The Constitution of the United States of America: Analysis and Interpretation Part 15

CONFLICTING VIEWS ON THE COURT

The second attempt to formulate a general doctrine was made in New York _v._ United States,[246] 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 was asked to and did reconsider 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."[247] 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.'"[248] 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 Const.i.tution."[249] In the most recent 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 munic.i.p.ality had borne the burden of the exaction.[250]

THE RULE OF UNIFORMITY

Whether a tax is to be apportioned among the States according to the census taken pursuant to article I, section 2, or imposed uniformly throughout the United States depends upon its cla.s.sification as direct or indirect.[251] 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."[252] The clause accordingly places no obstacle in the way of legislative cla.s.sification for the purpose of taxation, nor in the way of what is called progressive taxation.[253] A taxing statute does not fail of the prescribed uniformity because its operation and incidence may be affected by differences in State laws.[254] A federal estate tax law which permitted a deduction for a like tax paid to a State was not rendered invalid by the fact that one State levied no such tax.[255] 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.[256] Indeed, in Binns _v._ United States,[257] 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.

PURPOSES OF TAXATION

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 which Congress is authorized to regulate, the national taxing power, it has been said, "reaches only existing subjects."[258] Congress may tax any activity actually carried on, regardless of whether it is permitted or prohibited by the laws of the United States[259] or by those of a State.[260] 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.[261] This, nevertheless, does not signify that Congress may not often regulate to some extent a business within a State in order the more effectively to tax it. 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 tobacco[262] and oleomargarine,[263] ostensibly designed to prevent fraud in the collection of the tax; it has also upheld measures taxing drugs[264] and firearms[265] 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.

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 which 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.[266] In the language of a recent opinion: "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 const.i.tutional power of the lawmakers to realize by legislation directly addressed to their accomplishment.'"[267] 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;[268]

otherwise it is invalid.[269] During the Prohibition Era, Congress levied a heavy tax upon liquor dealers who operated in violation of State law. In United States _v._ Constantine[270] 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.

The 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 which recited 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."[271] After being debated for nearly a century and a half, the const.i.tutionality of protective tariffs was finally settled by the unanimous decision of the Supreme Court in Hampton and Company _v._ United States,[272] where Chief Justice Taft wrote: "The second objection to -- 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 compet.i.tion to the country's industries by the importation of goods from other countries at too low a rate to equalize foreign and domestic compet.i.tion 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 unconst.i.tutional to frame the customs duties with any other view than that of revenue raising. * * * In this first Congress sat many members of the Const.i.tutional Convention of 1787. This Court has repeatedly laid down the principle that a contemporaneous legislative exposition of the Const.i.tution when the founders of our Government and framers of our Const.i.tution were actively partic.i.p.ating 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 matters of history. * * *

Whatever we may think of the wisdom of a protection policy, we can not hold it unconst.i.tutional. 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."[273]

SPENDING FOR THE GENERAL WELFARE

The grant of power to "provide * * * for the general welfare" raises a two-fold question: How may Congress provide for "the general welfare"

and what is "the general welfare" which it is authorized to promote? The first half of this question was answered by Thomas Jefferson in his Opinion on the Bank as follows: "* * * the laying of taxes is the _power_, and the general welfare the _purpose_ for which the power is to be exercised. They [Congress] are not to lay taxes _ad libitum for any purpose they please_; but only _to pay the debts or provide for the welfare of the Union_. In like manner, they are not _to do anything they please_ to provide for the general welfare, but only to _lay taxes_ for that purpose."[274] The clause, in short, is not an independent grant of power, but a qualification of the taxing power. Although a broader view has been occasionally a.s.serted,[275] Congress has not acted upon it and the Courts have had no occasion to adjudicate the point.

Hamilton _v._ Madison

With respect to the meaning of "the general welfare" the pages of The Federalist itself disclose a sharp divergence of views between its two princ.i.p.al authors. Hamilton adopted the literal, broad meaning of the clause;[276] Madison contended that the powers of taxation and appropriation of the proposed government should be regarded as merely instrumental to its remaining powers, in other words, as little more than a power of self-support.[277] From an early date Congress has acted upon the interpretation espoused by Hamilton. Appropriations for subsidies[278] and for an ever increasing variety of "internal improvements"[279] constructed by the Federal Government, had their beginnings in the administrations of Washington and Jefferson.[280]

Since 1914, federal grants-in-aid,--sums of money apportioned among the States for particular uses, often conditioned upon the duplication of the sums by the recipient State, and upon observance of stipulated restrictions as to its use--have become commonplace.[281]

Triumph of the Hamiltonian Theory

The scope of the national spending power was brought before the Supreme Court at least five times prior to 1936, but the Court disposed of four of them without construing the "general welfare" clause. In the Pacific Railway Cases[282] and Smith _v._ Kansas City t.i.tle and Trust Company,[283] it affirmed the power of Congress to construct internal improvements, and to charter and purchase the capital stock of federal land banks, by reference to the powers of the National Government over commerce, the post roads and fiscal operations, and to its war powers.

Decisions on the merits were withheld in two other cases--Ma.s.sachusetts _v._ Mellon and Frothingham _v._ Mellon[284]--on the ground that neither a State nor an individual citizen is ent.i.tled to a remedy in the courts against an unconst.i.tutional appropriation of national funds. In United States _v._ Gettysburg Electric Railway Co.,[285] however, the Court had invoked "the great power of taxation to be exercised for the common defence and the general welfare,"[286] to sustain the right of the Federal Government to acquire land within a State for use as a national park. Finally, in United States _v._ Butler,[287] the Court gave its unqualified endors.e.m.e.nt to Hamilton's views on the taxing power. Wrote Justice Roberts for the Court: "Since the foundation of the Nation sharp differences of opinion have persisted as to the true interpretation of the phrase. Madison a.s.serted it amounted to no more than a reference to the other powers enumerated in the subsequent clauses of the same section; that, as the United States is a government of limited and enumerated powers, the grant of power to tax and spend for the general national welfare must be confined to the enumerated legislative fields committed to the Congress. In this view the phrase is mere tautology, for taxation and appropriation are or may be necessary incidents of the exercise of any of the enumerated legislative powers. Hamilton, on the other hand, maintained the clause confers a power separate and distinct from those later enumerated, is not restricted in meaning by the grant of them, and Congress consequently has a substantive power to tax and to appropriate, limited only by the requirement that it shall be exercised to provide for the general welfare of the United States. Each contention has had the support of those whose views are ent.i.tled to weight. This court had noticed the question, but has never found it necessary to decide which is the true construction. Justice Story, in his Commentaries, espouses the Hamiltonian position. We shall not review the writings of public men and commentators or discuss the legislative practice. Study of all these leads us to conclude that the reading advocated by Justice Story is the correct one. While, therefore, the power to tax is not unlimited, its confines are set in the clause which confers it, and not in those of -- 8 which bestow and define the legislative powers of the Congress. It results that the power of Congress to authorize expenditure of public moneys for public purposes is not limited by the direct grants of legislative power found in the Const.i.tution."[288]

The Security Act Cases

Although holding that the spending power is not limited by the specific grants of power contained in article I, section 8, the Court found, nevertheless, that it was qualified by the Tenth Amendment, and on this ground ruled in the Butler case that Congress could not use moneys raised by taxation to "purchase compliance" with regulations "of matters of State concern with respect to which Congress has no authority to interfere."[289] Within little more than a year this decision was reduced to narrow proportions by Steward Machine Co. _v._ Davis,[290]

which sustained the tax imposed on employers to provide unemployment benefits, and the credit allowed for similar taxes paid to a State. To the argument that the tax and credit in combination were "weapons of coercion, destroying or impairing the autonomy of the States," the Court replied that relief of unemployment was a legitimate object of federal expenditure under the "general welfare" clause; that the Social Security Act represented a legitimate attempt to solve the problem by the cooperation of State and Federal Governments; that the credit allowed for State taxes bore a reasonable relation "to the fiscal need subserved by the tax in its normal operation,"[291] since State unemployment compensation payments would relieve the burden for direct relief borne by the national treasury. The Court reserved judgment as to the validity of a tax "if it is laid upon the condition that a State may escape its operation through the adoption of a statute unrelated in subject matter to activities fairly within the scope of national policy and power."[292]

Earmarked Funds

The appropriation of the proceeds of a tax to a specific use does not affect the validity of the exaction, if the general welfare is advanced and no other const.i.tutional provision is violated. Thus a processing tax on coconut oil was sustained despite the fact that the tax collected upon oil of Philippine production was segregated and paid into the Philippine Treasury.[293] In Helvering _v._ Davis,[294] the excise tax on employers, the proceeds of which were not earmarked in any way, although intended to provide funds for payments to retired workers, was upheld under the "general welfare" clause, the Tenth Amendment being found to be inapplicable.

Conditional Grants-in-Aid

In the Steward Machine Company case, it was a taxpayer who complained of the invasion of the State sovereignty and the Court put great emphasis on the fact that the State was a willing partner in the plan of cooperation embodied in the Social Security Act.[295] A decade later the right of Congress to impose conditions upon grants-in-aid over the objection of a State was squarely presented in Oklahoma _v._ United States Civil Service Commission.[296] The State objected to the enforcement of a provision of the Hatch Act,[297] whereby its right to receive federal highway funds would be diminished in consequence of its failure to remove from office a member of the State Highway Commission found to have taken an active part in party politics while in office.

Although it found that the State had created a legal right which ent.i.tled it to an adjudication of its objection, the Court denied the relief sought on the ground that, "While the United States is not concerned with, and has no power to regulate local political activities as such of State officials, it does have power to fix the terms upon which its money allotments to State shall be disbursed. * * * The end sought by Congress through the Hatch Act is better public service by requiring those who administer funds for national needs to abstain from active political partisanship. So even though the action taken by Congress does have effect upon certain activities within the State, it has never been thought that such effect made the federal act invalid."[298]

"Debts of the United States"

The power to pay the debts of the United States is broad enough to include claims of citizens arising on obligations of right and justice.[299] The Court sustained an act of Congress which set apart for the use of the Philippine Islands, the revenue from a processing tax on coconut oil of Philippine production, as being in pursuance of a moral obligation to protect and promote the welfare of the people of the Islands.[300] Curiously enough, this power was first invoked to a.s.sist the United States to collect a debt due to it. In United States _v._ Fisher[301] the Supreme Court sustained a statute which gave the Federal Government priority in the distribution of the estates of its insolvent debtors. The debtor in that case was the endorser of a foreign bill of exchange which apparently had been purchased by the United States.

Invoking the "necessary and proper" clause, Chief Justice Marshall deduced the power to collect a debt from the power to pay its obligations by the following reasoning: "The government is to pay the debt of the Union, and must be authorized to use the means which appear to itself most eligible to effect that object. It has, consequently, a right to make remittances by bills or otherwise, and to take those precautions which will render the transaction safe."[302]

Clause 2. _The Congress shall have Power_ * * * To borrow Money on the credit of the United States.

The Borrowing Power

The original draft of the Const.i.tution reported to the convention by its Committee of Detail empowered Congress "To borrow money and emit bills on the credit of the United States."[303] When this section was reached in the debates, Gouverneur Morris moved to strike out the clause "and emit bills on the credit of the United States." Madison suggested that it might be sufficient "to prohibit the making them a tender." After a spirited exchange of views on the subject of paper money the convention voted, nine States to two, to delete the words "and emit bills."[304]

Nevertheless, in 1870, the Court relied in part upon this clause in holding that Congress had authority to issue treasury notes and to make them legal tender in satisfaction of antecedent debts.[305] When it borrows money "on the credit of the United States" Congress creates a binding obligation to pay the debt as stipulated and cannot thereafter vary the terms of its agreement. A law purporting to abrogate a clause in government bonds calling for payment in gold coin was held to contravene this clause, although the creditor was denied a remedy in the absence of a showing of actual damage.[306]

Clause 3. _The Congress shall have power_ * * * To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.

Purpose of the Clause

This clause serves a two-fold purpose: it is the direct source of the most important powers which the National Government exercises in time of peace: and, except for the due process of law clause of Amendment XIV, it is the most important limitation imposed by the Const.i.tution on the exercise of State power. The latter, or restrictive, operation of the clause was long the more important one from the point of view of Const.i.tutional Law. Of the approximately 1400 cases which reached the Supreme Court under the clause prior to 1900, the overwhelming proportion stemmed from State legislation.[307] It resulted that, with an important exception to be noted in a moment, the guiding lines in construction of the clause were initially laid down from the point of view of its operation as a curb on State power, rather than of its operation as a source of national power; and the consequence of this was that the word "commerce," as designating the thing to be protected against State interference, came to dominate the clause, while the word "regulate" remained in the background.

Definition of Terms: Gibbons _v._ Ogden

"COMMERCE"

The etymology of the word, "c.u.m merce (with merchandise)" carries the primary meaning of traffic--i.e., "to buy and sell goods; to trade"

(Webster's International). This narrow conception was replaced in the great leading case of Gibbons _v._ Ogden, 9 Wheat. 1 (1824), by a much broader one, on which interpretation of the clause has been patterned ever since. The case arose out of a series of acts of the legislature of New York, pa.s.sed between the years 1798 and 1811, which conferred upon Livingston and Fulton the exclusive right to navigate the waters of that State with steam-propelled vessels. Gibbons challenged the monopoly by sending from Elizabethtown, New Jersey, into the Hudson in the State of New York two steam vessels which had been licensed and enrolled to engage in the coasting trade under an act pa.s.sed by Congress in 1793.

Counsel for Ogden (an a.s.signee of Livingston and Fulton) argued that since Gibbons' vessels carried only pa.s.sengers between New Jersey and New York, they were not engaged in traffic and hence not in "commerce"

in the sense of the Const.i.tution. This argument Chief Justice Marshall answered as follows: "The subject to be regulated is commerce; * * * The counsel for the appellee would limit it to traffic, to buying and selling, or the interchange of commodities, and do not admit that it comprehends navigation. This would restrict a general term, applicable to many objects, to one of its significations. Commerce, undoubtedly, is traffic, but it is something more--it is intercourse."[308] The term, therefore, included navigation--a conclusion which Marshall supported by appeal to general understanding, to the prohibition in article I, -- 9, against any preference being given "'* * * by any regulation of commerce or revenue, to the ports of one State over those of another,'" and to the admitted and demonstrated power of Congress to impose embargoes.[309]