act
did not violate Section 111 because a retired federal civil servant is
not currently an "officer or employee of the United States" within the
meaning of that provision (J.S. App. A10-A11).  The Michigan Court of
Appeals affirmed (id. at A1-A8).  The court agreed with the Court of
Claims that someone who is not currently working for hire is not an
"employee." Section 111, the court therefore concluded (J.S. App. A6),
"has no application to (appellant), since (appellant) cannot be
considered an employee within the meaning of that act."

   The court of appeals further concluded that the Michigan Income Tax
Act did not violate equal protection because the favorable treatment
afforded to state retirees "bear(s) a rational relationship to a
legitimate state end" (J.S. App. A6-A7).  "In our opinion," the court
stated (id. at A7), "the attracting and retaining of qualified
employees is a legitimate state objective which is rationally achieved
by a retirement plan offering economic inducements" such as "tax
exempt status for their retirement benefits." The court justified the
discrimination against similarly-situated federal employees by noting
(ibid.) that "(t)he State of Michigan, as an employer, owes a special
responsibility to its employees, which it does not owe to federal
employees." Appellant's application for leave to appeal to the Supreme
Court of the State of Michigan was denied (id. at A9).

                          SUMMARY OF ARGUMENT

   Contrary to the Michigan Court of Appeals, Section 111 applies not
simply to the taxation of current employees of the United States, but
to "the taxation of pay or compensation for personal services as an
officer or employee of the United States." Appellant's pension is
clearly compensation, albeit deferred compensation, "for" his years of
"service as an * * * employee of the United States." Appellant's
pension therefore falls within the scope of Section 111.

   Section 111 itself merely restates, in the context of state
taxation of the compensation of federal employees, the general
constitutional rule requiring nondiscrimination in state taxation of
those dealing with the federal government.  Under the
nondiscrimination principle, a State may not treat its own former
employees more favorably for income tax purposes than former federal
employees, unless there are significant differences that justify
treating these two classes of former employees unequally.  Neither the
lower courts nor appellees have advanced any distinction between state
and federal retirees that would qualify under this standard.

   Appellant's pension is subject to taxation for the simple reason
that it is paid by the federal government rather than by the State or
one of its subdivisions.  The tax imposed by Michigan on that pension
thus discriminates against federal retirees and in favor of state
retirees based solely on "the source of the pay or compensation" (4
U.S.C. 111).  It follows that the Michigan tax is invalid.

                               ARGUMENT

   THE DOCTRINE OF INTERGOVERNMENTAL TAX IMMUNITY, AS EMBODIED IN 4
U.S.C. 111, PRESENTS THE STATE OF MICHIGAN FROM TAXING THE RETIREMENT
BENEFITS OF FORMER FEDERAL EMPLOYEES WHILE EXEMPTING FROM TAXATION
RETIREMENT BENEFITS PAID BY THE STATE AND ITS POLITICAL SUBDIVISIONS.

   Section 111, by its plain terms, forbids discriminatory taxation of
a retired federal employee who, through his pension, is still
receiving "compensation for personal service as an officer or employee
of the United States." If construed the same way as the
nondiscrimination principle derived from the doctrine of
intergovernmental tax immunity, Section 111 precludes a State from
treating its own former employees more favorably for income tax
purposes than former federal employees, absent a showing of
significant differences between the two classes.  Neither the courts
below nor appellees have identified any such differences.  The
judgment of the Michigan Court of Appeals should therefore be
reversed.

   1. The Michigan Court of Appeals erred in concluding that appellant
does not fall within the protection of Section 111.  The court stated
that as used in other contexts the term "employee" embraces only those
who currently work for "hire" and that "a retired federal civil
service employee is not to be considered an employee for civil service
purposes." J.S. App. A4-A5.  That is true (see, e.g., Chemical Workers
v. Pittsburgh Glass, 404 U.S. 157 (1971);  Lancellotti v. Office of
Personnel Management, 704 F.2d 91, 95 (3d Cir. 1983));  but it is also
irrelevant.  By its terms, Section 111 applies not just to the
taxation of current employees of the United States, but to "the
taxation of pay or compensation for personal service as an officer or
employee of the United States." Appellant's pension is clearly
compensation, albeit deferred compensation, "for" his years of
"service as an * * * employee of the United States." See, e.g., Zucker
v. United States, 758 F.2d 637, 639 (Fed. Cir.), cert. denied, 474
U.S. 842 (1985);  Kizas v. Webster, 707 F.2d 524, 535-536 (D.C. Cir.
1983), cert. denied, 464 U.S. 1042 (1984);  Clark v. United States,
691 F.2d 837, 842 (7th Cir. 1982).  Appellant's pension therefore
falls within the scope of Section 111.  /3/ It follows that if the tax
imposed by Michigan on that pension discriminates against federal
retirees and in favor of state retirees based solely on "the source of
the pay or compensation" (4 U.S.C. 111), then the Michigan tax is
invalid.

   2. Section 111 merely restates, in the context of state taxation of
the compensation of federal employees, the general constitutional rule
requiring nondiscrimination in state taxation of those dealing with
the federal government.  That rule, which is part of the
constitutional doctrine of intergovernmental tax immunity, arises from
the Supremacy Clause (Art. VI, Cl. 2).  See South Carolina v. Baker,
No. 94, Orig. (Apr. 20, 1988), slip op. 12, n.10.  Under the doctrine
of intergovernmental tax immunity, "States may not impose taxes
directly on the Federal Government, nor may they impose taxes the
legal incidence of which falls on the Federal Government." United
States v. County of Fresno, 429 U.S. 452, 459 (1977).  For many years
this doctrine was interpreted broadly to prohibit state taxation of
the salaries of officers and employees of the United States (Dobbins
v. Commissioners of Erie County, 41 U.S. (16 Pet.) 435 (1842)), as
well as federal taxation of the salaries of state officials.
Collector v. Day, 78 U.S. (11 Wall.) 113 (1870).  /4/ In Helvering v.
Gerhardt, 304 U.S. 405 (1938), however, this Court implicitly
overruled Day by permitting the imposition of a federal income tax on
employees of the New York Port Authority.  One year later, in Graves
v. New York ex rel. O'Keefe, 306 U.S. 466, 480 (1939), the Court
expressly overruled Dobbins, declaring that "(t)he theory * * * that a
tax on income is legally or economically a tax on its source, is no
longer tenable." Since Graves, "(s)ubsequent cases have consistently
reaffirmed the principle that a nondiscriminatory tax collected from
private parties contracting with another government is constitutional"
(South Carolina v. Baker, slip op. 15).

   Congressional consideration and enactment of the predecessor of
Section 111 responded to, and occurred during, the period of judicial
abrogation of the Day-Dobbins doctrine.  Following the Court's
decision in Gerhardt, Congress believed there was no longer any
constitutional impediment to federal taxation of the income of state
employees.  In view of this development, Congress concluded that, in
fairness, federal officers and employees should no longer remain
immune from nondiscriminatory state taxation.  Section 4 of the Public
Salary Tax Act of 1939 (1939 Tax Act), ch. 59, 53 Stat. 575, the
predecessor of Section 111, was designed to waive federal immunity to
permit such taxation.  See H.R. Rep. 26, 76th Cong., 1st Sess. (1939);
 S. Rep. 112, 76th Cong., 1st Sess. (1939).

   Shortly before the 1939 Tax Act was approved by Congress, however,
this Court decided Graves.  Accordingly, the government's "consent()
to the taxation of pay or compensation for personal service as an
officer or employee of the United States" in Section 111 was, in
effect, merely a codification of the intervening decision overruling
Dobbins.  Nonetheless, in conditioning state taxation of federal
employees' compensation on the State's "not discriminat(ing) against
the officer or employee because of the source of the pay or
compensation," Congress anticipated and also codified "(t)he
nondiscrimination principle at the heart of modern intergovernmental
tax immunity caselaw." South Carolina v. Baker, slip op. 19 n.14.  /5/

   3. This Court's decisions construing the nondiscrimination
principle in the context of intergovernmental tax immunities indicate
that the Michigan Income Tax Act impermissibly "discriminates" against
federal retirees within the meaning of 4 U.S.C. 111.  Under the
nondiscrimination principle, a tax is invalid, even if it is not
imposed directly on the United States, "'if it operates so as to
discriminate against the Government or those with whom it deals.'"
Moses Lake Homes, Inc. v. Grant County, 365 U.S. 744, 751 (1961)
(quoting United States v. City of Detroit, 355 U.S. 466, 473 (1958)).
See South Carolina v. Baker, slip op. 16-17;  Phillips Chemical Co. v.
Dumas Independent School Dist., 361 U.S. 376, 387 (1960).  Clearly,
the burden of the tax in question here falls on those with whom the
United States deals.  Appellant's pension is subject to taxation
solely because it is paid by the federal government rather than by the
State or one of its subdivisions.  There can, therefore, be little
doubt that the Michigan Income Tax Act operates in a discriminatory
fashion in imposing a tax upon the retirement benefits of a former
federal employee but not imposing it in similar circumstances upon the
retirement benefits of former state employees.  The principle of
nondiscrimination precludes a State from imposing a tax on federal
retirees if "it treats someone else better than it treats them."
Washington v. United States, 460 U.S. 536, 545 (1983).

   a. Appellees stress (Mot. to Dis. or Aff. 4) that federal retirees
have not been singled out for a tax imposed on them alone.  Rather,
all pensions that are not paid by the State or one of its political
subdivisions are treated alike.  This Court's decisions, however, have
rejected the notion that a State that treats those who deal with
itself more favorably than those who deal with the federal government
may avoid the charge of discriminatory taxation simply by treating
those who deal with the federal government the same as those who deal
with private entities.

   In Memphis Bank & Trust Co. v. Garner, 459 U.S. 392 (1983),
Tennessee imposed a tax on the net earnings of banks doing business
within the State and defined net earnings to include income from
obligations of the United States and its instrumentalities but to
exclude interest earned on the obligations of Tennessee and its
political subdivisions.  Although Tennessee treated income from
obligations of the United States the same as income from private
obligations, the tax was nonetheless declared invalid.  "It is clear,"
the Court noted (id. at 398-399 (footnote omitted)), "that under the
principles established in our previous cases, the Tennessee bank tax
cannot be characterized as nondiscriminatory * * *.  Tennessee
discriminates in favor of securities issued by Tennessee and its
political subdivisions and against federal obligations.  The State
does so by including in the tax base income from federal obligations
while excluding income from otherwise comparable state and local
obligations.  We conclude, therefore, that the Tennessee bank tax
impermissibly discriminates against the Federal Government and those
with whom it deals." /6/

   Similarly, in Phillips Chemical Co. v. Dumas Independent School
Dist., supra, the State of Texas imposed a lesser tax burden on
lessees of state property than it imposed on lessees of federal
property.  The Court held that the discriminatory tax was invalid
despite the fact that "there appears to be no discrimination between
the (federal) Government's lessees and lessees of private property"
(361 U.S. at 381).  The crucial point, the Court noted (id. at 382),
was that the federal lessee "would not be taxed at all if its lessor
were the State or one of its political subdivisions instead of the
Federal Government.  The discrimination against the United States and
its lessee seems apparent." "(I)t does not seem too much," the Court
concluded (id. at 385), "to require that the State treat those who
deal with the Government as well as it treats those with whom it deals
itself." /7/

   The principles governing Memphis Bank and Phillips Chemical Co.
apply with equal force here.  The State of Michigan is discriminating
in favor of pensions granted by the State and its political
subdivisions and against federal pensions.  "The State does so by
including in the tax base income from federal (pensions) while
excluding income from otherwise comparable state and local (pensions)"
(Memphis Bank, 459 U.S. at 398 (footnote omitted)).  Federal
pensioners "would not be taxed at all if (their former employer) were
the State or one of its political subdivisions instead of the Federal
Government.  The discrimination against the United States and its
(retirees) seems apparent." Phillips Chemical Co., 361 U.S. at 382.
It follows that the Michigan tax "impermissibly discriminates against
the Federal Government and those with whom it deals" (Memphis Bank,
459 U.S. at 399).

   b. The Michigan Court of Appeals, without denying that the Michigan
Income Tax Act discriminates against former federal employees, sought
to justify that discrimination under traditional equal protection
principles on the ground that the statutory classification "bear(s) a
rational relationship to (the) legitimate state end * * * (of)
attracting and retaining * * * qualified employees" (J.S. App. A6-A7).
 But this Court has already made it clear that ordinary equal
protection principles "are not necessarily controlling where problems
of intergovernmental tax immunity are involved" (Phillips Chemical
Co., 361 U.S. at 385).  General policy considerations are not
sufficient to justify discriminatory taxation against those who deal
with the federal government.  "The imposition of a heavier tax burden
on (those who deal with the federal government) than is imposed on
(those who deal with the State government) must be justified by
significant differences between the two classes" (id. at 383).  The
court of appeals made no attempt to justify the differential treatment
of state and federal retirees under this exacting standard.

   The fact that the discrimination at issue here gives the State a
competitive edge does not distinguish it from any special tax benefit
given to those who deal with the State rather than the federal
government.  In Phillips Chemical Co., 361 U.S. at 384, the Court
expressly rejected a similar justification proffered by the State that
favorable tax treatment for its lessees would "facilitate the leasing
of its own land." See also United States v. City of Manassas, Va., 830
F.2d at 534 (the only "justification" that would support a statute
discriminating against those who deal with the United States is "a
showing that the two classes of users, from federal and state sources,
are not similarly situated, so that in essence there is no
discrimination").

   Nor can the exemption of state pension benefits from state taxation
be justified on the ground that the State could accomplish the same
result by increasing the amount of benefits paid to retirees.  If the
State increased pension benefits, this in turn would increase the
federal tax liability of state retirees.  Thus, in order to confer the
same monetary advantage upon state retirees, the State would have to
pay out more in additional benefits than it foregoes in lost tax
receipts.  At bottom, therefore, the special tax exemption for state
retirement benefits amounts to an effort to increase the net after-tax
benefit received by retired state employees at the expense of federal
taxpayers.  /8/ In Phillips Chemical Co., the Court rejected the
contention that differential treatment of lessees of state property
could be justified because "the State can collect in rent what it
loses in taxes from its own lessees" (361 U.S. at 384);  the same
argument with respect to state pension benefits and taxes should be
rejected here as well.

   Federal and state retirees appear to be identically situated for
purposes of the tax in question here.  So too do the federal and state
governments in their capacities as employers.  At any rate, neither
appellees nor the Michigan Court of Appeals has identified any
differences that would justify the disparity in treatment between
state and federal pensions.  "It follows that (the state tax law,) as
applied in this case, discriminates unconstitutionally against the
United States and its (retirees)." Phillips Chemical Co., 361 U.S. at
387.

   4. The policy considerations underlying the doctrine of
intergovernmental tax immunity require that the nondiscrimination
principle be interpreted so that whatever tax burden is imposed by a
State on those who deal with the United States is imposed equally on
those who deal with that State.  This parity is necessary because the
United States has no representation in the individual States, and one
State must not be permitted to pursue its own parochial interests at
the expense of the other 49 States.  "(W)hen a state taxes the
operations of the government of the United States, it acts upon
institutions created, not by their own constituents, but by people
over whom they claim no control.  It acts upon the measures of a
government created by others as well as themselves, for the benefits
of others in common with themselves." McCulloch v. Maryland, 17 U.S.
(4 Wheat.) 316, 435 (1819).  Such taxation is subject to abuse because
"the people outside the state have no representatives who participate
in the legislation;  and in a real sense, as to them, the taxation is
without representation." Helvering v. Gerhardt, 304 U.S. at 412.  /9/

   These concerns, however, are alleviated when the state tax is
nondiscriminatory.  For when a State taxes those who deal with its own
institutions to the same extent as those who deal with federal
institutions, the State cannot harm the federal government without
inflicting an equal harm upon its own operations.  Thus, although "the
political check against abuse of the power to tax a State's
constituents is absent when the State taxes only a federal function"
(United States v. County of Fresno, 429 U.S. at 458), "(a)s long as
the tax imposed on those who deal with the Federal Government is an
integral part of a tax system that applies to the entire State, there
is little chance that the State will take advantage of the Federal
Government by increasing the tax." Washington v. United States, 460
U.S. at 546.  /10/

   One might argue that the tax in question here, since it applies to
retirees of private employers as well as to federal retirees,
"affect(s) enough voters in the State to provide the type of political
safeguard envisioned in M'Culloch and thereby protect federal
employees from the risk of disparate treatment." County of Fresno, 429
U.S. at 468 (Stevens, J., dissenting).  But this Court's decisions do
not suggest that a case-by-case inquiry into "virtual representation"
is required once it has been shown that a State is treating those with
whom it deals more favorably than those who deal with the federal
government.  Such an approach would in all likelihood prove to be
judicially unmanageable, and would only foster "inconsistent decisions
and excessively delicate distinctions" (United States v. New Mexico,
455 U.S. at 730).  Instead, once it has been shown that a State's
system of taxation, viewed as a whole, treats the State or those with
whom it deals more favorably than the federal government and those
with whom it deals, this Court's decisions indicate that
discrimination will be presumed.  See, e.g., Memphis Bank & Trust Co.
v. Garner, supra;  Moses Lake Homes, Inc. v. Grant County, supra;
Phillips Chemical Co. v. Dumas Independent School Distr., supra.  Such
a rule is not only administratively convenient, it also serves to
protect the important policy concerns underlying the doctrine of
intergovernmental tax immunity.  See Washington v. United States, 460
U.S. at 546 ("As long as the tax imposed on those who deal with the
Federal Government is an integral part of a tax system that applies to
the entire State, there is little chance that the State will take
advantage of the Federal Government by increasing the tax.");  South
Carolina v. Baker, slip op. 19 n. 13 ("the best safeguard against
excessive taxation (and the most judicially manageable) is the
requirement that the government tax in a nondiscriminatory fashion").
/11/

   Thus, only if the State treats those who deal with the federal
government in the same way that it treats those who deal with the
State and its political subdivisions can the proper balance of
interests sought by the doctrine of intergovernmental immunity be
assured.  Simply put, the State must make a choice:  it can impose a
tax on both federal and state pensions (thereby increasing the costs
of both the federal and state government) or it can make both federal
and state pensions nontaxable (thereby decreasing the revenues of both
federal and state governments).  But it cannot impose a tax on federal
pensions that does not apply to state pensions, a tax that increases
the costs and decreases the revenues of the federal government while
simultaneously decreasing the costs and increasing the revenues of the
state government.  The doctrine of intergovernmental tax immunity was
designed to prevent precisely this sort of parochially-motivated
disparity in treatment;  "it does not seem too much to require that
the State treat those who deal with the Government as well as it
treats those with whom it deals itself." Phillips Chemical Co., 361
U.S. at 385.  /12/

   "Although the scope of the Federal Government's constitutional tax
immunity has been interpreted more narrowly in recent years, there has
been no departure from the principle that state taxes are
constitutionally invalid if they discriminate against the Government."
Memphis Bank, 459 U.S. at 397 n.7.  In this "much litigated and often
confused field" (United States v. City of Detroit, 355 U.S. at 473),
we know of no case in which the Court has countenanced "so substantial
and transparent a discrimination" (Phillips Chemical Co., 361 U.S. at
387) in favor of those who deal with the State and against those who
deal with the federal government.  "(I)t still remains true, as it has
from the time of M'Culloch v. Maryland, 4 Wheat. 316, that a state tax
may not discriminate against the Government or those with whom it
deals." Phillips Chemical Co., 361 U.S. at 387.

                              CONCLUSION

   The judgment of the court of appeals should be reversed.

   Respectfully submitted.

   CHARLES FRIED

      Solicitor General

   WILLIAM S. ROSE

      Assistant Attorney General

   THOMAS W. MERRILL

      Deputy Solicitor General

   MICHAEL K. KELLOGG

      Assistant to the Solicitor General

   DAVID ENGLISH CARMACK

   STEVEN W. PARKS

      Attorneys

   SEPTEMBER 1988

   /1/ Section 206.30(1)(f) provides in relevant part:

         (1) "Taxable income" in the case of a person other than a
      corporation, estate, or trust means adjusted gross income as
      defined in the internal revenue code subject to the following
      adjustments:

                      * * * * *

         (f) Deduct to the extent included in adjusted gross income:

         (i) Retirement or pension benefits received from a public
      retirement system of or created by an act of this state or a
      political subdivision of this state.

         (ii) Any retirement or pension benefits received from a
      public retirement system of or created by another state or any
      of its political subdivisions if the income tax laws of the
      other state permit a similar deduction or exemption or a
      reciprocal deduction or exemption of a retirement or pension
      benefit received from a public retirement system of or created
      by this state or any of the political subdivisions of this
      state.

         (iii) Social security benefits as defined in section 86 of
      the internal revenue code.

         (iv) Retirement or pension benefits from any other retirement
      or pension system as follows:

         (A) For a single return, the sum of not more than $7,500.00.

         (B) For a joint return, the sum of not more than $10,000.00.

   /2/ Section 111 provides in pertinent part:

   The United States consents to the taxation of pay or compensation
for personal service as an officer or employee of the United States *
* * by a duly constituted taxing authority having jurisdiction, if the
taxation does not discriminate against the officer or employee because
of the source of the pay or compensation.

   /3/ Prior to enactment of the Public Salary Tax Act of 1939, ch.
59, 53 Stat. 574, from which Section 111 derives, "pensions or
retiring allowances paid by the United States or private persons" were
specifically designated as part of the recipient's "(c)ompensation for
personal services" under applicable federal tax laws.  See, e.g.,
Treas. Reg. 45, art. 32 (1919);  Treas. Reg. 62, art. 32 (1922);
Treas. Reg. 74, art. 52 (1929);  Treas. Reg. 86, art. 22(a)-2 (1935);
Treas. Reg. 101, art. 22(a)-2 (1939).  Similarly, state pensions, as
"compensation for past services rendered," were specifically excluded
from federal taxable income under the doctrine of intergovernmental
tax immunity (I.T. 1607, II-1 Cum. Bull. 71 (1923);  I.T. 2669, XII-1
Cum. Bull. 68 (1933)), as was other compensation paid by a State or
its political subdivisions to its officers and employees (Treas. Reg.
62, art. 88 (1922)).

   /4/ While federal immunity from state taxation derives from the
Supremacy Clause, state immunity from federal taxation is grounded in
the Tenth Amendment and in principles of federalism derived generally
from the Constitution.  South Carolina v. Baker, slip op. 4 n.4.
Despite the different sources of the two doctrines, "(c)ases
concerning the tax immunity of income derived from state contracts
freely cited principles established in federal tax immunity cases, and
vice versa" (id. at 11).  The two doctrines are not, however,
coterminous.  See n.9, infra.

   /5/ Congress may by legislation expand federal tax immunity beyond
the confines of the constitutional doctrine.  See Baker, slip op. 12,
n.10 ("The Federal Government * * * possesses the power to enact
statutes immunizing those with whom it deals from state taxation even
if intergovernmental tax immunity doctrine would not otherwise confer
an immunity.").  Plainly, Section 111 was not designed to extend
federal tax immunity.  Nor, on the other hand, is there anything in
the language or history of Section 111 to suggest that Congress
intended further to limit federal tax immunity by drawing a new
distinction between working federal employees and federal retirees
when it authorized nondiscriminatory taxation.  See n.3 supra.

   /6/ The Michigan court of appeals (J.S. App. A7-A8) sought to
distinguish Memphis Bank on the grounds that Tennessee's tax was
rendered invalid by a specific federal statute, 31 U.S.C. (1976 ed.)
742, which prohibits all but nondiscriminatory franchise or
nonproperty taxes on federal obligations.  See also Mot. to Dis. or
Aff. 14-18.  Section 111, however, has no less force than Section 742
in forbidding discriminatory taxation.  Furthermore, in analyzing
Section 742, the Court stated that it viewed that statute "as
principally a restatement of the constitutional rule" (459 U.S. at
397) and proceeded to scrutinize the Tennessee tax under the general
doctrine of intergovernmental tax immunity (id. at 397-398), a
doctrine that is equally applicable here.  Memphis Bank is therefore
directly on point.

   /7/ Most recently, in United States v. City of Manassas, Va., 830
F.2d 530, 534 (4th Cir. 1987), aff'd, No. 87-1117 (Apr. 25, 1988), the
Court affirmed a judgment striking down a Virginia tax statute which
provided that a company that leased or borrowed personal property from
a governmental body was liable for local taxation as if it were the
owner of the property.  The statute expressly exempted from its
provisions property owned by the Virginia Port Authority or by certain
local transportation districts.  Under the statute, therefore, "all
users of property (were) taxed alike, with the exception of those who
use(d) the property of the Virginia Port Authority and local
transportation districts, both of which are subdivisions of the
government of the Commonwealth" (830 F.2d at 533).  The court of
appeals held the statute unconstitutional, noting that "the
discrimination against the federal government in favor of subdivisions
of the state government is obvious" (ibid.).  This Court affirmed
summarily.

   /8/ The differential impact in terms of federal taxation is reduced
to some extent by the fact that an increase in pension benefits would
yield not only higher federal taxes but also higher state taxes, which
are generally deductible from income for purposes of determining
federal tax liability.  But because state income tax rates are
invariably lower than federal income tax rates, the higher deduction
would never completely offset the additional federal tax liability.

   /9/ The same concerns are not present when the federal government
levies taxes on those who deal with the States and their
instrumentalities.  "(I)n laying a federal tax on state
instrumentalities the people of the states, acting through their
representatives, are laying a tax on their own institutions and
consequently are subject to political restraints which can be counted
on to prevent abuse.  * * * The exercise of the national taxing power
is thus subject to a safeguard which does not operate when a state
undertakes to tax a national instrumentality." Helvering v. Gerhardt,
304 U.S. at 412.  Accordingly, "(m)any of this Court's opinions have
suggested that the Constitution should be interpreted to confer a
greater tax immunity on the Federal Government than on States because
all the people of the States are represented in the Federal Government
whereas all the people of the Federal Government are not represented
in individual States." South Carolina v. Baker, slip op. 12 n.10.  It
is unnecessary to consider in this case whether the federal government
would be precluded from bestowing a tax benefit on federal retirees
that was not also granted to state retirees.  But it is worth noting
simply that "the two cases are not on the same reason." McCulloch v.
Maryland, 17 U.S.C. (4 Wheat.) at 435-436.

   /10/ The Senate Report that accompanied the predecessor of 4 U.S.C.
111 made clear that, for precisely this reason, any tax a State
imposes on federal employees must also be imposed on state employees.
S. Rep. 112, 76th Cong., 1st Sess. 9 (1939):

         It should be kept in mind that the proposal before us
      provides only for nondiscriminatory taxation of the compensation
      of public employees and is reciprocal in nature.  Thus, whatever
      burden might be passed on to one government because of the
      taxation of its employees' compensation by another governmental
      unit would, in a measure at least, be offset by the converse
      application of the proposal.

   /11/ In any event, even if a case-by-case examination of whether
the federal government's interests would be adequately represented in
the state political process were thought to be appropriate, it is far
from clear that private employers operating in Michigan would
effectively represent the interests of the United States.  First,
private employers, unlike the United States, are subject to corporate
and other taxes in the State.  Revenues that the State obtains by
taxing the pensions of all non-state employees may be reflected in
lower corporation or other taxes.  Thus, the overall tax structure may
well induce private employers operating in the State to favor higher
taxes on pensions -- where the costs are shared by the federal
government -- to higher taxes elsewhere that are not shared by the
federal government.  Second, the United States itself imposes a tax on
pensions -- both state and federal.  See 26 U.S.C. 61(a)(11), 457.
Thus, the United States, in addition to paying higher pensions to
counterbalance the state tax, will enjoy lower revenues because state
pensions, reflecting the fact that they are not taxed by the State,
will be lower.  See p.14 and n.8, supra.  Since private employers
obviously do not tax state pensions, their interests on this question
will again diverge from those of the United States, making effective
representation of the interests of the United States doubtful.
Obviously, the question whether private employers would provide
effective representation of the interests of the federal government
here cannot be calibrated with precision;  but this simply underscores
the wisdom of presuming discrimination whenever the State treats those
with whom it deals more favorably than those who deal with the federal
government.

   /12/ For purposes of future taxation, the State could respond in a
number of ways to a judgment invalidating the differential treatment
of former state and federal employees, including eliminating the
special exemption for former employees of the State and its political
subdivisions, as well as extending this exemption to former federal
employees.  As in cases claiming a denial of equal protection, the
appropriate prospective remedy here "is a mandate of equal treatment,
a result that can be accomplished by withdrawal of benefits from the
favored class as well as by extension of benefits to the excluded
class." Heckler v. Mathews, 465 U.S. 728, 740 (1984) (emphasis in
orginal).  With respect to past taxes, however, the State's only
option appears to be to give appellant a refund of any taxes he has
paid on his federal pension.  This Court has twice stated simply that
"a discriminatory tax is void and 'may not be exacted.'" Moses Lake
Homes v. Grant County, 365 U.S. at 752 (quoting Phillips Chemical Co.,
361 U.S. at 387).