CRS Annotated Constitution
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Section 8. Clause 1. The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.
Kinds of Taxes Permitted
By the terms of the Constitution, the power of Congress to levy taxes is subject to but one exception and two qualifications. Articles exported from any State may not be taxed at all. Direct taxes must be levied by the rule of apportionment and indirect taxes by the rule of uniformity. The Court has emphasized the sweeping character of this power by saying from time to time that it “reaches every subject,”469 that it is “exhaustive”470 or that it “embraces every conceivable power of taxation.”471 Despite these generalizations, the power has been at times substantially curtailed by judicial decision with respect to the subject matter of taxation, the manner in which taxes are imposed, and the objects for which they may be levied.
Decline of the Forbidden Subject Matter Test.—In recent years the Supreme Court has restored to Congress the power to tax most of the subject matter which had previously been withdrawn[p.145]from its reach by judicial decision. The holding of Evans v. Gore472 and Miles v. Graham473 that the inclusion of the salaries received by federal judges in measuring the liability for a nondiscriminatory income tax violated the constitutional mandate that the compensation of such judges should not be diminished during their continuance in office was repudiated in O’Malley v. Woodrough.474 The specific ruling of Collector v. Day475 that the salary of a state officer is immune to federal income taxation also has been overruled.476 But the principle underlying that decision—that Congress may not lay a tax which would impair the sovereignty of the States—is still recognized as retaining some vitality.477
Federal Taxation of State Interests.—In 1903 a succession tax upon a bequest to a municipality for public purposes was upheld on the ground that the tax was payable out of the estate before distribution to the legatee. Looking to form and not to substance, in disregard of the mandate of Brown v. Maryland,478 a closely divided Court declined to “regard it as a tax upon the municipality, though it might operate incidentally to reduce the be[p.146]quest by the amount of the tax.”479 When South Carolina embarked upon the business of dispensing alcoholic beverages, its agents were held to be subject to the national internal revenue tax, the ground of the holding being that in 1787 such a business was not regarded as one of the ordinary functions of government.480
Another decision marking a clear departure from the logic of Collector v. Day was Flint v. Stone Tracy Co.,481 where the Court sustained an act of Congress taxing the privilege of doing business as a corporation, the tax being measured by the income. The argument that the tax imposed an unconstitutional burden on the exercise by a State of its reserved power to create corporate franchises was rejected, partly in consideration of the principle of national supremacy, and partly on the ground that the corporate franchises were private property. This case also qualified Pollock v. Farmers’ Loan & Trust Company to the extent of allowing interest on state bonds to be included in measuring the tax on the corporation.
Subsequent cases have sustained an estate tax on the net estate of a decedent, including state bonds,482 excise taxes on the transportation of merchandise in performance of a contract to sell and deliver it to a county,483 on the importation of scientific apparatus by a state university,484 on admissions to athletic contests sponsored by a state institution, the net proceeds of which were used to further its educational program,485 and on admissions to recreational facilities operated on a nonprofit basis by a municipal corporation.486 Income derived by independent engineering contractors from the performance of state functions,487 the compensation of trustees appointed to manage a street railway taken over and operated by a State,488 profits derived from the sale of state bonds,489 or from oil produced by lessees of state lands,490 have all been held to be subject to federal taxation despite a possible economic burden on the State.
In finally overruling Pollock, the Court stated that Pollock had “merely represented one application of the more general rule that[p.147]neither the federal nor the state governments could tax income an individual directly derived from any contract with another government.”491 That rule, the Court observed, had already been rejected in numerous decisions involving intergovernmental immunity. “We see no constitutional reason for treating persons who receive interest on governmental bonds differently than persons who receive income from other types of contracts with the government, and no tenable rationale for distinguishing the costs imposed on States by a tax on state bond interest from the costs imposed by a tax on the income from any other state contract.”492
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