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CRS Annotated Constitution

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ARTICLE I
LEGISLATIVE DEPARTMENT

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.

POWER TO TAX AND SPEND

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years the Supreme Court has restored to Congress the power to tax most of the subject matter which had previously been withdrawn[p.145]from its reach by judicial decision.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


Footnotes

469 License Tax Cases, 5 Wall. (72 U.S.) 462, 471 (1867).
470 Brushaber v. Union Pacific R. Co., 240 U.S. 1 (1916).
471 Id., 12.
472 253 U.S. 245 (1920).
473 268 U.S. 501 (1925).
474 307 U.S. 277 (1939).
475 11 Wall. (78 U.S.) 113 (1871).
476 Graves v. New York ex rel. O’Keefe, 306 U.S. 466 (1939). Collector v. Day was decided in 1871 while the country was still in the throes of Reconstruction. As noted by Chief Justice Stone in a footnote to his opinion in Helvering v. Gerhardt, 304 U.S. 405, 414 n. 4 (1938), the Court had not determined how far the Civil War Amendments had broadened the federal power at the expense of the States, but the fact that the taxing power had recently been used with destructive effect upon notes issued by the state banks, Veazie Bank v. Fenno, 8 Wall. (75 U.S.) 533 (1869), suggested the possibility of similar attacks upon the existence of the States themselves. Two years later, the Court took the logical step of holding that the federal income tax could not be imposed on income received by a municipal corporation from its investments. United States v. Railroad Company, 17 Wall. (84 U.S.) 322 (1873). A far– reaching extension of private immunity was granted in Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429 (1895), where interest received by a private investor on state or municipal bonds was held to be exempt from federal taxation. (Though relegated to virtual desuetude, Pollock was not expressly overruled until South Carolina v. Baker, 485 U.S. 505 (1988)). As the apprehension of this era subsided, the doctrine of these cases was pushed into the background. It never received the same wide application as did McCulloch v. Maryland, 4 Wheat. (17 U.S.) 316 (1819), in curbing the power of the States to tax operations or instrumentalities of the Federal Government. Only once since the turn of the century has the national taxing power been further narrowed in the name of dual federalism. In 1931 the Court held that a federal excise tax was inapplicable to the manufacture and sale to a municipal corporation of equipment for its police force. Indian Motorcycle v. United States, 283 U.S. 570 (1931). Justice Stone and Brandeis dissented from this decision, and it is doubtful whether it would be followed today. Cf. Massachusetts v. United States, 435 U.S. 444 (1978).
477 At least, if the various opinions in New York v. United States, 326 U.S. 572 (1946), retain force, and they may in view of (a later) New York v. United States, 112S.Ct.2408 (1992), a commerce clause case rather than a tax case.
478 12 Wheat. (25 U.S.) 419, 444 (1827).
479 Snyder v. Bettman, 190 U.S. 249, 254 (1903).
480 South Carolina v. United States, 199 U.S. 437 (1905). See also Ohio v. Helvering, 292 U.S. 360 (1934).
481 220 U.S. 107 (1911).
482 Greiner v. Lewellyn, 258 U.S. 384 (1922).
483 Wheeler Lumber Co. v. United States, 281 U.S. 572 (1930).
484 Board of Trustees v. United States, 289 U.S. 48 (1933).
485 Allen v. Regents, 304 U.S. 439 (1938).
486 Wilmette Park Dist. v. Campbell, 338 U.S. 411 (1949).
487 Metcalf & Eddy v. Mitchell, 269 U.S. 514 (1926).
488 Helvering v. Powers, 293 U.S. 214 (1934).
489 Willcuts v. Bunn, 282 U.S. 216 (1931).
490 Helvering v. Producers Corp., 303 U.S. 376 (1938), overruling Burnet v. Coronado Oil & Gas Co., 285 U.S. 393 (1932).
491 South Carolina v. Baker, 485 U.S. 505, 517 (1988).
492 Id., 524.
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