Can the NC General Assembly give tax refunds or credits to former federal employees even though courts say the state owes them nothing?

Plain-English summary

The background here is Davis v. Michigan, 489 U.S. 803 (1989). Before Davis, many states (including NC) taxed federal retirement income while exempting state retirement income. The U.S. Supreme Court held that disparity unconstitutional under the intergovernmental tax immunity doctrine. NC, like other states, faced a wave of federal pensioner refund claims. State courts and the U.S. Supreme Court ultimately worked through which refunds were owed and which were not, and many federal pensioners ended up with no enforceable claim. By 1995, NC had no legal obligation to compensate that group.

But the political and equity question persisted: should the General Assembly give them relief anyway? Sen. John Kerr asked his bill-drafting staff to find out. Director Gerry Cohen sent the question to the AG.

Chief Deputy AG Andrew A. Vanore, Jr. answered that the General Assembly had the authority to provide relief if it chose to. The constitutional obstacle was Article I, § 32, the exclusive emoluments clause, which says "No person or set of persons is entitled to exclusive or separate emoluments or privileges from the community but in consideration of public services." The clause bars legislative gifts to favored classes; it does not bar legislative recognition of past public service.

NC case law has consistently allowed compensation tied to past public service. The Supreme Court in Town of Emerald Isle v. State, 320 N.C. 640 (1987) articulated the modern two-part test: an exemption survives the emoluments clause if (1) the exemption promotes the general welfare rather than the individual's private benefit, and (2) the legislature has a reasonable basis to conclude the exemption serves the public interest. Older cases applied the same spirit. Hinton v. State Treasurer, 193 N.C. 496 (1927) (home loan programs for WWI vets); Bromley v. Baxter, 225 N.C. 691 (1945) (donation of municipal land for a WWII Veterans Center); Bridges v. City of Charlotte, 221 N.C. 472 (1942) (retirement benefits for state employees as deferred compensation).

The most on-point recent case was Leete v. County of Warren, 114 N.C. App. 755 (1994). Warren County paid its departing county manager $5,073.12 as a severance after he voluntarily resigned. A taxpayer sued, calling it an unlawful gratuity. The Court of Appeals upheld the payment because the county manager had previously rendered public service to the county. The court explained that "the primary inquiry under Article I, [Section] 32 is not whether the recipient has a legal or enforceable claim against the governmental entity granting the benefit, but rather, whether the governmental entity took such action in consideration of the recipient's public service."

Federal employment is public service. So if the General Assembly determined that federal pensioners' prior service as federal employees warranted compensation, the resulting legislation would clear Article I, § 32, even though courts had foreclosed any enforceable Davis claim.

Currency note

This opinion was issued in 1995. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. Subsequent NC legislation did address federal pensioner relief through targeted settlements and refund programs; the constitutional framework has remained largely stable through later exclusive-emoluments decisions.

Background and statutory framework

The exclusive emoluments clause. Article I, § 32 of the NC Constitution is a Reconstruction-era restraint on legislative favoritism. Its plain text bars privileges that flow to a class without a corresponding public service.

The Simonton-Plott line. Simonton v. Lanier, 71 N.C. 498 (1874) and Plott v. Ferguson, 202 N.C. 446 (1932) are the foundational cases for the rule that exclusive privileges without a public-service rationale are unconstitutional. Both cases struck down narrowly-targeted legislation that benefited specific interests without articulable public justification.

The Emerald Isle test. Town of Emerald Isle v. State, 320 N.C. 640 (1987) modernized the test: a legislative exemption survives the clause if it promotes the general welfare rather than individual benefit and the legislature has a reasonable basis. The general-welfare element is not demanding; many tax expenditures and targeted programs qualify.

The veterans-benefit line. Hinton, Bromley, and Bridges (and many subsequent cases) treat veterans' benefits and government-employee retirement programs as paradigmatic permissible exclusive-emoluments. The unifying principle is past public service.

Leete v. County of Warren. Leete sharpened the rule: the recipient need not have a legal or enforceable claim. The question is whether the government's action was taken "in consideration of" public service, not whether the recipient could have sued for it.

Davis v. Michigan in context. Davis, 489 U.S. 803 (1989), held it unconstitutional for a state to tax federal retirement income while exempting state retirement income. The fallout consumed years of litigation and state-by-state legislative repair. Federal pensioner claims for past tax years were largely cut off by state remedy laws and the U.S. Supreme Court's Reich v. Collins / McKesson framework. By 1995, the question was: with the door legally closed, could the legislature open it as a matter of grace?

The political reality. This was a politically active question. Federal retirees had organized aggressively for refund legislation. The AG's opinion gave legal cover for the General Assembly to act.

Common questions

Q: Did the General Assembly actually pass federal pensioner relief after this opinion?

A: NC enacted federal pensioner tax settlement legislation and refund programs at various points after Davis v. Michigan. The opinion confirmed those programs would survive constitutional challenge.

Q: Could a state legislature give money to private individuals with no government service?

A: That is the harder case. The exclusive emoluments clause requires a "public services" rationale. Pure private gifts to favored individuals are vulnerable; legislation tied to a recognized class of past public servants is not.

Q: What about non-federal-pensioner classes (firefighters, teachers, military reservists)?

A: The same reasoning applies. NC has long upheld preferential treatment of classes whose service is tied to public welfare. Each program needs articulation of the public service basis.

Q: Did the opinion require the legislature to articulate the public-service basis on the record?

A: The opinion did not impose any specific findings requirement. Practice is for the General Assembly to include findings or recitals tying the benefit to past public service, which simplifies later judicial review.

Q: How is this different from a forbidden gift of public funds?

A: NC does not have a strict "gift clause" like some states. Article I, § 32 functions similarly but is narrower; it polices exclusive privileges, not all public expenditures.

Q: Could a federal pensioner refund program face equal-protection challenge by other taxpayers?

A: That is a separate constitutional issue. Equal-protection challenges to public-service-based programs face rational-basis review, which is deferential.

Citations from the opinion

• N.C. Const. Art. I, § 32
• Simonton v. Lanier, 71 N.C. 498 (1874)
• Plott v. Ferguson, 202 N.C. 446 (1932)
• Town of Emerald Isle v. State, 320 N.C. 640 (1987)
• Hinton v. State Treasurer, 193 N.C. 496 (1927)
• Bromley v. Baxter, 225 N.C. 691 (1945)
• Bridges v. City of Charlotte, 221 N.C. 472 (1942)
• Leete v. County of Warren, 114 N.C. App. 755 (1994)

Source

• Landing page: https://ncdoj.gov/opinions/authority-of-the-general-assembly-to-provide-relief-to-federal-pensioners/

Original opinion text

At the request of Senator John Kerr, you ask our opinion whether the General Assembly may lawfully enact legislation giving refunds or tax credits to federal pensioners even though the courts have definitively held that the state has no legal obligation to provide such relief.

For reasons which follow, it is our opinion that the Legislature has the authority to provide relief to federal pensioners, notwithstanding the decisions of the federal and state courts that the state has no legal obligation to provide such relief. This decision would be within the discretion of the General Assembly should it believe that federal pensioners' prior public service as federal employees warrants such relief.

Article I, Section 32 of the North Carolina Constitution provides: "No person or set of persons is entitled to exclusive or separate emoluments or privileges from the community but in consideration of public services."

The exclusive emoluments provision of our State Constitution bars legislative grants which exempt some individuals from prohibitions that otherwise apply generally to all citizens of the state or which extend special privileges to select individuals or groups of individuals without a corresponding return of public service. Simonton v. Lanier, 71 N.C. 498 (1874); Plott v. Ferguson, 202 N.C. 446 (1932). However, not all special or exclusive emoluments are prohibited by Article I, Section 32. The Supreme Court of North Carolina recently held that "a statute which confers an exemption that benefits a particular group of persons is not an exclusive emolument or privilege within the meaning of Article I, Section 32 if: (1) the exemption is intended to promote the general welfare rather than the benefit of the individual, and (2) there is a reasonable basis for the legislature to conclude the granting of the exemption serves the public interest." Town of Emerald Isle v. State, 320 N.C. 640, 654 (1987).

Applying this test, the Supreme Court of North Carolina has held that government-conferred benefits do not violate Article I, Section 32 in a variety of circumstances even though the benefits were extended exclusively to small groups of individuals. See, Hinton v. State Treasurer, 193 N.C. 496 (1927) (home loan programs to World War I veterans did not violate the emoluments provision); Bromley v. Baxter, 225 N.C. 691 (1945) (donation of municipal land for World War II Veterans Center held not to violate the emoluments provision); Bridges v. City of Charlotte, 221 N.C. 472 (1942) (benefits received by retired state employees are deferred payments of salaries for services rendered and do not violate the emoluments provision).

The most recent appellate court decision that is directly in point is Leete v. County of Warren, 114 N.C. App. 755 (1994). In Leete, the Warren County Board of Commissioners made a payment of $5,073.12 to the county manager who voluntarily resigned. The trial judge enjoined the county for making the payment on the ground that it was an unlawful gratuity that violated Article I, Section 32. The Court of Appeals upheld the payment, notwithstanding the fact that the county had absolutely no legal obligation to pay this gratuity to the former county manager. The Court upheld the payment because of the county manager's past public service to the county. As the Court of Appeals reasoned:

"North Carolina Case law demonstrates that it is permissible to compensate public service previously rendered without violating the constitutional ban on private emoluments, even though the recipient may have no legal and enforceable right to the benefit. * * *

Hence, our Supreme Court has held, on more than one occasion, that the constitutional ban on exclusive emoluments is not violated by a governmental grant of certain benefits, paid out of public resources, to one class of citizens, but not to be enjoyed by all, if the grant is in consideration of public service. From these cases, we discern that the primary inquiry under Article I, [Section] 32 is not whether the recipient has a legal or enforceable claim against the governmental entity granting the benefit, but rather, whether the governmental entity took such action in consideration of the recipient's public service." Id., 758, 759

Here, since all of the federal pensioners were federal employees, and because federal employment like state employment is considered a public service, should the General Assembly determine that some benefits should be provided to these federal pensioners because of their prior public service, we believe such legislation would be constitutional.

Should you have any further questions, please contact us.

Andrew A. Vanore, Jr., Chief Deputy Attorney General