Article I, 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; . . .
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,” 1 that it is “exhaustive” 2 or that it “embraces every conceivable power of taxation.” 3 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The Supreme Court has restored to Congress the power to tax most of the subject matter which had previously been withdrawn from its reach by judicial decision.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. Gore4 and Miles v. Graham5 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.6 The specific ruling of Collector v. Day7 that the salary of a state officer is immune to federal income taxation also has been overruled.8 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.9
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,10 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.” 11 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.12
Another decision marking a clear departure from the logic of Collector v. Day was Flint v. Stone Tracy Co.,13 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,14 excise taxes on the transportation of merchandise in performance of a contract to sell and deliver it to a county,15 on the importation of scientific apparatus by a state university,16 on admissions to athletic contests sponsored by a state institution, the net proceeds of which were used to further its educational program,17 and on admissions to recreational facilities operated on a nonprofit basis by a municipal corporation.18 Income derived by independent engineering contractors from the performance of state functions,19 the compensation of trustees appointed to manage a street railway taken over and operated by a state,20 profits derived from the sale of state bonds,21 or from oil produced by lessees of state lands,22 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.” 23 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.” 24
Regulation by Taxation
Congress has broad discretion in methods of taxation, and may, under the Necessary and Proper Clause, regulate business within a state in order to tax it more effectively. For instance, the Court has sustained regulations regarding the packaging of taxed articles such as tobacco25 and oleomargarine,26 which were ostensibly designed to prevent fraud in the collection of the tax. It has also upheld measures taxing drugs27 and firearms,28 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.29
Even where a tax is coupled with regulations that have no possible relation to the efficient collection of the tax, and 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.30 “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,
In some cases, however, the structure of a taxation scheme is such as to suggest that the Congress actually intends to regulate under a separate constitutional authority. As long as such separate authority is available to Congress, the imposition of a tax as a penalty for such regulation is valid.32 On the other hand, where Congress had levied a heavy tax upon liquor dealers who operated in violation of state law, the Court held that this tax was unenforceable after the repeal of the Eighteenth Amendment, because the National Government had no power to impose an additional penalty for infractions of state law.33
Discerning whether Congress, in passing a regulation that purports to be under the taxing authority, intends to exercise a separate constitutional authority, requires evaluation of a number of factors.34 Under the Child Labor Tax Case,35 decided in 1922, the Court, which had previously rejected a federal prohibition of child labor laws as being outside of the Commerce Clause,36 also rejected a tax on companies using such labor. First, the Court noted that the law in question set forth a specific and detailed regulatory scheme — including the ages, industry, and number of hours allowed — establishing when employment of underage youth would incur taxation. Second, the taxation in question functioned as a penalty, in that it was set at one-tenth of net income per year, regardless of the nature or degree of the infraction. Third, the tax had a scienter requirement, so that the employer had to know that the child was below a specified age in order to incur taxation. Fourth, the statute made the businesses subject to inspection by officers of the Secretary of Labor, positions not traditionally charged with the enforcement and collection of taxes.
More recently, in National Federation of Independent Business (NFIB) v. Sebelius,37 the Court upheld as an exercise of the taxing authority a requirement under the Patient Protection and Affordable Care Act (ACA)38 that mandates certain individuals to maintain a minimum level of health insurance. Failure to purchase health insurance may subject a person to a monetary penalty, administered through the tax code. Chief Justice Roberts, in a majority holding,39 used a functional approach in evaluating the authority for the requirement, so that the use of the term “penalty” in the ACA40 to describe the enforcement mechanism for the individual mandate was found not to be determinative. The Court also found that the latter three factors identified in the Child Labor Tax Case (penal intent, scienter, enforcement by regulatory agency) were not present with respect to the individual mandate. Unlike the child labor taxation scheme, the tax level under the ACA is established based on traditional tax variables such as taxable income, number of dependents and joint filing status; there is no requirement of a knowing violation; and the tax is collected by the Internal Revenue Service.
The majority, however, did not appear to have addressed the first Child Labor Case factor: whether the ACA set forth a specific and detailed course of conduct and imposed an exaction on those who transgress its standard. The Court did note that the law did not bear characteristics of a regulatory penalty, as the cost of the tax was far outweighed by the cost of obtaining health insurance, making the payment of the tax a reasonable financial decision.41 Still, the majority’s discussion suggests that, for constitutional purposes, the prominence of regulatory motivations for tax provisions may become less important than the nature of the exactions imposed and the manner in which they are administered.
In those areas where activities are subject to both taxation and regulation, the taxing authority is not limited from reaching activities otherwise prohibited. For instance, Congress may tax an activity, such as the business of accepting wagers,42 regardless of whether it is permitted or prohibited by the laws of the United States43 or by those of a state.44 However, Congress's authority to regulate using the taxing power “reaches only existing subjects.” 45 Thus, so-called federal “licenses,” so far as they relate to topics outside Congress's constitutional authority, merely express, “the purpose of the government not to interfere . . . with the trade nominally licensed, if the required taxes are paid.” In those instance, whether the “licensed” trade shall be permitted at all is a question that remains a decision by the state.46
- 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.
- Felsenheld v. United States, 186 U.S. 126 (1902).
- In re Kollock, 165 U.S. 526 (1897).
- United States v. Doremus, 249 U.S. 86 (1919). Cf. Nigro v. United States, 276 U.S. 332 (1928).
- Sonzinsky v. United States, 300 U.S. 506 (1937).
- 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).
- McCray v. United States, 195 U.S. 27 (1904).
- United States v. Sanchez, 340 U.S. 42, 45 (1950). See also Sonzinsky v. United States, 300 U.S. 506, 513–14 (1937).
- Sunshine Anthracite Coal Co. v. Adkins, 310 U.S. 381, 393 (1940). See also Head Money Cases, 112 U.S. 580, 596 (1884).
- United States v. Constantine, 296 U.S. 287 (1935).
- Hill v. Wallace, 259 U.S. 44 (1922); Helwig v. United States, 188 U.S. 605 (1903).
- Bailey v. Drexel Furniture Co. (Child Labor Tax Case), 259 U.S. 20 (1922).
- Hammer v. Dagenhart, 247 U.S. 251 (1918).
- 567 U.S. ___, No. 11-393, slip op. (2012).
- Pub. L. No. 111-148, as amended.
- For this portion of the opinion, Justice Roberts was joined by Justices Ginsburg, Breyer, Sotomayor and Kagan.
- 26 U.S.C. §§ 5000A(c), (g)(1).
- 567 U.S. ___, No. 11-393, slip op. at 35–36 (2012).
- 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).
- United States v. Yuginovich, 256 U.S. 450 (1921).
- United States v. Constantine, 296 U.S. 287, 293 (1935).
- License Tax Cases, 72 U.S. (5 Wall.) 462, 471 (1867).
- License Tax Cases, 72 U.S. at 471 (1867).
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