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,”537 that it is “exhaustive”538 or that it “embraces every conceivable power of taxation.”539 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.
The Su- preme Court has restored to Congress the power to tax most of the subject matter which had previously been withdrawn from its reach by judicial decision. The holding of Evans v. Gore540 and Miles v. Graham541 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.542 The specific ruling of Collector v. Day543 that the salary of a state officer is immune to federal income taxation also has been overruled.544 But the principle underlying that decision—that Congress may not lay a tax that would impair the sovereignty of the states—is still recognized as retaining some vitality.545
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,546 a closely divided Court declined to “regard it as a tax upon the municipality, though it might operate incidentally to reduce the bequest by the amount of the tax.”547 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.548
Another decision marking a clear departure from the logic of Collector v. Day was Flint v. Stone Tracy Co.,549 in which 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 because 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 Co. to the extent that it allowed 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,550 excise taxes on the transportation of merchandise in performance of a contract to sell and deliver it to a county,551 on the importation of scientific apparatus by a state university,552 on admissions to athletic contests sponsored by a state institution, the net proceeds of which were used to further its educational program,553 and on admissions to recreational facilities operated on a nonprofit basis by a municipal corporation.554 Income derived by independent engineering contractors from the performance of state functions,555 the compensation of trustees appointed to manage a street railway taken over and operated by a state,556 profits derived from the sale of state bonds,557 or from oil produced by lessees of state lands,558 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 neither the federal nor the state governments could tax income an individual directly derived from any contract with another government.”559 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 government 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.”560
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, the Court has stated that “all agree that not all of the former immunity is gone.”561 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 to concur with any single opinion in the latter case leaves the question very much in doubt. In Helvering v. Gerhardt,562 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.”563
The second attempt to formulate a general doctrine was made in New York v. United States,564 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.”565 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.”566 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.”567 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.568
Articulation of the current approach may be found in South Carolina v. Baker.569 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 burden falls on the [other government], as long as the tax does not discriminate against the [other government] or those with which it deals.”570 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.”571
Whether a tax is to be appor- tioned among the states according to the census taken pursuant to Article I, § 2, or imposed uniformly throughout the United States depends upon its classification as direct or indirect.572 The rule of uniformity for indirect taxes is easy to obey. It requires 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.”573 Even the geographical limitation is a loose one, at least if one follows United States v. Ptasynski,574 in which 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,”575 the 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.576 A taxing statute does not fail of the prescribed uniformity because its operation and incidence may be affected by differences in state laws.577 A federal estate tax law that permitted deduction for a like tax paid to a state was not rendered invalid by the fact that one state levied no such tax.578 The term “United States” in this clause refers only to the states of the Union, the District of Columbia, and incorporated territories. Congress is not bound by the rule of uniformity in framing tax measures for unincorporated territories.579 Indeed, in Binns v. United States,580 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.
- License Tax Cases, 72 U.S. (5 Wall.) 462, 471 (1867).
- Brushaber v. Union Pac. R.R., 240 U.S. 1 (1916).
- 240 U.S. at 12.
- 253 U.S. 245 (1920).
- 268 U.S. 501 (1925).
- 307 U.S. 277 (1939).
- 78 U.S. (11 Wall.) 113 (1871).
- 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, 75 U.S. (8 Wall.) 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 Co., 84 U.S. (17 Wall.) 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, 17 U.S. (4 Wheat.) 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). Justices 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).
- 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, 505 U.S. 144 (1992), a Commerce Clause case rather than a tax case.
- 25 U.S. (12 Wheat.) 419, 444 (1827).
- Snyder v. Bettman, 190 U.S. 249, 254 (1903).
- South Carolina v. United States, 199 U.S. 437 (1905). See also Ohio v. Helvering, 292 U.S. 360 (1934).
- 220 U.S. 107 (1911).
- Greiner v. Lewellyn, 258 U.S. 384 (1922).
- Wheeler Lumber Co. v. United States, 281 U.S. 572 (1930).
- Board of Trustees v. United States, 289 U.S. 48 (1933).
- Allen v. Regents, 304 U.S. 439 (1938).
- Wilmette Park Dist. v. Campbell, 338 U.S. 411 (1949).
- Metcalf & Eddy v. Mitchell, 269 U.S. 514 (1926).
- Helvering v. Powers, 293 U.S. 214 (1934).
- Willcuts v. Bunn, 282 U.S. 216 (1931).
- Helvering v. Producers Corp., 303 U.S. 376 (1938), overruling Burnet v. Coronado Oil & Gas Co., 285 U.S. 393 (1932).
- South Carolina v. Baker, 485 U.S. 505, 517 (1988).
- 485 U.S. at 524–25.
- New York v. United States, 326 U.S. 572, 584 (1946) (concurring opinion of Justice Rutledge).
- 304 U.S. 405 (1938).
- 304 U.S. at 419–20.
- 326 U.S. 572 (1946).
- 326 U.S. at 584.
- 326 U.S. at 589–90.
- 326 U.S. at 596.
- Wilmette Park Dist. v. Campbell, 338 U.S. 411 (1949). Cf. Massachusetts v. United States, 435 U.S. 444 (1978).
- 485 U.S. 505 (1988).
- 485 U.S. at 523.
- 485 U.S. at 524 n.14.
- See also Article I, § 9, cl. 4.
- LaBelle Iron Works v. United States, 256 U.S. 377 (1921); Brushaber v. Union Pac. R.R. Co., 240 U.S. 1 (1916); Head Money Cases, 112 U.S. 580 (1884).
- 462 U.S. 74 (1983).
- 462 U.S. at 85.
- Knowlton v. Moore, 178 U.S. 41 (1900).
- Fernandez v. Wiener, 326 U.S. 340 (1945); Riggs v. Del Drago, 317 U.S. 95 (1942); Phillips v. Commissioner, 283 U.S. 589 (1931); Poe v. Seaborn, 282 U.S. 101, 117 (1930).
- Florida v. Mellon, 273 U.S. 12 (1927).
- Downes v. Bidwell, 182 U.S. 244 (1901).
- 194 U.S. 486 (1904). The Court recognized that Alaska was an incorporated territory but took the position that the situation in substance was the same as if the taxes had been directly imposed by a territorial legislature for the support of the local government.