No. 92-499
IN THE SUPREME COURT OF THE STATE OF MONTANA
1993
EDMUND F. SHEEHY, CATHERINE N. SHEEHY,
JUNIUS CHADWICK, LILLIAN PAUL, and
BEN JOHNS, on behalf of themselves, and
all other similarly situated taxpayers,
Plaintiffs and Appellants,
PUBLIC EMPMYEES RETIREMENT DIVISION,
TEACHERS RETIREMENT DIVISION, DEPmTMENT
OF ADMINISTRATION: STATE OF MONTANA:
- -
and DEPARTMENT OF REVENUE, STATE OF MONTANA,
'
Defendants and Respondents,
ASSOCIATION OF MONTANA RETIRED PUBLIC EMPMYEES, et al.,
Defendants and Respondents.
APPEAL FROM:
7.- e.
--
--A -..
LL-.. ,.
District Court of the First Judicial District,
ot~u L V L L u r LUUJILY uf Lewis and Clark,
L
..
The Honorable Thomas C. Honzel, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Edmund F. Sheehy, Jr. (argued); Cannon & Sheehy,
Helena, Montana
For Respondents:
David W. Woodgerd, Dep't of Revenue, Helena, Montana
R. Bruce McGinnis (argued), Tax Counsel, Helena, MT
Brenda Nordlund (argued), Dep't of Administration,
Helena, Montana
Leo Berry; Browning, Kaleczyc, Berry & Hoven, Helena
Montana (Association of Montana Retired Public
Employees)
Heard: April 28, 1 9 9 3
Submitted: July 2 7 , 1 9 9 3
i A
#I Decided: November 23, 1993
Filed:
Justice Karla M. Gray delivered the Opinion of the Court.
This is an appeal from the grant of summary judgment to
defendants by the First Judicial District Court, Lewis and Clark
County. We affirm in part and reverse in part.
We consider the following issues on appeal:
1. Did the District Court err in concluding that no
contractual right existed in certain state retirees to
continued exemption from taxation of state retirement
benefits, and that Ch. 823, 1991 Mont. Laws, does not
violate Article 11, Sec. 31 of the Montana Constitution?
2. Did the District Court err in concluding that the
provision of Ch. 823, 1991 Mont. Laws, phasing out the
$3,600 exemption does not violate 4 U.S.C. § Ill?
3. Did the District Court err in concluding that the
retirement adjustment payment contained in Ch. 823, 1991
Mont. Laws, does not violate 4 U.S.C. 5 Ill?
4. Are the retirement adjustment payment and related
implementation provisions severable from Ch. 823, 1991
Mont. Laws?
For many years, the state of montana exempted from ir~tioute
taxation all retirement benefits paid through its various
retirement systems to teachers and state government retirees, while
taxing retirement benefits paid by the United States to federal
retirees. In 1989, the United States Supreme Court decided Davis
v. Michigan Dep't of Treasury (1989), 489 U.S. 803, 109 S.Ct. 1500,
103 L.Ed.2d 891. The Supreme Court determined that 4 U.S.C. 5 111
waives the immunity retired federal employees otherwise would enjoy
from state taxation of retirement benefits received as a result of
their employment with the federal government, exce~t the extent
to
such state taxation discriminates on the basis of the source of the
retirement benefits. Because the Michigan tax at issue favored
retired state employees based on the source of their retirement
benefits, the Supreme Court concluded that the tax violated
principles of intergovernmental tax immunity. Davis, 489 U.S. at
810, 815, 109 S.Ct. at 1505, 1509, 103 L.Ed.2d 901, 906.
Although oavis was decided during Montana's 1989 legislative
session, the legislature did not amend Montana's tax laws in
response to Davis prior to adjourning. As a result, a group of
federal retirees filed a declaratory judgment action to have the
existing taxation scheme declared unconstitutional; they also
souyht a retroactive application of Davis for purposes of
entitlement to a refund of taxes illegally collected by the State.
By the time that case reached this Court, the district court had
adopted the parties1 stipulation that the tax was invalid for tax
years beginning after December 31, 1988; only the issue of
retroactive application of oavis was before us. See Sheehy v.
State, Deprt of Revenue (1991), 250 Mont. 437, 820 P.2d 1257.
The Montana legislature subsequently passed Chapter 823, 1991
Montana Laws, which, according to its title, restructures the
income tax on pension benefits by equalizing the taxation o f all
pension benefits. In lieu of extending the total exemption from
taxation previously available to state retirement income to federal
retirement income, the legislature opted in Chapter 823 to bring
all retirement income--including both state and federal pensions--
within the Montana income tax. Chapter 823 does exempt from
taxation the first $3,600 of all pension and annuity income
received, except that the exemption is reduced or phased out by $2
for every $1 of federal adjusted gross income in excess of $30,000.
In addition, section 5 of Chapter 823 grants to state retirees who
are Montana residents, and who now were to be taxed in response to
m, an annual retirement adjustment paxpent.
Appellants, who are primarily federal retirees but who include
one or more state and teacher retirees (hereafter Taxpayers), filed
the instant declaratory judgment action against two state
retirement divisions of the Montana Department of Administration
and the Montana Department of Revenue (hereafter the State),
challenging Chapter 823 on a number of grounds. The Association of
Montana Retired Public Employees was allowed to intervene. The
parties entered into an agreed statement of facts and submitted the
case to the District Court on cross motions for summary judgment.
The District Court granted summary judgment to the State on
all issues. Taxpayers appeal from portions of that judgment.
I
Did the District Court err in concluding that no contractual
right existed in certain state retirees to continued exemption from
taxation of state retirement benefits, and that Ch. 823, 1991 Mont.
Laws, does not violate Article 11, Sec. 31 of the Montana
Constitution?
Taxpayers argue that as to state employees who retired on or
before the effective date of Chapter 823 and began receiving
retirement benefits at a time when those benefits were fully exempt
from taxation, Chapter 823 violates Article 11, Section 31 of the
1972 Montana Constitution, which prohibits the legislature from
passing any law impairing the obligation of contracts. The thrust
of the argument is that, by taxing these retirees' state pensions,
Chapter 823 impairs private contractual rights codified at §§ 19-4-
706 and 19-3-105, MCA (1989), that exempted their pensions from
taxation.
The State counters that the pre-Chapter 823 statutes did not
create private contractual rights, and could not create a right in
state retirees never to be taxed because it is prohibited from
surrendering or contracting away its taxing power by Article VIII,
Section 2 of the 1972 Constitution. Thus, the State contends,
Article 11, Section 31 is inapplicable here.
The District Court correctly relied on Wage Appeal v. Board of
Personnel Appeals (1984), 208 Mont. 33, 676 P.2d 194, in concluding
that §§ 19-4-706 and 19-3-105, MCA (1989), constituted current
policy statements regarding public employment, rather than a
contract providing that state retirement benefits would never be
taxed. In Waqe Appeal, a statewide pay plan was challenged on the
basis that it impaired employment contracts entered into before it
took effect. We stated:
[Wlhen the Legislature enacts a statute fixing certain
terms and conditions of public employment, such as
salaries and compensation, it is presumed that the
statute does not create contractual rights, but is
intended merely to declare a policy to be pursued until
the Legislature declares otherwise.
Wase Appeal, 676 P.2d at 199 (citations omitted). While
recognizing the "presumptionw language in Waqe Appeal, Taxpayers
rely on additional language therein:
If contractual rights are to be created by statute, the
language of the statute and the circumstances must
manifest a legislative intent to create private rights of
a contractual nature enforceable against the State.
Waqe Awweal, 676 P.2d at 199 (citations omitted). Taxpayers assert
that the provisions of § 19-4-706 and 19-3-105, MCA (1989),
clearly manifest legislative intent to create private contractual
rights enforceable against the State. We disagree.
Notwithstanding their bald assertion of clearly manifested
legislative intent, Taxpayers offer no analysis of the statutes to
support the assertion. Thus, it is necessary only to point out
that § 19-4-706, MCA (1989), provides that state retirement
benefits are exempted from state tax. The use of the present tense
"arew indicates that the statute is a statement of current policy
regarding public employment. The statute contains no manifestation
of legislative intent to create private and enforceable contractual
rights as contempiated in Wase Aoweai; nor does it make or imply
any promises regarding ongoing or future tax treatment of state
retirement benefits. Taxpayers have not met their burden under
Waae Awweal.
Moreover, Taxpayers' reliance on Clarke v. Ireland (1948)' 122
Mont. 191, 199 P.2d 965, and State ex rel. Sullivan v. State
(1977), 174 Mont. 482, 571 P.2d 793, as support for their theory
that §§ 19-4-706 and 19-3-105, MCA (1989), created a contract right
to continued exemption from taxation of state retirement benefits
is misplaced. Both cases involved an effort to deny the plaintiffs
therein an actual retirement benefit provided by the Teachers*
Retirement Act at the time the plaintiffs became members of the
6
teachers' retirement system; our conclusions in Clarke and Sullivan
that contract rights existed were based on those facts.
Here, we have no issue concerning efforts to deny or limit
state retirees' actual retirement benefits. The question before us
relates to a taxation provision entirely separate from state
retirement programs and entitlements thereunder. Furthermore, the
taxation characteristic which distinguishes this case from Clarke
and Sullivan also brings into play Article VIII, Section 2 of the
1972 Constitution, which prohibits the state from surrendering or
contracting away the power to tax. Under that constitutional
provision, the state cannot promise any group of taxpayers that it
will never tax them.
We hold that the District Court correctly concluded that state
employees retiring prior to the effective date of Chapter 823 did
not have a contractual right to continued exemption from taxation
of their state retirement benefits. On that basis, the District
Court also correctly determined that Chapter 823 does not violate
Article 11, Section 31 of the Montana Constitution.
I1
Did the District Court err in concluding that the provision of
Ch. 823, 1991 Mont. Laws, phasing out the $3,600 exemption does not
violate 4 U.S.C. § Ill?
Prior to adoption of the Public Salary Tax Act of 1939 (the
Act), compensation of both state and federal employees generally
was thought to be exempt from taxation by another sovereign under
the doctrine of intergovernmental tax immunity. The purpose of the
Act was to impose federal income tax on the salaries of all state
and local government employees. In order to ensure that federal
employees did not remain immune from state taxation while state
employees were being required to pay federal income taxes, Congress
enacted 5 4 of the Act--now 4 U.S.C. 5 Ill--waiving immunity which
might otherwise have shielded federal employees from state
taxation, but retaining immunity from discriminatory taxation based
on the source of the income:
The United States consents to the taxation of pay or
compensation for personal service as an officer or
employee of the United States, a territory or possession
or political subdivision thereof, the government of the
District of Columbia, or an agency or instrumentality of
one or more of the foregoing, by a duly constituted
taxing authority having jurisdiction, if the taxation
does not discriminate aqainst the officer or emplovee
because of the source of the oav or comwensation.
4 U.S.C. 5 111 (emphasis added).
In 1989, the United States Supreme Court decided Davis, which
involved a Michigan income tax system discriminating in favor of
state retirees and against federal retirees by exempting only state
retirement benefits from taxation. The Supreme Court determined
that the discriminatory tax was based on the source of the
retirement benefits and was not justified by significant
differences between the two classes of retirees. Davis, 489 U.S.
When Davis was decided, it became clear that Montana's income
tax statutes regarding state versus federal retirement benefits
also violated federal law. In responding to Davis and
restructuring the taxation of pension benefits in Chapter 823, the
Montana legislature provided a $3,600 exemption from taxation to
all retirees; the exemption is phased out beginning at the $30,000
income level. Taxpayers contend that the phase-out violates 4
U.S.C. 5 111 by discriminating against federal retirees based on
the source of their income. This is so, they contend, because
federal pensions are larger than state pensions and, as a result,
federal retirees will lose all or part of the exemption. The State
contends that the phase-out exemption treats state and federal
retireesf pensions equally and that any difference is based on
amount, not source, of income.
As discussed above, the controlling federal statute does not
prohibit all differences in state taxation of state and federal
pensions. Rather, it precludes taxation which discriminates
against federal retirees because of the source of the pension. 4
U.S.C. 111. Here, the phase-out exemption is neutral on its
face; it applies to all taxpayers equally. Any difference in
impact on federal and state retirees is based entirely on the
amount of income received by each individual taxpayer, without
regard to the source of that income.
Indeed, the Supreme Court in Davis tacitly approved
differences in taxation such as the phase-out exemption before us:
A taxation exemption truly intended to account for
differences in retirement benefits would not discriminate
on the basis of the source of those benefits .
. . ;
rather, it would discriminate on the basis of the amount
of benefits received by individual retirees.
Davis, 489 U.S. at 817, 109 S.Ct. at 1508, 103 L.Ed.2d at 906
(emphasis added!. The phase-out exemption contained ir? Chapter 823
treats individual retirees differently based on differences in the
amount of retirement income received. Taxpayers' strained
interpretation that because federal pensions generally are larger
than state pensions and, thus, that the phase-out discriminates as
to source rather than amount, simply does not square with Davis.
We conclude that the phase-out exemption does not discriminate
as to source of income. Therefore, we hold that the District Court
correctly concluded that the provision of Chapter 823 phasing out
the $3,600 exemption does not violate 4 U.S.C. g 111.
111
Did the District Court err in concluding that the retirement
adjustment payment contained in Ch. 823, 1991 Mont. Laws, does not
violate 4 U.S.C. 5 111?
Observing that Davis does not limit the State's ability to set
the terms and conditions of public employment, the District Court
concluded that the adjustment constitutes a legitimate increased
retirement benefit to state retirees. It relied primarily on Clark
v. United States (7th Cir. 1982), 691 F.2d 837.
Taxpayers argue that the adjustment is part of the taxation
scheme and that it impermissibly discriminates against them. They
also argue that Clark is inapplicable. The State contends that the
adjustment is unrelated to the tax and that, pursuant to Clark, it
is a valid retirement benefit.
Davis requires a two-pronged analysis of the legislation at
issue here: 1) Does it constitute discriminatory taxation against
federal retirees or in favor of state retirees on the basis of
source of income? and 2) If so, is the different treatment
"directly related to, and justified by, 'significant differences
between the two classes'"? Davis, 489 U.S. at 816, 109 S.Ct. at
1508, 103 L.Ed.2d at 905 (citation omitted). Application of
to the case before us mandates our conclusion that the retirement
adjustment payment (hereafter adjustment) contained in section 5 of
Chapter 823 violates 4 U.S.C. 5 111.
It is clear that the revenue, equalization and adjustment
provisions of Chapter 823 are related parts of a comprehensive
income tax program encompassing all pension income. The provisions
were all included in and part of the same bill, originally
introduced as Senate Bill 226 in the 1991 Montana legislature. The
title of the bill, subsequently enacted as Chapter 823, reads in
pertinent part:
An Act to Restructure the Income Tax on Pension Benefits
by Equalizing the Taxation of All Pension Benefits; To
Provide an Exemption of $3,600 from Taxation of Benefits
from Federal, State, and Private Retirement, Annuity,
Pension, and Endowment Plans or Systems; To Provide That
the Amount of the Exemption be Reduced by $2 for Every $1
of Federal Adjusted Gross Income Received by the Taxpayer
in Excess of $30,000; To Provide for an Adjustment
Payment to Retirees of State, Local, and Teacher
Retirement Systems Who are Montana Residents. ..
.
Reading the title makes it clear that the overall purpose of this
bill was to tax state and federal pensions in a manner that does
not violate 4 U.S.C. 5 111 as interpreted in Davis. Rather than
comply with 4 U.S.C. § 111 by extending the total exemption from
state income taxation previously granted to state retirement
benefits to include federal retirement benefits, the legislature
chose to equalize the burden by taxing all retirement benefits,
subject to the phase-out exemption discussed above. Within the
same legislative enactment, the legislature provided for an
adjustment payment to state retirees who are Montana residents.
The State's argument that the two portions of the bill are not
related defies logic,
Moreover, the relationship between the tax equalization
provisions of the bill, with their negative impacts on state
retirees, and the adjustment intended to make up, in part, for that
equalization cannot be gainsaid. The adjustment--while purporting
to be an adjustment to state retirement benefits--is, in fact, an
adjustment to the equalization achieved via the first sections of
Chapter 8 2 3 . This conclusion is inescapable given the inclusion
of the adjustment in, and as part of, the tax equalization program.
No other interpretation of these two portions of Chapter 8 2 3
comports with our duty to construe statutes in a reasonable manner.
It is clear that the adjustment is not an actual and
legitimate pension or retirement benefit. If it were a pension
benefit, the State would have provided it to of its retirees in
recognition of their years of public service rather than just those
living in Montana. There was no need to do so because the sole
purpose of the adjustment was to partially recompense state
retirees living in Montana for the tax they now must pay under the
equalizing provisions of Chapter 8 2 3 .
Further evidence that the adjustment is not an actual
increased retirement benefit for retired state employees is the
fact that the funding of the section 5 adjustment bears no
resemblance to the funding of actual state retirement benefit
adjustments previously enacted by the legislature. Such actual
retirement adjustments as those contained in the Public Employees'
Retirement System at 5 19-3-1603, MCA, and in the Teachersr
Retirement System at 5 19-20-713, MCA, are funded by investment
income produced by the retirement fund made up of employee and
employer contributions. See § 19-3-1602 and 19-20-712, MCA.
Here, the funding for the so-called retirement adjustment payment
is statutorily appropriated from the general fund pursuant to
section 4 of Chapter 823--that is, from the taxes collected from
all Montana taxpayers. The money to pay the adjustment never goes
into the state retirement funds, but is simply paid by the state
treasurer to the retirement boards, to be distributed by the boards
in accordance with the provisions of Chapter 823. While this
evidence is not conclusive as to the nature of the adjustment at
issue here, it undercuts any notion that the adjustment is a
legitimate increase in retirement benefits for state retirees.
We conclude that the adjustment is a partial tax rebate
denominated otherwise in an attempt to evade the requirements of
federal law. The discriminatory aspect of the adjustment is clear:
the adjustment favors state retirees living in Montana based solely
on the source of their retirement income; that is, those retirees
living in Montana and receiving state retirement income receive the
adjustment, while federal retirees living in Montana and receiving
federal retirement income do not. Thus, the adjustment constitutes
discriminatory taxation based solely on the source of the
respective retiree's income, in violation of 4 U.S.C. 1 111.
The State's reliance on Clark for the proposition that the
adjustment is merely an allowable increased retirement benefit is
misplaced. Clark involved a cost-of-living adjustment provided to
all federal retirees as an actual and legitimate pension
adjustment. Clark, 691 F.2d at 841. Here, the adjustment was
provided not to all state retirees, but only to state retirees who
are Montana residents. Further, the adjustment provided in Clark
was entirely independent of, and unrelated to, any tax provisions.
Here, it is part of a tax equalization scheme mandated by federal
law.
Because the adjustment contained in section 5 of Chapter 823
violates 4 U.S.C. 1 111, the disparate tax treatment of state and
federal retirement income is justified only if it is "directly
related to, and justified by, 'significant differences between the
two classes. ' I i Davis, 489 U.S. at 816, 109 S.ct. at 1508, 103
L.Ed.2d at 905. Application of this test mandates the conclusion
that the adjustment contained in Chapter 823 cannot stand.
The State makes no real argument that significant differences
in fact exist between the two classes of retirees that justify the
discriminatory adjustment. Perhaps this is to the State's credit,
since it is clear that no such articulable differences exist which
could withstand Davis scrutiny. The most obvious contention to be
made regarding differences between the classes is the State's
interest in inducing and retaining qualified state government
workers. While this position is not asserted here, it is precisely
the argument made by the state of Michigan in Davis to justify the
preferential treatment of its retired employees, and is the
argument squarely rejected by the Davis Court:
This argument is wholly beside the point, however, for it
does nothing to demonstrate that there are "significant
differences between the two classesm themselves; rather,
it merely demonstrates that the State has a rational
reason for discriminating between two similar groups of
employees. The State's interest in adopting the
discriminatory tax, no matter how substantial, is simply
irrelevant to an inquiry into the nature of the two
classes receiving inconsistent treatment.
Davis, 489 U.S. at 816, 109 S.Ct. at 1508, 103 L.Ed.2d at 905
(emphasis added).
Moreover, no reasonable argument can be made that the
adjustment is necessary or intended (a) to retain retired residents
in Montana in order to provide a critical mass of retired people to
use those services and facilities that are important to retired
people; or (b) to entice other retired people into the state. Such
arguments would apply to all retired people and would support the
similarities between state and federal retirees rather than
establishing any significant differences between the two classes.
Here, as noted, the State does not address or attempt to meet
the Davis requirement that it justify disparate treatment on the
basis of significant differences between the two classes of
retirees. The reason is clear: the "adjustment" is not based on
any difference in the nature of the two classes before us. The
disparate treatment is based entirely on the State's desire to
continue to provide an advantage to those of its own retirees
losing a pre-l)avis advantage--namely, state retirees who reside in
Montana and whose state pensions are now subject to income tax
pursuant to Chapter 823. While the desire is understandable and
perhaps even laudable, it is legally insufficient under l a i as a
)vs
justification for taxation which discriminates against federal
retirees.
We conclude that the adjustment contained in section 5 of
Chapter 823 constitutes discriminatory taxation which is not
related to, or justified by, significant differences between state
and federal retirees. We hold that the District Court erred in
determiningthat the retirement adjustment payment does not violate
4 U.S.C. 5 111.
IV
Are the retirement adjustment payment and related
implementation provisions severable from Chapter 823, 1991 Mont.
Laws?
Having concluded that the adjustment provision contained in
section 5 of Chapter 823 violates 4 U.S.C. § 111, it is necessary
to determine whether that provision and related implementing
provisions can be severed from Chapter 823, or whether the entirety
of Chapter 823 must be stricken. We conclude that the invalid
provisions can be severed.
Section 20 of Chapter 823 provides that if a part of the
legislation is invalid, all valid parts that are severable from the
invalid part remain in effect. We previously have concluded that
the inclusion of a severability clause is an indication that the
drafters desired judicial severability policy to apply. Montana
Automobile Assoc. v. Greely (1981), 193 Mont. 378, 399, 632 P.2d
300, 311. Thus, we begin our analysis with stated legislative
intent favoring severability. We then apply severability
principles in determining whether the invalid provisions can be
severed or whether the entire legislative act must be stricken:
If an invalid part of a statute is severable from the
rest, the portion which is constitutional may stand while
that which is unconstitutional is stricken out and
rejected. . . . A statute "is not destroyed in toto
because of an improper provision, unless such provision
is necessary to the integrity of the statute or was the
inducement to its enactment." . . .If, when an
unconstitutional portion of an act is eliminated, the
remainder is complete in itself and capable of being
executed in accordance with the apparent legislative
intent, it must be sustained.
Greely, 632 P.2d at 311 (citations omitted).
Here, the income tax provisions of Chapter 823 clearly are not
destroyed in toto by striking the adjustment provisions contained
in sections 4 and 5; indeed, they are not impacted in any way. The
income tax still may be imposed and the exemption may be given
effect without the adjustment for state retirees living in Montana.
Nor was the adjustment the inducement for enacting the legislation;
the "inducement*'for Chapter 823 was 4 U.S.C. § 111 and the Supreme
Court's Davis decision.
The income taxes and exemption contained in Chapter 823 remain
complete in themselves and capable of being executed in accordance
with the overall legislative intent, which was to equalize taxes.
Granted, the legislature al-so intended to continue an advantage for
certain state retirees through the adjustment. But where we have
invalidated the adjustment portion of Chapter 823, it is clear that
the legislature intended, through the severability clause it
included in Chapter 823, to preserve all valid parts.
Our earlier determination that the revenue, equalization and
adjustment provisions of Chapter 823 are related parts of a
comprehensive income tax program encompassing all pension income
does not negate our conclusion here regarding severability. The
fact that the provisions are related from the standpoint of whether
they can withstand 4 U.S.C. g 111 and &&
y scrutiny does not mean
that they are not, and cannot be, separate and independent from a
severability standpoint. From an administrative and operational
perspective, it is clear that sections 4 and 5 are segregable from
the income tax and exemption provisions.
Finally, and returning again to the legislature's specific
intent that invalid portions of Chapter 823 be severed, we note
that, absent a severability clause:
[Tlhe presumption is against the mutilation of a statute,
and that the legislature would not have enacted it except
in its entirety. The incorporation of a provision such
as section 20 [severability clause] creates a presumption
to the contrary; namely, that the legislature would have
enacted the law without its invalid portions being
incorporated therein.
State v. Holmes (1935), 100 Mont. 256, 291, 47 P.2d 624, 636
(citation omitted). See also Ingraham v. Champion Int'l (1990),
243 Mont. 42, 49, 793 P.2d 769, 773. The presumption operates here
in support of the legislature's intent that the remainder of
Chapter 823 remains valid even where the adjustment provisions are
determined to be invalid. Nothing in Chapter 823 indicates any
intent that the tax and exemption provisions are dependent on the
validity of the adjustment for state retirees living in Montana;
thus, no inconsistency between such a provision and the contrary
and clearly-stated severability clause exists in Chapter 823 which
might require us to depart from the plain language used by the
legislature and delve into the legislative history to resolve the
issue before us.
We conclude that sections 4 and 5 are severable from Chapter
823, 1991 Montana Laws. We hold that those sections are severed
and excised from Chapter 823 and, with those invalid and severed
provisions excepted, Chapter 823, 1991 Montana Laws, remains valid
and in full force and effect.
Affirmed in part and reversed in part.
We concur:
ourt, s i t t i n g
C Harrison
7
w i s t r i c t C o u r t , sittiAg i n a t h e
s e a t v a c a t e d by t h e r e t i r e m e n t
o f J u s t i c e R.C. McDonough
~istrictJudge Peter L. Rapkoch specially concurring in part and
dissenting in part.
I concur in the majority opinion on Issue I, that state
employees retiring before the effective date of Chapter 823, 1991
Laws of Montana, did not have a contractual right to continued
exemption from taxation of their state retirement benefits.
I also agree that the provision of Chapter 823 phasing out the
$3600 exemption does not violate 4 U.S.C. 5 111 (1966).
Nor do I disagree with the majority that the adjustment
contained in section 5 of Chapter 823 constitutes discriminatory
taxation and therefore violates 4 U.S.C. 5 111 (1966).
It is, however, my opinion that the adjustment payment
provision is not severable from the rest of Chapter 823, and
therefore, I dissent from the majority's opinion on that point.
Section 20 of Chapter 823 is the severability provision here.
The incorporation of that provision raises a presumption that the
Legislature would have enacted the law without its invalid
portions. Williams v. Standard Oil Co. (1929), 278 U.S. 235,
241-42; State v. Holmes (1935), 100 Mont. 256, 291, 47 P.2d 624,
636; Ingraham v. Champion Intll. (1990), 243 Mont. 42, 49, 793 P.2d
769, 773.
That is a rebuttable presumption though, and a weak one at
that; rebuttable by the nature of the statue being considered: its
purpose manifested by its provisions before severance as compared
to its apparent purpose, as manifested by the provisions remaining
after amputation. Can it be said that the purpose is the same
after surgery as it was before?
The majority cites and quotes Montana Automobile Association
v, Greely (19811, 193 Mont. 378, 399, 632 P.2d 300, 311 as follows:
A statute Itis not destroyed in toto because of an
improper provision, unless such provision is necessarvto
the intearity of the statue or was the inducement to its
enactment." If, when an unconstitutional portion of an
act is eliminated, the remainder is complete in itself
and capable of being executed in accordance with the
awwarent leaislative intent, it must be sustained.
[Citation omitted; emphasis added].
This cannot be done here. "Apparent legislative intentw must
be that intent manifested by the language of the statute before
severance. It is true that neither the income tax provisions nor
the equalization parts are not themselves destroyed or affected by
striking the adjustment provisions. But the former cannot in this
case be considered separate and apart from the amputated adjnstment
provision. And ltamputatedlt the right word.
is What remains and
will be enforced under the majority opinion will not be the same as
what clearly appears to be the intent of the Legislature in the
original enactment. The Legislature did not, in enacting Chapter
823, set out to do no more than equalize the income tax on all
retirees. It went on and set out, bv the adjustment wrovision, to
remove or lessen that impact on resident Montana retirees.
The general statement of the severability rule in Greely is an
accurate statement. Portions of a statute are severable if:
(1) the invalid part is not necessary to the integrity of the
statute: or
(2) the invalid part was not the inducement to its enactment;
(3) the remainder of the statute is complete in itself; g&
(conjunctive)
(4) the remainder is capable of being executed in accordance
with the avvarent_?,egislativeintent. Greelv, 632 P.2d at 311.
I submit that the surgery here performed on Chapter 823 fails
to meet condition 1 above in that sections 4 and 5, the adjustment
provisions, are necessary to the integrity of the entire Chapter
823 as originally enacted. It is correct that the equalization
provisions may be imposed and the exemption given effect without
the adjustment to income for Montana resident retirees. But what
would then be imposed and given effect would be a law completely
different from what is clearly intended in the original act. It
may even be a better law, but that is not our business; such would
be judicial legislation.
It also seems that the adjustment provision is part of an
enactment that is a byzantine effort to avoid Davis v. Michigan
Department of Treasury (1989), 489 U.S. 803. 1 stand in awe and
admiration of such effort, but we are subject to 4 U.S.C. 5 111
(1966) and Davis and must apply logic to the premises therein set
forth. I, therefore, believe that the adjustment provision is an
inseparable inducement to the enactment of Chapter 823, thereby
failing the second condition above.
The remainder of the statute, after eliminating the adjustment
provision is complete in itself, but only in &self. It is not
what the Legislature enacted or intended. There go conditions 3
and 4 above.
What remains after our decision is not, as stated ad nauseam
above, capable of being executed in accordance with the apparent
legislative intent. We cannot cut out a third of the legislation
where that third completely changes the effect of the whole
enactment and say that what is left is what the Legislature started
with.
Greelv is not on point. There the purpose of the Act was to
regulate lobbying. The Legislature indulged in overkill by, for
instance, defining the proscribed practice so a person of normal
intelligence could not figure out what he could not do. Several
sections were therefore held void; others, because the subject
matter of some of the sections was not embraced in the title of the
Initiative, contrary to Article V, Section 11, Clause 3, of the
Montana Constitution.
This Court stated:
The Initiative, while being lengthy, is basically
amendatory in nature. Its purpose was to expand
Chapter 7, Title 5, of Montana's Lobbying Act, to provide
for the disclosure of money spent to influence action of
public officials and to require elected officials to
disclose their business interests. This purpose is not
frustrated by our limitations of the Initiative. Even
after our excisions, Chapter 7, Title 5, as amended by
the Initiative is complete in itself and capable of being
executed in accordance with the intention of the people
of Montana. [Emphasis added].
Greelv, 632 P.2d at 311-12.
The legislation there considered is of a different nature than
Chapter 823, where the parts are meaningful only in internal
conjunction with each other. The whole of Chapter 823 was enacted
as a unit.
I must disagree with the view expressed that the legislative
intent is clearly expressed in section 20, Chapter 823, which is
the severability clause, and provides that if a part of the Act is
invalid, all invalid parts of the Act are severable, and valid
parts remain in effect. This is not the legislative intent that is
relevant here. In fact, it is not the legislative intent at all
that the act is severable; the intent is that if the act is
severable. .. By use of the word "ifw the Legislature recognizes
the fact that severance, or declaration of severability is a
judicial act, not legislative. If the Legislature had intended the
severed statue, it could and should and would have legislated
accordingly.
This may, as is stated and shown earlier, raise a presumption
that the Legislature would have enacted the law without its invalid
portions being incorporated. But that presumption is, I believe,
a rebuttable presumption, here rebutted. Also, the inclusion of a
severability provision is to a judicial act. Before it can be
given effect, the judicial branch must do the severing.
The relevant intent for the judiciary to look at in
considering severability is not the legislative intent to provide
for severability, but the legislative intent in enactincr the
statute, the purpose of the statute, as indicated by its
provisions. The intent to make portions severable is an interim
intention, a procedural means, not the end. This Court has stated:
The inclusion of a severability clause in the Initiative
is an indication that its drafters and the voters desired
this judicial policy [the severability rule] to be
applied to the Initiative. [Emphasis added].
Greely, 632 P.2d at 311.
Lastly, section 20, Chapter 823, reads as follows:
Severability. If a part of [this act] is invalid, all
valid parts that are severable from the invalid part
remain in effect. If a part of [this act] is invalid in
one or more of its - - -
applications, the part remains in
--
effect in all valid applications that are sev.erable from
the invalid applications. [Emphasis added].
That language, I think, is clear. That section speaks not of
physical parts of provisions. It speaks of applications of those
parts. To apply the equalization portions without the adjustment
portion is to apply t i e former portions at a divergence of 180
degrees, more or less, from the application intended by the
Legislature as the act is presently constituted. A severability
clause is an appeal to the judiciary.
It is, therefore, my opinion that the whole of Chapter 823 is
invalid and the adjustment provisions are not severable.
sitting for justice ~il'liak E. Hunt, Sr.
Justice Terry N. Trieweiler joins in the foregoing concurrence
and dissent.
Justice Fred J. Weber specially concurs and dissents as follows:
I concur with issues I and II of the majority, but dissent on
issues I11 and IV. Issue I11 asks if the District Court erred in
concluding that the retirement adjustment payment contained in
Chapter 823, 1991 Montana Laws, violates 4 U.S.C. 5 111. I do not
find such discrimination.
The majority states:
It is clear that the revenue, equalization and adjustment
provisions of Chapter 823 are related parts of a
comprehensive income tax program encompassing all pension
income,
I agree that Chapter 823 is a comprehensive income tax program;
however, this does not preclude this statute from encompassing
other issues. The majority quotes verbatim the vipertinenti'
part of
the bill's title. The first part of the title of the restructuring
plan indicates that the legislature attempted to "equalizew the
taxes on all pension benefits. Although, listed after this in
sequence, the provision indicating the legislature's intent to
provide the adjustment payment to State retirees living in Montana
is an integral part of the Act as seen by the title's wording:
.... To Provide for an Adjustment Payment to Retirees
of State, Local, and Teacher Retirement Systems Who are
Montana Residents ....
It is not necessary to rely upon the title to determine the
intent of the legislature. The chapter starts with the following
list of seven WHEREAS'S, and with the exception of the taxation of
benefits referred to in the first WHEREAS, all of the remaining
WHEREAS'S set forth an intent directly relating to the adjustment
payment and the reasons for the adjustment payment:
WHEREAS, the State of Montana desires to tax federal,
state, and private retirement benefits equally; and
WHEREAS, the State of Montana has in the past provided
its employees with a benefit of employment through its
tax system: and
WHEREAS, the Leaislature desires and encouraaes aualified
emvlovees to enter and remain in wublic service; and
WHEREAS, it is the policy of the State of Montana to
encourage public employees who become superannuated or
incapacitated to retire and, to that end, to provide
sufficient benefits to provide for retirement; and
WHEREAS, the Lesislature wishes to encouracle all retired
persons to remain within Montana tc provide a critical
mass of retired persons who use certain services and
facilities that are important to retired persons and that
may keep and perhaps entice other retired persons into
the state: and
WHEREAS, the Legislature has in the past granted
increases in retirement benefits in a manner designed to
provide relatively greater increases to those retirees
who were employed during the years of low wages and whose
benefits are relatively small; and
WHEREAS, the Leaislature therefore srants an increase in
benefits to its former public emwlovees who are residents
of the state to provide compensation to encouraqe them to
remain in Montana.
(Emphasis added.)
The above statement of intent was added because the legislature
knew that the Davis decision mandated that all pension holders must
be taxed equally. The Act does that. At the same time, the
legislature knew that such an increase in taxes on State pensions
could create a situation where many retirees would leave the State.
Acting through its legislature and governor, Montana as a sovereign
and as an employer expressed a desire to provide an incentive for
Montana retirees to remain in the State. Without subterfuge of any
type the legislature declared this intent. Unfortunately, that
openness appears to have been a basis for the majority to conclude
there was discrimination.
If the same adjustment payment provided in the Act were
provided in another act in some future year, and denominated a cost
of living, no one would even raise the discrimination argument. I
do not find a basis to condemn the adjustment merely because it is
included with the tax.
The adjustment payment is paid to State retirees who already
are receiving retirement benefits. I find nothing in the record
which demonstrates a corresponding obligation by the State of
Montana to make some sort of payment to federal retirees whose
retirement benefits are paid by the United States. I do not
understand how the payment by the State to its retirees can lead to
a *clear*'determination of discrimination, as compared to a federal
increase to federal retirees which would not be such
discrimination.
The fact that federal retirees do not get this adjustment is
not discrimination as to source. The same adjustment is not given
to private retirees either.
The basic intent of 4 U.S .C. § 111 has been lost. That intent
is that the income taxation of Montana should tax federal and State
retirement benefits at the same rates. The Act does that. An
increase in pay to encourage State retirees to remain in the state
is not discrimination as contemplated in 5 111. An incentive to
stay is not discrimination as to source. There is a recognition on
the part of the legislature that the new tax on Montana public
employee pensions might cause them to leave the State. Such a
recognition, stated up front and in the open, does not equal the
discrimination that the majority characterizes as "clear."
The fact that this adjustment payment comes from the general
fund is also of no consequence. Any other cost of living increase
for State public employees comes from the same source. This
adjustment payment is no different than any other benefit which the
State as an employer has a right to offer a group of its retirees.
The majority refers to 5 l9-2O-?l3, MCA, which provides a cost
of living increase for teachers in the Teachersi Retirement System.
The title of Chapter 658 of Montana Laws 1985 shows that only
rpcertainw
teachers within the retirees from this system would be
benefitted by the increase. I do not understand how the majority
condemns the 1991 Act because it is made applicable to *IcertainSi
retirees and yet refers to the Teachers1 Retirement Act as
nondiscriminatory where it also benefits only "certain" teacher
retirees.
In addition, the Teachers' Retirement Act uses the "general
fund" as the source of funds with which to pay teachers who retired
from the various units of the University System and other schools,
stating:
If the employer is the superintendent of public
instruction, a public institution of the state of
Montana, a unit of the Montana university system, or the
Montana state school for the deaf and blind, the
lecrislature shall a~vrovriate the emplover an adeauate
to
amount to allow ~avment the emploveris contribution.
of
(Emphasis added.)
Section 3, amended 5 19-20-605(3), MCA. With this annuity type
system, the employers' part of the cost of living increase for
"certainw retirees is paid by the State of Montana. How is that
different from the present Act?
I conclude there is no discrimination "as to source" within
the 1991 Act. As a matter of policy, Montana provides its own
retirees an "incentivem without an intention to discriminate in any
manner.
The Davis test of significant differences between the classes
is not e v ~ n reached here. One only has to determine the
significant difference between classes if discrimination has
occurred. Here, there is no agreement as to even what the
appropriate classes are. The only classes that are pertinent to 4
UCS g 111 are "state retirees" and "federal retirees." Both of
these classes are taxed equally under this Act. It is only the
segment of State retirees that receive the benefit.
While the majority merely mentions that the discrimination is
"clearw it does not go on to explain how the vfincentivewor
~vadjustmentvl discriminatory. Nor does it explain how the Davis
is
quote applies to what we have before us:
Under our precedents, "[tlhe imposition of a heavier tax
burden on [those who deal with one sovereign] than is
imposed on [those who deal with the other] must be
justified by significant differences between the two
classes. (Emphasis added.)
Davis, 489 U.S. at 815-816. The federal retirees have no heavier
"tax burdenw than do State retirees. The tax burden on both State
and federal retirees is identical. The exemption of $3,600 is
identical as are the tax rates applicable to both State and federal
retirees. The range at which the exemption begins is $30,000 for
both State and federal retirees. The only difference is that State
retirees who reside in Montana are given an "incentiv€?"to Stay
within the State that has employed them and from whom their
pensions are derived. I point out here that the wincentivew is
still subject to tax at the same rates as any amounts received by
the retirees.
The District Court determined that the adjustment was part of
a policy decision on the part of the State toward its employees.
I would affirm the court on this analysis. The State acting as an
employer has every right to act in concert with the sovereign and
the legislature to provide an incentive to retired public employees
to stay within the State that has been their home for years. This
policy decision does not constitute discrimination against the
retirees of any other sovereign or any other group of retirees. In
this case, the other sovereign's retirees are taxed identically
with those of the State sovereign. I conclude that instead of
condemning the legislature and the governor for their openness in
enacting the Act, they should be commended for the forthright way
in which this was done.
I also disagree with the conclusion that the adjustment is
severable from the Act. Both the title and the statement of intent
make it obvious that the adjustment or incentive to stay in Montana
is an integral part of this Act. The incentive, based upon the
fact that public retirees will now be receiving less money because
of the mandatory taxation, should not be divorced from the tax plan
itself. The tax plan explains why the employer State of Montana is
granting this incentive. I do not believe the intention of
granting some additional monies can be divorced from the taxation
which applies to the retiree benefits and the adjustment. As
demonstrated clearly in the WHEREAS clauses at the beginning of the
Act, the taxation and the granting of the adjustment are not
severable. The action of the majority is punitive in nature,
taxing all benefits equally while eliminating the additional
benefit awarded under the Act.
I also concur in the portion of Judge Rapkoch's concurrence
and dissent in which he concludes that the adjustment payment is
not severable from the rest of Chapter 823.
November 23, 1993
CERTIFICATE OF SERVICE
I hereby certify that the following order was sent by United States mail, prepaid, to the following
named:
Edmund F. Sheehy, Jr.
Cannon & Sheehy
P. 0.Box 5717
Helena, MT 59604
Hon. Joseph P. Mazurek, Attorney Genera!
Clay R. Smith, Solicitor
215 N. Sanders, Justice Building
Helena, MT 59620
David W. Woodgerd
Department of Revenue
Mitchell Building
Helena, MT 59620
R. Bruce McGinnis
Tax Counsel
Mitchell Building
Helena, MT 59620
Brenda Nordlund
Attorney General's Office
Justice Building
Helena. MT 59620
Leo Berry
Browning, Kaleczyc, Berry & Hoven
P. 0. Box 1697
Helena, MT 59624
ED SMITH
CLERK OF THE SUPREME COURT