Did Oregon's taxation of private pension income while exempting PERS and federal pensions violate equal protection or uniformity rules?
Plain-English summary
Before 1991, Oregon exempted PERS pension income from state taxable income; federal pensions were exempt only up to a dollar limit. The U.S. Supreme Court ruled in Davis v. Michigan (1989) that states can't favor state-pension recipients over federal-pension recipients. To comply, Oregon's 1991 Legislature repealed the PERS exemption and gave PERS retirees a benefit bump to compensate. After litigation, Oregon also had to refund federal retirees' taxes on pension income from pre-1991 service.
The Director of Administrative Services asked: while Oregon is busy not-taxing federal pensions and effectively rebating PERS taxes, is it constitutional to keep taxing private pension income? Attorney General Hardy Myers answered yes. Under the rational basis test that applies to tax classifications under Article I, section 32 (uniformity), Article IX, section 1 (uniformity), and Article I, section 20 (equal privileges), Oregon could rationally treat private pensions differently. The state's compensation of PERS retirees was a rational response to a breach-of-contract obligation; the exemption of federal pensions was a rational response to federal intergovernmental immunity. Federal Equal Protection analysis tracks Oregon's section 20 analysis, and reached the same result.
Currency note
This opinion was issued in 1999. 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.
Common questions
Q: Why does Oregon get to tax private pensions at all?
A: There's no federal rule against it, and no Oregon constitutional rule requires equal tax treatment between private and public pensions. Tax classifications survive constitutional review if there's "any conceivable state of facts" supporting them (Huckaba v. Johnson). Compensation patterns for public retirees and intergovernmental tax immunity rules supplied that conceivable basis.
Q: What did Davis v. Michigan actually require?
A: That federal pension income receive at least equally favorable state-tax treatment to state and local pension income. It doesn't require any particular tax treatment of private pensions.
Q: Why does Oregon compensate PERS retirees for paying taxes?
A: Hughes v. State of Oregon (1992) held that the 1991 repeal breached the contract with PERS members for service performed before September 28, 1991. The 1995 and 1997 PERS benefit increases were the negotiated settlement remedy. Vogl v. Dept. of Rev. (1998) then said federal retirees had to get equivalent treatment under Davis, which is why federal pension refunds happened.
Q: Couldn't private retirees argue invidious discrimination?
A: Article I, section 20 prevents discrimination based on "immutable characteristics" reflecting invidious social or political premises. Pension source is not immutable. It's a financial classification, not a race or religion classification. Rational basis applies.
Q: What's the test under each provision?
A: Tax uniformity (Article I, section 32 and Article IX, section 1) and equal privileges (Article I, section 20) both apply rational-basis review here. Federal Equal Protection under the Fourteenth Amendment also applies rational basis to tax classifications and generally coincides with Oregon section 20.
Background and statutory framework
The pre-1991 statutory framework exempted PERS pension income (ORS 316.680(1)(d) (1989)) and most public retirement system pension income from in-state employers (ORS 316.680(1)(c) (1989)), with a limited exemption for federal pension income. Davis v. Michigan (1989) made that combination unconstitutional under federal intergovernmental tax immunity principles. Oregon Laws 1991, ch. 823 repealed the PERS exemption; ch. 796 increased PERS benefits up to 4 percent as partial compensation.
The Oregon Supreme Court in Hughes held the 1991 repeal breached the PERS members' employment contracts. Oregon Laws 1995, ch. 569 and 1997, ch. 175 funded the negotiated settlement. Federal retirees challenged the result in Vogl v. Dept. of Rev., and the resulting class-action judgment required tax refunds and future exclusions for federal retirees.
The opinion's analysis steps through three constitutional grounds: state tax uniformity (Article I, section 32 and Article IX, section 1), state equal-privileges (Article I, section 20), and federal Equal Protection. Under each, rational basis applies and is satisfied.
Citations and references
Constitutional provisions and statutes:
- Article I, section 32; Article IX, section 1; Article I, section 20, Oregon Constitution
- Fourteenth Amendment, U.S. Constitution
- ORS 316.680(1)(c), (d), former pension exemptions
- Oregon Laws 1991, ch. 796, 823; 1995, ch. 569; 1997, ch. 175
Cases:
- Davis v. Michigan Dept. of Treasury, 489 US 803 (1989), intergovernmental tax immunity
- Hughes v. State of Oregon, 314 Or 1, 838 P2d 1018 (1992), PERS contract impairment
- Vogl v. Dept. of Rev., 327 Or 193, 960 P2d 373 (1998), federal retirees' Davis claim
- Huckaba v. Johnson, 281 Or 23, 573 P2d 305 (1978), tax classification rational basis
- Simpson v. Dept. of Rev., 12 OTR 455 (1993), aff'd 318 Or 579, 870 P2d 824 (1994), Alaska pension taxation
- Sealey v. Hicks, 309 Or 387, 788 P2d 435 (1990), "true class" requirements
- State v. Clark, 291 Or 231, 630 P2d 810 (1981), classification analysis
- Dutton Lbr. Corp. v. Tax Com., 228 Or 525, 365 P2d 867 (1961), federal Equal Protection
Source
- Landing page: https://www.doj.state.or.us/oregon-department-of-justice/office-of-the-attorney-general/attorney-general-opinions/
- Original PDF: https://www.doj.state.or.us/wp-content/uploads/1999/03/op8267.pdf
Original opinion text
March 30, 1999
No. 8267
This opinion is issued in response to a question from Jon Yunker, Director, Oregon Department of Administrative
Services, concerning the state personal income tax treatment of private pension income.
QUESTION PRESENTED
Does Oregon unlawfully discriminate in taxing private pension income while:
1. Providing a pension benefit increase to Public Employees' Retirement System (PERS) retirees that is the functional
equivalent of a rebate of Oregon personal income taxes attributed to their PERS pension income, and
2. Not taxing federal pension income?
ANSWER
No.
DISCUSSION
I. Background
Before 1991, Oregon exempted from state taxable income all pension income received from PERS. ORS 316.680(1)(d)
(1989). The law further exempted all pension income received by retirees and their surviving spouses from non-PERS
public retirement systems maintained by public employers within Oregon. ORS 316.680(1)(c) (1989). There was a limited
exemption for pension income from federal retirement systems, subject to a maximum dollar limit. Id. There was no
exemption for private pension income.
In 1989, the United States Supreme Court held that federal statutory and constitutional principles of intergovernmental tax
immunity prohibit a state from providing a tax exemption for state and local government pension benefits without
providing a similar exemption for federal pension benefits. Davis v. Michigan Dept. of Treasury, 489 US 803, 109 S Ct
1500, 103 L Ed2d 891 (1989). To comply with Davis, the 1991 Oregon legislature repealed the state income tax
exemptions for PERS and local government pension income. Or Laws 1991, ch 823, § 3./ The legislature also increased
PERS retirement benefits by up to 4 percent to partially compensate PERS members for the loss of the tax exemption. Or
Laws 1991, ch 796.
PERS members immediately commenced a lawsuit challenging the repeal of the tax exemption. The Oregon Supreme
Court held that the repeal breached the employment contract between participating public employers and PERS members
to the extent it required taxation of benefits attributable to services performed before September 28, 1991, the effective
date of the repeal. Hughes v. State of Oregon, 314 Or 1, 36, 838 P2d 1018 (1992). The Hughes court declined to comment
on the appropriate remedy for the breach, noting that "[t]he legislature is the most appropriate branch of government in the
first instance to choose among the available remedies." Id. at 33 n 36.
In 1993 and 1994, PERS members filed two lawsuits, subsequently consolidated, to recover damages for the breach of
their employment contract. After several years of litigation, the case was settled. Pursuant to the settlement agreement, the
legislature enacted PERS benefit increases that were designed to fully compensate PERS members for the loss of the tax
exemption for benefits attributable to service performed before September 29, 1991. Or Laws 1995, ch 569; Or Laws
1997, ch 175./
Federal retirees challenged the 1995 benefit increase, alleging that it was a tax rebate that illegally favored state and local
government retirees over federal retirees. The Oregon Supreme Court held that the 1995 increase was the functional
equivalent of a tax rebate and that, under Davis, the state could not provide such a rebate without providing similar tax
treatment to federal retirees./ Vogl v. Dept. of Rev., 327 Or 193, 208, 960 P2d 373 (1998). The court declined to direct a
remedy, but remanded the case to the Tax Court for further proceedings. Id. at 212. On remand, the case was certified as a
class action and the parties agreed to a stipulated judgment, which was entered by the court. The judgment requires the
Oregon Department of Revenue to refund state personal income taxes paid by members of the class to the extent those
taxes were attributable to federal pension income based on services performed before September 29, 1991. In addition, the
Department of Revenue must allow class members to exclude from their taxable income in future tax years all federal
pension income attributable to services performed before September 29, 1991.
II. Legality of Providing Unequal Tax Treatment to Private Pension Income
State legislative power is plenary subject only to limitations imposed by the state and federal constitutions and preemptive
federal statutes and regulations. See, e.g., Latourette v. Clackamas Co. et al, 131 Or 168, 170, 281 P 182 (1929).
Accordingly, our review is confined to determining whether the disparate tax treatment afforded private pension income
violates a limitation found in one of those authorities.
No federal statutes or regulations prohibit the states from treating public and private pension income differently for tax
purposes. Therefore, the scope of our inquiry is limited to whether such different treatment violates any state or federal
constitutional provision. Disparate tax treatment potentially implicates three constitutional limitations: (a) the tax
uniformity requirements of Article I, section 32, and Article IX, section 1, of the Oregon Constitution; (b) the equal
privileges and immunities guarantee in Article I, section 20, of the Oregon Constitution; and (c) the equal protection
guarantee of the Fourteenth Amendment to the United States Constitution.
We begin by analyzing the state constitutional limitations. See, e.g., Sterling v. Cupp, 290 Or 611, 614, 625 P2d 123
(1981); Cooper v. OSAA, 52 Or App 425, 432, 629 P2d 386 (1981), rev den 291 Or 504, 634 P2d 1347 (1981) (citing
State v. Spada, 286 Or 305, 594 P2d 815 (1979)). See also Linde, First Things First, Rediscovering the State's Bill of
Rights, 9 Bal L Rev 379 (1980).
A. Tax Uniformity Provisions Under the Oregon Constitution
Two provisions in the Oregon Constitution require uniform taxation./ Article I, section 32, provides, in part, that:
all taxation shall be uniform on the same class of subjects within the territorial limits of the authority
levying the tax.
Article IX, section 1, provides:
The Legislative Assembly shall, and the people through the initiative may, provide by law uniform rules of
assessment and taxation. All taxes shall be levied and collected under general laws operating uniformly
throughout the State.
The Oregon Supreme Court has held that tax classifications survive constitutional scrutiny under these provisions if there
is a rational basis for the classification. The court explained:
What is required in assessing a constitutional challenge to classification for tax benefit is a review of the
grounds for the classification to determine if it rests upon a rational basis. The legislature may make
distinctions of degree having a rational basis, and when subjected to judicial scrutiny they must be
presumed to rest on that basis if there is any conceivable state of facts which would support it. * * * It,
however, is not sufficient to merely point out differences between the groups of taxpayers for divergent
treatment. The differences justifying the attempted classification must bear a reasonable relationship to the
legislative purpose.
Huckaba v. Johnson, 281 Or 23, 26, 573 P2d 305 (1978) (citations omitted).
In Huckaba, a federal retiree challenged an Oregon statute that provided an income tax exemption for up to $2,400 of
federal retirement income other than military retirement income. Military retirees were eligible for this exemption only
after reaching age 65. Moreover, the exemption for military retirees was reduced, dollar for dollar, by any earned income
received by the retiree during the taxable year. ORS 316.067(1)(c) and (3) (1975). The Department of Revenue argued that
the reason for this disparate treatment was that military personnel, unlike other federal employees, were eligible for
retirement after 20 years of service, regardless of age. Because military personnel generally enter the armed forces at a
relatively early age, they are more likely than other federal employees to retire while still young enough to pursue a second
career and to earn additional retirement benefits in that career. The court held that this rationale established a reasonable
basis for the challenged law and, therefore, the disparate treatment afforded military retirees did not violate Article I,
section 32, or Article IX, section 1, of the Oregon Constitution./ 281 Or at 28-31. The Huckaba court emphasized that a
tax classification need not be narrowly drawn, but may instead be a general one based on characteristics typical of the
affected class:
General rules are essential if a system of the magnitude and complexity of the Personal Income Tax Act is
to be administered with a modicum of efficiency, even though application of the rule may produce
seemingly arbitrary consequences in some cases. A nonmilitary federal retiree may, in fact, after retirement
obtain employment and create an additional retirement fund. Or conversely an Armed Forces retiree may be
unable to enter a new career and be required to subsist on his military retirement pay. Making these
determinations would require individualized proof as each income exclusion was claimed. The legislature
could reasonably choose between a system of individualized inquiry and a general rule based on the source
of the retirement benefit. The former method would introduce complexities in the administration of an
already complex tax system and increase the expense of administration. The choice between these
competing policies is a legislative determination and the decision to accord the benefit on the basis of an
easily ascertainable criterion does not offend constitutional principles.
Id. at 30-31.
More recently, the courts have upheld Oregon's taxation of public retirement benefits paid by the state of Alaska from
1985 through 1990, even though PERS benefits were exempt from tax during that time period. Simpson v. Dept. of Rev.,
12 OTR 455 (1993), aff'd 318 Or 579, 870 P2d 824 (1994). The taxpayer in Simpson had argued that the failure to exempt
benefits paid by Alaska's pension plan violated, among other things, Article I, section 32, of the Oregon Constitution. 12
OTR at 456. The tax court rejected the taxpayer's argument, noting:
The purpose of [the tax exemption for PERS benefits] is to reduce payroll costs to the State of Oregon. The
state can reduce current salaries paid to its employees in exchange for exempting the same employees'
retirement benefits from state income taxes; this is certainly within the legislature's power. This court has
previously found such purpose is a "rationale [sic] predicate" for the classification.
Id. at 457-8 (footnote omitted) (citing Lindau v. Dept. of Rev., 10 OTR 92, 93 (1985)). The tax court further observed that
the taxpayers did not challenge the taxation of retirement benefits received from private pension plans, "recognizing that
they may be substantially different." 12 OTR at 457 n 3. On appeal, the Oregon Supreme Court affirmed the tax court's
holding, stating that the taxpayers "have not advanced any viable legal basis supporting their contentions." 318 Or at 581.
Under Huckaba, the state has broad discretion to establish tax classifications as long as the distinction supporting the
classifications rests on a rational basis, which "any conceivable state of facts" would support. Huckaba, 281 Or at 26.
Simpson stands for the further proposition that the state may rationally decide to compensate Oregon public employees by
providing a tax exemption instead of additional cash compensation or other employee benefits, while taxing non-PERS
pension income. 12 OTR at 457-8, aff'd 318 Or 579; see also Lindau v. Dept. of Rev., 10 OTR at 93. The same rationale
applies to the 1995 and 1997 PERS benefit increases, which compensated PERS members for the loss of the tax
exemption. Thus, we conclude that Oregon's constitutional tax uniformity provisions do not require equal tax treatment of
PERS benefits and private pension income.
Under Davis, discussed above, federal principles of intergovernmental immunity require equal treatment of Oregon
government and federal pension income. The state's decision not to tax federal pension income attributable to services
performed before September 29, 1991, was for the purpose of correcting a violation of those federal law principles and
complying with the terms of a court judgment. Under the circumstances, the state's decision not to tax federal pension
income was manifestly rational. In contrast, the federal intergovernmental immunity principles do not require equal tax
treatment of public and private pension income. Accordingly, we conclude that the state does not violate Oregon's
constitutional tax uniformity provisions in providing a tax exemption for federal pension income without providing a
similar exemption for private pension income.
To summarize, we conclude that the state's taxation of private pension income does not violate Article I, section 32, or
Article IX, section 1, of the Oregon Constitution.
B. Equal Privileges and Immunities Under the Oregon Constitution
Article I, section 20, of the Oregon Constitution provides:
No law shall be passed granting to any citizen or class of citizens privileges, or immunities, which, upon the
same terms, shall not equally belong to all citizens.
A violation of this constitutional provision requires there to be (1) a privilege or immunity, (2) which is denied to an
individual or class of citizens, (3) without a rational foundation in light of the purposes of the law or program at issue.
- Privilege or Immunity
To establish a violation of Article I, section 20, the plaintiff must first show that there is a privilege or immunity that
someone else is receiving. State v. Scott, 96 Or App 451, 455, 773 P2d 394 (1989). Recipients of private pension income
are taxed on that income, while recipients of PERS and federal pension income either are not taxed or are compensated for
the tax by a commensurate increase in their pension income. Thus, private retirees are denied a privilege that is provided to
PERS and federal retirees. - Discrimination Against a Class
The next issue is whether the taxation of private pension income constitutes a denial of a privilege to a cognizable "class"
of citizens within the meaning of Article I, section 20. The Oregon Supreme Court has consistently held that laws
establishing classifications do not automatically violate Article I, section 20.
[T]his court will not invalidate a law on the simple grounds that the law classifies individuals or groups of individuals.
"[E]very law itself can be said to 'classify' what it covers from what it excludes." State v. Clark, supra, 291 Or at 240.
Article I, section 20, prohibits those schemes that classify "persons or groups by virtue of characteristics which they have
apart from the law in question."
Wilson v. Dept. of Rev., 302 Or 128, 131-32, 727 P2d 614 (1986).
Generally, to be cognizable under Article I, section 20, a class must be identifiable by virtue of social or personal
characteristics that exist apart from the classification created by the challenged government action; classes that are created
solely by the challenged law itself "are entitled to no special protection and, in fact, are not even considered to be classes
for the purposes of Article I, section 20." Sealey v. Hicks, 309 Or 387, 397, 788 P2d 435 (1990); see also Greist v.
Phillips, 322 Or 281, 292, 906 P2d 789 (1995); Hale v. Port of Portland, 308 Or 508, 524-26, 783 P2d 506 (1989). Even
when an identifiable class exists, the courts generally have rejected attacks on class legislation "whenever the law leaves it
open to anyone to bring himself or herself within the favored class on equal terms." State v. Clark, 291 Or 231, 240-41,
630 P2d 810 (1981); see also Wilson v. Dept. of Rev., 302 Or at 132.
Although these principles are easily articulated, their application to specific cases can be problematic. The Supreme
Court's analysis of "true classes" under Article I, section 20, has not been entirely clear or consistent. See Neher v.
Chartier, 124 Or App 220, 225-26 n 3 (summarizing cases), 862 P2d 1307 (1993), rev'd 319 Or 417, 879 P2d 156 (1994).
Based on the current status of the law, we believe it is an open question whether the Supreme Court would consider such
groups as "private retirees," "federal retirees" and "PERS retirees" to be "true classes." Compare State ex rel Huddleston
v. Sawyer, 324 Or 597, 932 P2d 1145 (1997) and Wilson v. Dept. of Rev., 302 Or 128, with Sealey v. Hicks, 309 Or 387.
We need not step into this quagmire because our analysis of the third element of Article I, section 20, is determinative.
Therefore, we will assume, solely for purposes of reaching an analysis of the third element, that these groups are
cognizable classes under Article I, section 20. - Rational Basis Test
We next consider whether anything about the source of the private retirees' pension income justifies the discriminatory tax
treatment. A discriminatory classification violates Article I, section 20, only if it "either is impermissibly based on persons'
immutable characteristics and reflects 'invidious' social or political premises or has no rational foundation in light of the
enabling statute's purposes." Northwest Advancement v. Bureau of Labor, 96 Or App 133, 142, 772 P2d 943, rev den 308
Or 315 (1989). The tax classification at issue here is based on the source of the taxpayer's pension income and therefore
does not constitute "invidious" discrimination based on immutable personal characteristics of the disfavored class. See
Letter of Advice dated October 14, 1985, to Raymond P. Thorne, Administrator, Employment Division (OP-5878) at 3
(distinction based upon tax rates does not create suspect class). The issue, therefore, is whether the classification lacks a
rational foundation in light of its purposes. See Huckaba v. Johnson, 281 Or at 26.
For the reasons discussed in Part IIA above, there is a rational basis for providing favorable tax treatment to federal and
PERS pension income while taxing private pension income. The Oregon Supreme Court has applied the same rational
basis test to determine whether discriminatory tax treatment of pension income violates Article I, section 20. Huckaba,
281 Or 23. Because there is a rational basis for the disparate tax treatment afforded private retirees, we conclude that the
disparity does not violate Article I, section 20, of the Oregon Constitution.
C. Equal Protection Under the United States Constitution
The Equal Protection Clause of the Fourteenth Amendment to the United States Constitution provides that "No State shall
* * * deny to any person within its jurisdiction the equal protection of the laws." The Oregon Supreme Court has noted:
The equal protection of the laws required by the Fourteenth Amendment does not prevent states from resorting to
classifications for the purposes of legislation and they have a wide range of discretion in that regard * * * if the
classification is reasonable, not arbitrary and rests upon some ground of difference having a fair and substantial relation to
the object of the legislation, so that persons similarly situated shall be treated alike. This latitude is notably wide in
classifications for purposes of taxation.
Dutton Lbr. Corp. v. Tax Com., 228 Or 525, 539, 365 P2d 867 (1961) (citations omitted, emphasis added) (citing Royster
Guano Co. v. Virginia, 253 US 412, 40 S Ct 560, 64 L Ed 989, 990 (1920)).
Oregon courts generally find a classification to be constitutional under the federal equal protection clause if it is
constitutional under Article I, section 20, of the Oregon Constitution. See, e.g., State v. Freeland, 295 Or 367, 370, 667
P2d 509 (1983) ("The test of unequal treatment under Or. Const. art. I, § 20, is not always the same as the tests articulated
from time to time under the federal equal protection clause, although the clauses are sufficiently similar that compliance
with article I, section 20 usually will also satisfy the 14th amendment"); State v. Clark, 291 Or at 243 ("for most purposes
analysis under Article I, section 20 and under the federal equal protection clause will coincide"); Cooper v. OSAA, 52 Or
App at 432 (scope of Article I, section 20, and the federal equal protection clause are generally the same). For the reasons
discussed above, we find that the tax classification at issue here rests on a rational basis, and we therefore conclude that the
disparate tax treatment afforded private pension income does not violate the Equal Protection Clause of the Fourteenth
Amendment to the United States Constitution.
HARDY MYERS
Attorney General