APPEAL FROM THE COURT OF APPEAL OF CALIFORNIA, FIFTH APPELLATE DISTRICT
Burger, Brennan, Stewart, White, Marshall, Blackmun, Powell, Rehnquist, Stevens.
MR. JUSTICE WHITE delivered the opinion of the Court.
The issue in this case is whether, consistent with the Federal Government's immunity from state taxation inherent in the Supremacy Clause of the United States Constitution, see M'Culloch v.. Maryland, 4 Wheat. 316 (1819), the State of California may tax federal employees on their possessory interests in housing owned and supplied to them by the Federal Government as part of their compensation. We hold that it may.
The individual appellants in this case are employees of the Forest Service, a branch of the United States Department
of Agriculture responsible for administering the national forests. These appellants work in the Sierra, Sequoia, and Stanislaus National Forests which are located in Fresno and Tuolumne Counties in California. During the year 1967 each appellant lived with his family in a house which was built and owned by the Forest Service in one of these national forests. Appellants were required by the Forest Service to live in these houses*fn1 so that they would be nearer to the place where they performed their duties and so that they would be better able to perform those duties. Structurally, the houses were very similar to residential houses of the same size available in the private sector. The Forest Service viewed the occupancy of these houses as partial compensation for the services of its employees, and made a deduction from the salary of the employee for each two-week pay period in which the employee occupied such a house. The Forest Service fixed the amount of the deduction by estimating the fair rental value of a similar house in the private sector and then discounting that figure to take account of the distance between the Forest Service house and the nearest established community and the absence, if any, of any customary amenities in or near the house.*fn2 Adjustment was
also made for the fact that the Forest Service reserved the right to remove employees from their houses at any time, to enter the houses with or without notice for inspection purposes, and to use part or all of the houses for official purposes in an emergency.
Pursuant to 16 U.S.C. § 480, the States retain civil and criminal jurisdiction over the national forests notwithstanding the fact that the national forests are owned by the Federal Government. Under the California Revenue and Taxation Code, §§ 104, 107 (West 1970), and § 21(b) of Title 18 of the California Administrative Code (1971), counties in California are authorized to impose an annual use or property tax on possessory interests in improvements on tax-exempt land.*fn3
The Counties of Fresno and Tuolumne imposed such a tax on the appellants - Forest Service employees who live in the federally owned houses in the national forests located in those counties. In computing the value of the possessory interests on which the tax is imposed, the counties used the annual estimated fair rental value of the houses, discounted to take into account essentially the same factors considered by the Forest Service in computing the amount that it deducted from the salaries of employees who used the houses.*fn4
Appellants paid the taxes under protest and they, together with the United States, sued for a refund in California courts in Fresno and Tuolumne Counties. They claimed, inter alia, that the tax interfered with a federal function - i.e., the running of the Forest Service - that it discriminated against employees of the Federal Government, and that it was therefore forbidden by the Supremacy Clause of the United States Constitution. E.g., M'Culloch v.. Maryland, supra. The trial courts each sustained appellants' claims, holding, inter alia, that appellants had no taxable possessory interest under state law. The California Court of Appeal, Fifth Appellate District, reversed, 50 Cal. App. 3d 633, 123 Cal. Rptr. 548 (1975) (County of Fresno case, followed in County of Tuolumne case (unreported)). It held that each appellant had a possessory interest in the houses owned by the Forest Service that was subject to taxation under state law. The court then held that the tax on such possessory interests is not a tax on the Federal Government, on Government property, or on a "federal function." Rather, it is a tax imposed on "the private citizen, and it is the
private citizen's usufructuary interest in the government land and improvements alone that is being taxed. (City of Detroit v.. Murray Corp., 355 U.S. 489...; United States v.. Township of Muskegon, 355 U.S. 484...; United States v.. City of Detroit, 355 U.S. 466....)" Id., at 640, 123 Cal. Rptr., at 552. Consequently, the court held, the tax is not barred by the Supremacy Clause of the Federal Constitution. The California Court of Appeal also rejected appellants' contention that the tax operates to discriminate against the Federal Government and its employees. The Supreme Court of California denied review. We noted probable jurisdiction to review the decision of the California Court of Appeal, 425 U.S. 970 (1976).
Appellants argue that the tax is "a levy upon the activities of the United States" because the occupancy of the houses by the Forest Service employees was "for the sole purpose of discharging their governmental function of running the national forests." Brief for Appellants 11. Consequently, the Government argues, the tax is forbidden by the doctrine announced in M'Culloch v.. Maryland, that under the Supremacy Clause of the Federal Constitution the States may not tax the properties, functions, or instrumentalities of the Federal Government. We disagree with the Government, and affirm the judgment below.
The Government relies principally on the landmark case of M'Culloch v.. Maryland. There the State of Maryland imposed a tax on notes issued by "any Bank... established without authority from the State."*fn5 The only such bank in Maryland was the Bank of the United States, created and incorporated by Act of Congress in order to
carry out Congress' enumerated powers. No similar tax was imposed on the issuance of notes by any other bank in Maryland. The Court held the tax to violate that part of the Federal Constitution which declares that the laws of the United States are the "supreme law of the land." An Act of Congress had created the bank in order to carry out functions of the National Government enumerated in the United States Constitution. The Court noted that the power to tax the bank "by the States may be exercised so as to destroy it," 4 Wheat., at 427, and consequently that the power to tax, if admitted, could be exercised so as effectively to repeal the Act of Congress which created the bank. If the State's power to tax the bank were recognized in principle, the Court doubted the ability of federal courts to review each exercise of such power to determine whether the tax would or would not destroy a federal function. Finally, the Court rejected the State's argument that the power to tax involves the power to destroy only where the taxing power is abused, and that the Court should simply trust the States not to abuse their power to tax a federal function just as it must trust a State not to abuse its power to tax its own citizens. The Court rejected the argument because the political check against abuse of the power to tax a State's constituents is absent when the State taxes only a federal function.*fn6 A State's constituents can
be relied on to vote out of office any legislature that imposes an abusively high tax on them. They cannot be relied upon to be similarly motivated when the tax is instead solely on a federal function.
The Court was careful to limit the reach of its decision. It stated that its opinion does not S
"extend to a tax... imposed on the interest which the citizens of Maryland may hold in this institution [the bank], in common with other property of the same description throughout the State." Id., at 436. (Emphasis added.)I
Since M'Culloch, this Court has adhered to the rule that States may not impose taxes directly on the Federal Government, nor may they impose taxes the legal incidence of which falls ...