CRS Annotated Constitution

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Regulation by Taxation

The discretion of Congress in selecting the objectives of taxation has also been held at times to be subject to limitations implied from the nature of the Federal System. Apart from matters that Congress is authorized to regulate, the national taxing power, it has been said, “reaches only existing subjects.”513 Congress may tax any activity actually carried on, such as the business of accepting wagers,514 regardless of whether it is permitted or prohibited by the laws of the United States515 or by those of a State.516 But so– called federal “licenses,” so far as they relate to trade within state limits, merely express, “the purpose of the government not to interfere . . . with the trade nominally licensed, if the required taxes are paid.” Whether the “licensed” trade shall be permitted at all is a question for decision by the State.517 This, nevertheless, does not signify that Congress may not often regulate to some extent a business within a State in order to tax it more effectively. Under the necessary– and–proper clause, Congress may do this very thing. Not only has the Court sustained regulations concerning the packaging of taxed articles such as tobacco518 and oleomargarine,519 ostensibly designed to prevent fraud in the collection of the tax, it has also upheld measures taxing drugs520 and fire[p.151]arms,521 which prescribed rigorous restrictions under which such articles could be sold or transferred, and imposed heavy penalties upon persons dealing with them in any other way. These regulations were sustained as conducive to the efficient collection of the tax though they clearly transcended in some respects this ground of justification.522

Extermination by Taxation

A problem of a different order is presented where the tax itself has the effect of suppressing an activity or where it is coupled with regulations that clearly have no possible relation to the collection of the tax. Where a tax is imposed unconditionally, so that no other purpose appears on the face of the statute, the Court has refused to inquire into the motives of the lawmakers and has sustained the tax despite its prohibitive proportions.523 “It is beyond serious question that a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. . . . The principle applies even though the revenue obtained is obviously negligible . . . or the revenue purpose of the tax may be secondary. . . . Nor does a tax statute necessarily fall because it touches on activities which Congress might not otherwise regulate. As was pointed out in Magnano Co. v. Hamilton, 292 U.S. 40, 47 (1934): ‘From the beginning of our government, the courts have sustained taxes although imposed with the collateral intent of effecting ulterior ends which, considered apart, were beyond the constitutional power of the lawmakers to realize by legislation directly addressed to their accomplishments.”’524

But where the tax is conditional, and may be avoided by compliance with regulations set out in the statute, the validity of the measure is determined by the power of Congress to regulate the subject matter. If the regulations are within the competence of Congress, apart from its power to tax, the exaction is sustained as an appropriate sanction for making them effective;525 otherwise it[p.152]is invalid.526 During the Prohibition Era, Congress levied a heavy tax upon liquor dealers who operated in violation of state law. In United States v. Constantine,527 the Court held that this tax was unenforceable after the repeal of the Eighteenth Amendment, since the National Government had no power to impose an additional penalty for infractions of state law.

Promotion of Business: Protective Tariff

The earliest examples of taxes levied with a view to promoting desired economic objectives in addition to raising revenue were, of course, import duties. The second statute adopted by the first Congress was a tariff act reciting that “it is necessary for the support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufactures, that duties be laid on goods, wares and merchandise imported.”528 After being debated for nearly a century and a half, the constitutionality of protective tariffs was finally settled by the unanimous decision of the Supreme Court in J. W. Hampton & Co. v. United States,529 where Chief Justice Taft wrote: “The second objection to Sec. 315 is that the declared plan of Congress, either expressly or by clear implication, formulates its rule to guide the President and his advisory Tariff Commission as one directed to a tariff system of protection that will avoid damaging competition to the country’s industries by the importation of goods from other countries at too low a rate to equalize foreign and domestic competition in the markets of the United States. It is contended that the only power of Congress in the levying of customs duties is to create revenue, and that it is unconstitutional to frame the customs duties with any other view than that of revenue raising.”

The Chief Justice then observed that the first Congress in 1789 had enacted a protective tariff. “In this first Congress sat many members of the Constitutional Convention of 1787. This Court has repeatedly laid down the principle that a contemporaneous legislative exposition of the Constitution when the founders of our Government and framers of our Constitution were actively participating in public affairs, long acquiesced in, fixes the construction to be given its provisions. . . . The enactment and enforcement of a number of customs revenue laws drawn with a motive of maintaining a system of protection, since the revenue law of 1789, are mat[p.153]ters of history. . . . Whatever we may think of the wisdom of a protection policy, we cannot hold it unconstitutional. So long as the motive of Congress and the effect of its legislative action are to secure revenue for the benefit of the general government, the existence of other motives in the selection of the subject of taxes cannot invalidate Congressional action.”530


513 License Tax Cases, 5 Wall. (72 U.S.) 462, 471 (1867).
514 United States v. Kahriger, 345 U.S. 22 (1953). Dissenting, Justice Frankfurter maintained that this was not a bona fide tax, but was essentially an effort to check, if not stamp out, professional gambling, an activity left to the responsibility of the States. Justices Jackson and Douglas noted partial agreement with this conclusion. See also Lewis v. United States, 348 U.S. 419 (1955).
515 United States v. Yuginovich, 256 U.S. 450 (1921).
516 United States v. Constantine, 296 U.S. 287, 293 (1935).
517 License Tax Cases, 5 Wall. (72 U.S.) 462, 471 (1867).
518 Felsenheld v. United States, 186 U.S. 126 (1902).
519 In re Kollock, 165 U.S. 526 (1897).
520 United States v. Doremus, 249 U.S. 86 (1919). Cf. Nigro v. United States, 276 U.S. 332 (1928).
521 Sonzinsky v. United States, 300 U.S. 506 (1937).
522 Without casting doubt on the ability of Congress to regulate or punish through its taxing power, the Court has overruled Kahriger, Lewis, Doremus, Sonzinsky, and similar cases on the ground that the statutory scheme compelled self–incrimination through registration. Marchetti v. United States, 390 U.S. 39 (1968); Grosso v. United States, 390 U.S. 62 (1968); Haynes v. United States, 390 U.S. 85 (1968); Leary v. United States, 395 U.S. 6 (1969).
523 McCray v. United States, 195 U.S. 27 (1904).
524 United States v. Sanchez, 340 U.S. 42, 44 (1950). See also Sonzinsky v. United States, 300 U.S. 506, 513–514 (1937).
525 Sunshine Coal Co. v. Adkins, 310 U.S. 381, 383 (1940). See also Head Money Cases, 112 U.S. 580, 596 (1884).
526 Child Labor Tax Case (Bailey v. Drexel Furniture Co.), 259 U.S. 20 (1922); Hill v. Wallace, 259 U.S. 44 (1922); Helwig v. United States, 188 U.S. 605 (1903).
527 296 U.S. 287 (1935).
528 1 Stat. 24 (1789).
529 276 U.S. 394 (1928).
530 Id., 411–412.
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