Opinion ID: 1830790
Heading Depth: 1
Heading Rank: 2

Heading: Whether Alabama's retirement-tax structure violates Amendment 25 to the Alabama Constitution of 1901.

Text: The exemptions and constitutional amendments at issue were adequately recounted in their historical context by the Court of Civil Appeals: Amendment 25 to the Alabama Constitution of 1901 was ratified in 1933. It authorized the State to levy an income tax on Alabama citizens, but prohibited any special income tax treatment of the income of public officers and employees. Subsequent to the ratification of Amendment 25, the Legislature enacted an Alabama income tax in 1935. 1935 Ala. Acts No. 194. The Legislature created the Teachers Retirement System of Alabama (`TRS') and the State Employees Retirement System of Alabama (`ERS') in 1939 and 1945, respectively. 1939 Ala. Acts, Act No. 419, and 1945 Ala. Acts, Act No. 515. Each of the acts creating the two retirement systems contains a provision exempting the systems' retirement benefits from any state or municipal tax. These exemptions remain in effect today. § 16-25-23 and § 36-27-28, Ala. Code 1975. Amendment 61 to the Alabama Constitution of 1901 was ratified in 1947. Section C. of that Amendment provides: `All laws relating to the income tax, not in conflict herewith and valid on the date of the ratification of this amendment, are hereby validated and confirmed.' In 1958, the Legislature codified the previously granted exemptions to retirement benefits of TRS and ERS members into the income tax statutes. 1959 Ala. Acts, Act No. 112. Pursuant to § 36-27-6(a), Ala.Code 1975, counties, municipalities, and public or quasi-public boards of the state may join the ERS and thereby qualify their retirees for the exemption of retirement benefits from Alabama income tax. Beginning with the tax year 1991, the Legislature exempted from income tax the retirement benefits received by Alabama taxpayers from: 1) the TRS, 2) the ERS, 3) political subdivisions of the State for employment as firefighters or peace officers, 4) any United States Government source; and 5) a defined benefit plan, as defined in § 414(j) of the Internal Revenue Code of 1986. §§ 40-18-19 through -20, Ala.Code 1975. Before 1991, for the tax years beginning in 1987, firefighters received an exemption on the first $8,000 per year of retirement compensation. Before 1991, for the tax years beginning in 1984, peace officers received an exemption on the first $8,000 per year of retirement compensation. Before 1991, there was no exemption for private retirement benefits. The retirement benefits of Alabama teachers, state employees, and federal civil service employees were exempt from tax before 1991 and for the years in question in this case. The Internal Revenue Code, as amended by the Employee Retirement Income Security Act (`ERISA'), Pub.L. No. 93-406, 1974, classifies qualified retirement plans as `defined benefit plans' and `defined contribution plans.' The distinction between the two types of plans is that an employee's benefit under a `defined contribution plan' is the amount in an account in the employee's name, while an employee's benefit under a `defined benefit plan' is specified by the terms of the plan. In other words, a `defined contribution plan' specifies how much goes into the plan, while a `defined benefit plan' specifies how much comes out of the plan. The retirement benefits distributed by the TRS and the ERS are from a `defined benefit plan,' meaning that the employee's benefit is specified by the terms of the plan. § 16-25-14 and § 36-27-16, Ala.Code 1975. Melof v. James, 735 So.2d at 1168-69. In essence, Amendment 25 to the Alabama Constitution of 1901 does three things: 1) it allows the Legislature to institute an income tax; 2) it tells how the tax funds are to be distributed; and 3) it prohibits the State from imposing on the citizenry at large an income-tax structure that differs from that applied to state employees. Amendment 25 reads in full: Article XXII. The legislature shall have the power to levy and collect taxes for state purposes on net incomes from whatever source derived within this state, including the incomes derived from salaries, fees and compensation paid from the state, county, municipality, and any agency or creature thereof, for the calendar year, 1933, and thereafter and to designate and define the incomes to be taxed and to fix the rates of taxes, provided that the rate shall not exceed 5 percent nor 3 percent on corporations. Income shall not be deemed property for purposes of ad valorem taxes. From net income an exemption of not less than fifteen hundred dollars ($1,500.00) shall be allowed to unmarried persons and an exemption of not less than three thousand dollars ($3,000.00) shall be allowed to the head of a family, provided that only one exemption shall be allowed to husband and wife where they are living together and make separate returns for income tax. An exemption of not less than three hundred dollars ($300.00) shall be allowed for each dependent member of the family of an income tax payer under the age of 18 years. The legislature shall reduce the ad valorem tax from time to time when and to such an amount as the revenue derived from the income tax will justify. In the event the legislature levies an income tax, such tax must be levied upon the salaries, income, fees, or other compensation of state, county and municipal officers and employees, on the same basis as such income taxes are levied upon other persons. All income derived from such tax shall be held in trust for the payment of the floating debt of Alabama until all debts due on Oct. 1st, 1932, are paid and thereafter used exclusively for the reduction of state ad valorem taxes. (Emphasis added.) The representatives argue that the Legislature has, through the system of exemptions described above, levied an income tax on persons other than state, county, and municipal officers and employees (hereinafter referred to as private employees) on a basis different from the basis upon which income received by state, county, and municipal officers and employees (hereinafter referred to as public employees) is taxed. They claim that, according to the plain meaning of Amendment 25, any income tax levied on Alabama taxpayers must be levied on the same basis as that levied on income paid to state, county and municipal employees. They then conclude that for the income tax to be levied on the same basis, pension benefits, which are exempt from income tax when received by a public employee, must be exempt from income tax when received by a private employee. The representatives claim that retirement benefits are salaries, income, fees, or other compensation within the meaning of Amendment 25. In this respect, the representatives argue that the fact that pension benefits are paid to former public officers and employees does not render the prohibitions of Amendment 25 inapplicable, because, they say, the words other compensation encompass pension benefits distributed to former employees. The representatives claim that these pension benefits are merely deferred compensation, like those benefits addressed by the United States Supreme Court in Davis v. Michigan Dep't of Treasury, supra, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891. Davis involved a former federal employee, Davis, who challenged Michigan's practice of exempting from taxation retirement benefits paid by the State of Michigan or its political subdivisions, while taxing retirement benefits paid by other employers. While Davis dealt with the interpretation of federal law, the Court resolved the issue whether pension benefits are deferred compensation and did so in a persuasive manner: [Davis] places principal reliance on 4 U.S.C. § 111. In relevant part, that section provides: `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.' As a threshold matter, the State argues that § 111 applies only to current employees of the Federal Government, not to retirees such as appellant. In our view, however, the plain language of the statute dictates the opposite conclusion. Section 111 by its terms applies to `the taxation of pay or compensation for personal services as an officer or employee of the United States.' [Emphasis added in Davis. ] While retirement pay is not actually disbursed during the time an individual is working for the Government, the amount of benefits to be received in retirement is based and computed upon the individual's salary and years of service. We have no difficulty concluding that civil service retirement benefits are deferred compensation for past years of service rendered to the Government. And because these benefits accrue to employees on account of their service to the Government, they fall squarely within the category of compensation for services rendered `as an officer or employee of the United States.' Appellant's federal retirement benefits are deferred compensation earned `as' a federal employee, and so are subject to § 111. Davis, 489 U.S. at 808, 109 S.Ct. 1500 (citations omitted). According to the representatives, then, because the statutes in question levy income tax on the compensation of public employees differently than they do on the compensation of private employees, the retirement-tax structure directly conflicts with Amendment 25 and is unconstitutional. The Court of Civil Appeals disagreed with the representatives' arguments and adopted the trial court's conclusion that the Amendment 25 prohibition on special income-tax treatment was repealed by Amendment 61, which reads: Section A. The entire proceeds of the income tax in the treasury of the state of Alabama on September 30, 1947, including cash and investments and the interest thereon, shall be used for the following purposes and in the following manner: 1st. The sum of $12,249,860.00 shall be and is hereby set aside and shall be and is hereby constituted an irrevocable trust fund for the purpose of paying the principal of and interest on the bonds issued by the state of Alabama commonly known as `income tax bonds,' being the warrant refunding bonds issued to fund the floating debt existing October 1, 1932, which bonds were issued under the authority of Act No. 14 approved February 5, 1935 [Acts 1935, p. 27], and Act No. 50 approved February 8, 1935 [Acts 1935, p. 118]. 2nd. An amount (approximately $6,700,000.00) which, when added to the sinking fund (approximately $1,857,000.00) heretofore created to pay the bonds issued by the state of Alabama, commonly known as the `old bonded debt' and as `carpet bag bonds' together with the interest on said sinking fund accrued on September 30, 1947, shall equal the principal of said bonds in the sum of $8,557,000.00, shall be and is hereby set aside, and together with said sinking fund and the interest thereon, shall be and is hereby constituted an irrevocable trust fund for the purpose of paying the principal of said bonds upon their maturity, said bonds being the class A renewal bonds, class C renewal bonds and funding renewal bonds. That both of the irrevocable trust funds herein created shall be invested in United States government securities by the treasurer of the state of Alabama with the approval of the governor. 3rd. The residue shall be paid over to the building commission created by Act 128 of 1945 General Acts [p. 116] to be expended by said building commission for capital outlay only for educational purposes, provided, however, that not more than twelve per centum of such amount shall be allocated to the institutions of higher learning including the state teachers colleges, and not less than eighty-eight per centum shall be allocated to county and city boards of education on an actual teacher unit basis in accordance with the minimum school program. Section B. Beginning October 1, 1947, and thereafter, all net proceeds of such tax, plus the earnings from investment of the trust funds, must be used only in the manner and in the order following: (1) To replace the revenue lost to the several funds of the state by reason of the exemption of homesteads from the state ad valorem tax. All homesteads in Alabama are hereby declared to be exempt from all state ad valorem tax to the extent of at least $2,000.00 in assessed value and a sufficient amount is hereby appropriated from the proceeds of the income tax in each fiscal year to replace the revenue lost to the several funds of the state by reason of the homestead exemption herein declared; (2) The residue shall be placed in the state treasury to the credit of the Alabama special education trust fund to be used for the payment of public school teachers salaries only. Section C. This amendment supersedes the provisions of amendment XXV [25] (article XXII) relating to the disposition of the income tax proceeds insofar as the same are in conflict herewith. All laws relating to the income tax, not in conflict herewith and valid on the date of the ratification of this amendment, are hereby validated and confirmed. The provisions hereof with respect to the creation of funds and the use thereof are declared to be self-executing. (Emphasis added.) Because we disagree with certain portions of the trial court's reasoning, it would be helpful at this point to restate that section of the trial court's order that was adopted by the Court of Civil Appeals: Amendment 25's prohibition against the special income tax treatment of the income of public employees was repealed by the ratification of Amendment 61. After the ratification of Amendment 25 in 1933, the Legislature exempted the retirement benefits of Alabama school teachers and state employees, in 1939 and 1945 respectively, from all state taxation, including Alabama's income tax. In 1947, Amendment 61 was ratified. Amendment 61 superseded the provisions of Amendment 25 and repealed Amendment 25's prohibition against the special income tax treatment of the income of public employees by validating and confirming all `laws relating to, the income tax' which were valid on the date of the ratification of Amendment 61. Included in the existing `laws relating to the income tax' in 1947 were the exemptions from state tax granted by the Legislature to the retirement benefits of Alabama school teachers and state employees. Acts of Alabama 1939, No. 419, p. 559, at 573; Acts of Alabama 1945, No. 515, p. 734, at 748. At the time of the ratification of Amendment 61 in 1947, these exemption statutes were unchallenged, valid and presumed to be constitutional. Tanner v. Tuscaloosa County Commission, 594 So.2d 1207, at 1209 (Ala.1992); Craig v. State, 410 So.2d 449, at 453 (Ala.Crim.App.1981). The Legislature is presumed to have had full knowledge and information on those existing exemption statutes when Amendment 61 was proposed and ratified. See Ex parte Love, 513 So.2d 24, at 29 (Ala.1987) (citing Miller v. State, 349 So.2d 129 (Ala.Crim.App.1977)). Obviously, the Legislature intended to validate those exemptions and repeal the 25th Amendment's prohibition against the special income tax treatment of the income of public employees. Why else would Alabama's classification of retirement benefits remain unchallenged pursuant to the provisions of Amendment 25 for 50 years? There is no other explanation for the inclusion of the `validation' sentence in Amendment 61. The Legislature knew that an amendment to the Alabama Constitution repeals all inconsistent older provisions of the Constitution to the extent of any inconsistency. Birmingham Electric Co. v. Harry, 21 Ala.App. 483, 484, 111 So. 39, 40 (1926). Alabama's pre-1991 and post-1991 classification of retirement benefits, including the exemptions granted to the benefits of teachers and state employees and the subsequent partial exemptions granted to the benefits of peace officers and firefighters, cannot be interpreted to violate Amendment 25's prohibition against special income tax treatment of the income of public employees, because Amendment 61 repealed the prohibition of Amendment 25. 735 So.2d at 1169-70. We do not agree that Amendment 61's repeal of Amendment 25 was all-encompassing. Both Amendment 25 and Amendment 61 contain sections detailing how the collected funds are to be spent. The portion of Amendment 61 that overrides Amendment 25 is clear: that portion relating to the disposition of the income tax proceeds. Amendment 61 merely changes how the proceeds will be disposed of; the prohibition on special taxation treatment is left undisturbed. Also, the Legislature can, as mentioned in the trial court's order, validate an unconstitutional statute. Ex parte Southern Ry., 556 So.2d 1082 (Ala.1989). However, the trial court's order seems to incorrectly imply that validation of certain exemptions to the prohibition of Amendment 25 repeals the prohibition in full. Logically, however, the prohibition would stand, but the exemptions would be immunized from further constitutional attack. Although we note those disagreements for clarification purposes, we affirm the conclusion of the Court of Civil Appeals for a different reason. Decisions of this Court have made it clear that [i]t is the duty of courts to sustain the constitutionality of a legislative act unless it is clear beyond a reasonable doubt that it is in violation of the fundamental law. Crosslin v. City of Muscle Shoals, 436 So.2d 862, 863 (Ala. 1983). See also White v. Reynolds Metals Co., 558 So.2d 373, 383 (Ala.1989); Home Indemnity Co. v. Anders, 459 So.2d 836, 840 (Ala.1984); State Board of Health v. Greater Birmingham Ass'n of Home Builders, Inc., 384 So.2d 1058, 1061 (Ala. 1980); Alabama State Federation of Labor v. McAdory, 246 Ala. 1, 9-10, 18 So.2d 810, 814-15 (1944); Yeilding v. State ex rel. Wilkinson, 232 Ala. 292, 298, 167 So. 580, 585 (1936) (our solemn duty [is] to uphold a law, which has received the sanction of the Legislature, unless we are convinced beyond a reasonable doubt of its unconstitutionality); State ex rel. Woodward v. Green, 154 Ala. 249, 254, 46 So. 268, 270 (1908). Therefore, only if the petitioners have demonstrated beyond a reasonable doubt that their interpretation of Amendment 25 is accurate would we declare the retirement-tax structure unconstitutional. Because we find, from the State's arguments, legitimate reasons to doubt the representatives' construction of Amendment 25's prohibition, we decline to strike down the retirement-tax structure at issue. The State points out that Amendment 25, by its express terms, prohibits different income-tax treatment between public and private employees, not former employees. The State claims that, while the term other compensation may be broad, the plain meanings of the terms used by Amendment 25 limit the term other compensation to compensation of employees. According to the State, the drafters of Amendment 25 could not have meant to incorporate the Davis notion of deferred compensation, because retirement plans such as those before us were not even in existence in 1933, when Amendment 25 was drafted and ratified. [1] Of course, the representatives could argue that the inclusion of such broad language as other compensation was for the purpose of encompassing any future employee compensation like deferred compensation. The language of Amendment 25, however, lends itself to both interpretations. While we disagree with the State's contention that Amendment 61 expressly repealed the prohibition of Amendment 25, there may be merit to the State's further contention that Amendment 61 validated the exemptions that were in existence at that time. As mentioned above, the Legislature does have the ability to begin the process for validating a constitutionally deficient statute, by proposing a constitutional amendment that by clear and express terms validates and confirms the statute. Ex parte Southern Ry., 556 So.2d 1082, 1090 (Ala.1989) (citing Bonds v. State Dep't of Revenue, 254 Ala. 553, 49 So.2d 280 (1950)). Amendment 61 expressly states that [a]ll laws relating to the income tax, not in conflict herewith and valid on the date of the ratification of this amendment, are hereby validated and confirmed.  The exemptions at issue would certainly be laws that relate to the income tax. It is not necessary, at this time, to decide whether the term clear and express refers to actually naming the statute in the validating amendment or to using the term validate and confirm. However, the fact that the answer to that question is not immediately evident from the language of the Southern Ry. opinion suggests a reason to doubt the unconstitutionality of the retirement-tax structure, some of which has gone unchallenged for 50 years. Because both sides proffer arguments that seem to take account of the textual and historical standpoints that this case involves, we are unable to say that, beyond a reasonable doubt, Alabama's system of exemptions violates Amendment 25. Therefore, we hold that the representatives have not met their burden; their argument based on Amendment 25 has not shown the summary judgment to be improper.