CRS Annotated Constitution
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Scope of State Immunity From Federal Taxation.—Although there have been sharp differences of opinion among members of the Supreme Court in cases dealing with the tax immunity of state functions and instrumentalities, it has been stated that “all agree that not all of the former immunity is gone.”493 Twice, the Court has made an effort to express its new point of view in a statement of general principles by which the right to such immunity shall be determined. However, the failure to muster a majority in concurrence with any single opinion in the latter case leaves the question very much in doubt. In Helvering v. Gerhardt,494 where, without overruling Collector v. Day, it narrowed the immunity of salaries of state officers from federal income taxation, the Court announced “two guiding principles of limitation for holding the tax immunity of State instrumentalities to its proper function. The one, dependent upon the nature of the function being performed by the State or in its behalf, excludes from the immunity activities thought not to be essential to the preservation of State governments even though the tax be collected from the State treasury. . . . The other principle, exemplified by those cases where the tax laid upon individuals affects the State only as the burden is passed on to it by the taxpayer, forbids recognition of the immunity when the burden on the State is so speculative and uncertain that if allowed it would restrict the federal taxing power without affording any corresponding tangible protection to the State government; even though the function be thought important enough to demand immunity from a tax upon the State itself, it is not necessarily protected from a tax which well may be substantially or entirely absorbed by private persons.”495[p.148]
The second attempt to formulate a general doctrine was made in New York v. United States,496 where, on review of a judgment affirming the right of the United States to tax the sale of mineral waters taken from property owned and operated by the State of New York, the Court reconsidered the right of Congress to tax business enterprises carried on by the States. Justice Frankfurter, speaking for himself and Justice Rutledge, made the question of discrimination vel non against state activities the test of the validity of such a tax. They found “no restriction upon Congress to include the States in levying a tax exacted equally from private persons upon the same subject matter.”497 In a concurring opinion in which Justices Reed, Murphy, and Burton joined, Chief Justice Stone rejected the criterion of discrimination. He repeated what he had said in an earlier case to the effect that “the limitation upon the taxing power of each, so far as it affects the other, must receive a practical construction which permits both to function with the minimum of interference each with the other; and that limitation cannot be so varied or extended as seriously to impair either the taxing power of the government imposing the tax . . . or the appropriate exercise of the functions of the government affected by it.”498 Justices Douglas and Black dissented in an opinion written by the former on the ground that the decision disregarded the Tenth Amendment, placed “the sovereign States on the same plane as private citizens,” and made them “pay the Federal Government for the privilege of exercising powers of sovereignty guaranteed them by the Constitution.”499 In a later case dealing with state immunity the Court sustained the tax on the second ground mentioned in Helvering v. Gerhardt—that the burden of the tax was borne by private persons—and did not consider whether the function was one which the Federal Government might have taxed if the municipality had borne the burden of the exaction.500
Articulation of the current approach may be found in South Carolina v. Baker.501 The rules are “essentially the same” for federal immunity from state taxation and for state immunity from federal taxation, except that some state activities may be subject to direct federal taxation, while States may “never” tax the United States directly. Either government may tax private parties doing business with the other government, “even though the financial[p.149]burden falls on the [other government], as long as the tax does not discriminate against the [other government] or those with which it deals.”502 Thus, “the issue whether a nondiscriminatory federal tax might nonetheless violate state tax immunity does not even arise unless the Federal Government seeks to collect the tax directly from a State.”503
Uniformity Requirement.—Whether a tax is to be apportioned among the States according to the census taken pursuant to Article I, Sec. 2, or imposed uniformly throughout the United States depends upon its classification as direct or indirect.504 The rule of uniformity for indirect taxes is easy to obey. It exacts only that the subject matter of a levy be taxed at the same rate wherever found in the United States; or, as it is sometimes phrased, the uniformity required is “geographical,” not “intrinsic.”505 Even the geographical limitation is a loose one, at least if United States v. Ptasynski506 is followed. There, the Court upheld an exemption from a crude–oil windfall–profits tax of “Alaskan oil,” defined geographically to include oil produced in Alaska (or elsewhere) north of the Arctic Circle. What is prohibited, the Court said, is favoritism to particular States in the absence of valid bases of classification. Because Congress could have achieved the same result, allowing for severe climactic difficulties, through a classification tailored to the “disproportionate costs and difficulties . . . associated with extracting oil from this region,”507the fact that Congress described the exemption in geographic terms did not condemn the provision.
The clause accordingly places no obstacle in the way of legislative classification for the purpose of taxation, nor in the way of what is called progressive taxation.508 A taxing statute does not fail of the prescribed uniformity because its operation and incidence may be affected by differences in state laws.509 A federal estate tax law which permitted deduction for a like tax paid to a State was not rendered invalid by the fact that one State levied no such tax.510 The term “United States” in this clause refers only to the States of the Union, the District of Columbia, and incorporated[p.150]territories. Congress is not bound by the rule of uniformity in framing tax measures for unincorporated territories.511 Indeed, in Binns v. United States,512 the Court sustained license taxes imposed by Congress but applicable only in Alaska, where the proceeds, although paid into the general fund of the Treasury, did not in fact equal the total cost of maintaining the territorial government.
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