Posted: May 14, 2009
TAXATION WITHOUT COMPENSATION
By Celia Cohen
The federal government taxes a penny saved and a penny earned. It takes a bite out of vices like gambling and virtues like marriage.
Delaware judges are leery of the prospect that the feds even want to tax good intentions.
It is the sort of strange and unintended consequence that can crop up when the state tries to do what it is supposed to do -- simultaneously balance its brutalized budget and uphold its constitution. Who knew?
The state has 56 judges. They are not rich by hedge-fund standards, although they are by the unemployment line. Their annual paychecks range from $194,850 for Chief Justice Myron Steele to $121,750 for Chief Magistrate Alan Davis. Most judges are paid $168,850 a year.
There is more to judicial pay than mere money. Like tea and taxation without representation, judges' salaries had a part to play in the Revolution. Set by royal whim, they were hardly the stuff of an independent judiciary. It was one of the grievances in the Declaration of Independence.
It was also the reason a prohibition on cutting judges' salaries was written into the U.S. Constitution, as well as Delaware's, where the provision remains to this day. Mostly it draws about as much attention as the constitutional clause against bestowing titles of nobility.
Not anymore. The judges have been forced to be keenly aware of it, once Gov. Jack Markell proposed slashing state workers' pay by 8 percent as part of the dire efforts to balance the budget during this Great Recession.
The judges declared themselves unwilling to keep their paychecks amid universal sacrifice. "I can't find a single judge who does not think it unconscionable," Chief Justice Steele said.
The solution seemed obvious. Volunteer for a lesser payday. It would preserve the state constitution and render a savings of about $600,000 to the budget, if the cut of 8 percent stands.
Being the judges they are, they next read the fine print in the tax code. Uh-oh.
It seems the Internal Revenue Service does not care if the judges voluntarily return a percentage of their salaries to the state. They would be taxed as if they pocketed all of it.
No good deed goes unpunished, as the saying goes.
"It's one thing to say we'll give up what the state employees give up, but it seems like a double whammy, which seems unfair," Steele said.
The judges are researching whether there is a way for them to avoid the tax liability on otherwise phantom income. If not, they are considering another approach.
They would make a comparable contribution to the Delaware Bar Foundation, a charity administered by the bench and bar. One of its purposes is to provide legal representation to the poor in civil cases. The state, which also allots money for indigent legal aid, would reduce its budget line by the amount of the judges' donation.
The state still would get its savings, the legal help still would be available, and the judges would get a charitable tax deduction instead of a tax liability on pay they did not take.
"This is not an attempted end-run on our part," Steele said. "I think it's a win-win situation."
The judges are not alone in bumping against the constitution. It also protects the governor's pay.
Like the judges, Markell has decided to take a voluntary hit on his paycheck, which is $171,000 a year. He plans to write the state a check for 10 percent of what he collected in this fiscal year when it ends June 30, and to dock himself 20 percent, writing a check every month, in the next fiscal year.
Markell is not bothering to consider the tax implications. It is probably just as well.
Before he went into politics, Markell was there for the dawning of the telecommunications era and moved on up from his Newark roots to Chateau Country. He did so well that he routinely loans his campaigns in the neighborhood of three-quarters of a million dollars, although he has not had to spend it because of his fund-raising prowess.
The last time the state had this little sympathy for a governor's wallet, it had one named du Pont.