Taxation

The Heritage Guide to the Constitution

Taxation

Article I, Section 8, Clause 1

The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises.

The first power that the Constitution grants to Congress in Article I, Section 8 is the power to tax. The Articles of Confederation had granted Congress only the power to seek "requisitions" (requests) from the states, which Alexander Hamilton called "this inis fatuus [will-o'-the-wisp] in finance" in The Federalist No. 30. Most of the leading figures at the Constitutional Convention, including William Paterson, author of the New Jersey Plan that was most protective of the states, believed that the new government should have an independent power to tax. But many important Anti-Federalists balked at the idea. At the Convention, the Virginia Plan made no provision for an independent taxing power, but based representation on the states' "quotas of contributions" and enabled Congress to "call forth the force of the Union against any member of the Union failing to fulfill its duties under the articles thereof." The New Jersey Plan avoided the Virginia Plan's recipe for confrontation between the federal government and he states by specifying that Congress be independently "authorized to pass acts for raising a revenue, by levying a duty or duties" on imports, stamps, and post-age, with congressional acts as "supreme law," enforceable against individuals. 

In the ratification debates, most delegates presumed that Congress would seek to apply "direct taxes rather than excises as the main basis of obtaining revenue. And the Anti-Federalists expressed much apprehension over that power. At the Virginia ratifying convention, for example, George Mason argued that Congress's ability to lay direct taxes was "at discretion, unconfined, and without any kind of control" and would lead to "consolidated Government." After Pennsylvania succeeded in ratifying the Constitution, the Pennsylvania Packet printed "The Dissent of the Minority of the Convention," which stated Congress's power to levy direct taxes on "land, cattle, trades, occupations, etc. to any amount" would force people to pay even the most oppressive taxes or have their property seized because "all resistance will be in vain." In Massachusetts, one delegate noted that raising taxes for "the general welfare" meant it could cover "any expenditure whatsoever" and that such a "universal, unbounded" power should not be given by a free people to its government, and he argued rather for a limited grant of revenue "adequate to all necessary purposes." 

The Federalists answered these charges by claiming that duties on imports would normally be sufficient for federal needs and that direct taxes would only be used during great emergencies, like war, in which relying on requisitions from the states would be dangerously slow and risk national security. Additionally, the United States could borrow money with greater ease if it had what Edmund Randolph at the Virginia ratifying convention called the "full scope and complete command over the resources of the union," which the Federalists argued was also essential to national security because Congress otherwise would have to borrow money to finance wars.

Still, Massachusetts, South Carolina, New York, New Hampshire, Virginia, as well as delegates from an unofficial convention in Harrisburg, Pennsylvania, all supported the Constitution on the basis that it would be amended, and each of those states proposed amendments that would require Congress to requisition the states for their portion of a federal direct tax and let the federal government raise those taxes itself only after a state failed to act. But when James Madison proposed a set of amendments to the First Congress, he and the Federalist majority left the federal taxing power as it was.

Nonetheless, the Framers did not leave the taxing power unbounded. The Constitution placed a number of limitations on it: "direct'" taxes must be apportioned according to population (Article I, Section 9, Clause 4); other taxes must be "uniform" throughout the United States (Article I, Section 8, Clause 1); and Congress cannot tax exports (Article I, Section 9, Clause 5). As Alexander Hamilton put it in his 1791 "Report on Manufactures," "These three qualifications excepted, the power to raise money is plenary, and indefinite; and the objects to which it may be appropriated are no less comprehensive...." Hamilton's second claim--set off, appropriately enough, by a semicolon--concerns what has been called the "spending power" (Article I, Section 8, Clause 1), the subject of enormous interpretive controversy, but which can be seen as an additional limitation on the taxation power ("to pay the Debts and provide for the common Defense and general Welfare of the United States"). The interpretation of the first portion of Article I, Section 8, Clause 1, the power to tax, has been more limited. 

The most important dispute surrounding the clause was whether the taxing power could be used for any purpose other than raising revenue. The first Congress had little difficulty justifying an import tax that also protected domestic industry from foreign competition. The first section of the first tariff act (4 July 1789) declared 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." Though the duties and their protective impact were modest, there is little doubt that the act's purpose was protective, and nobody in Congress objected on constitutional grounds. 

The tariffs of 1824 and 1828 were even more protective, and produced a new set of constitutional objections. John C. Calhoun and his allies now claimed that Congress could tax imports only for revenue, not to regulate trade. The American colonists made the opposite comparison during the Imperial Conflict of the 1760s based on their understanding of the unwritten constitution that governed England and the colonies: Parliament could impose taxes to regulate imperial trade as part of its sovereign imperial power, but not to raise revenue. The last required a mechanism of consent on the part of the governed. 

In two letters of 1828 to Joseph C. Cabell, Madison took the same principle as had the colonists and stated that under the commerce power, Congress could regulate trade with foreign nations including by means of taxation, and that Congress did not need a separate power of taxation to do so. Justice Joseph Story supported Madison's position in his Commentaries on the Constitution of the United States (1833). Subsequently, Congress reduced tariffs to minimize protection after the Nullification crisis of 1832-1833. The Republicans restored protection in 1861, and the United States remained a high-tariff country almost continuously until the Second World War. The Supreme Court did not rule on the constitutionality of a protective tariff until 1928, upholding it in J.@. Hampton, Jr. & Co. v. U.S.

The principle that a delegated power of Congress implies the necessary means (confirmed by the Necessary and Proper Clause, Article I, Section 8, Clause 18) came to be applied to internal taxes as well, beginning with the Civil War. 

In 1866 Congress imposed a tax ons Tate banknotes, which had been the nation's only form of paper currency since the demise of the Second Bank of the United States in 1836. The 1866 tax meant to drive state banknotes out of existence (the constitutionality of which the Supreme Court had upheld in Briscoe v. Bank of Kentucky in 1837). In Veazie Bank v. Fenno (1869) the Court upheld the tax ons Tate banknotes. The Court recognized that the taxing power could not be "exercised for ends inconsistent with the limited grants of power in the Constitution." But, reading the Constitution's grant of power "to coin money [and] regulate the value thereof" broadly enough to include the issuing of national banknotes, the Court found that Congress could stamp out state rivals.

In doing so, the Court affirmed that the power to tax even as a means to execute a delegated power was subject to constitutional limitations. Although the Court rejected the argument that the 1866 tax was a "direct" tax, it did admit that, "There are, indeed, certain virtual limitations, arising from the principles of the Constitution itself. It would undoubtedly be an abuse of the power if so exercised as to impair the separate existence and independent self-government of the States." This principle would later spawn a host of "intergovernmental tax immunity" cases. 

McCulloch v. Maryland (1819) held that a state did not have the sovereign power to tax a federal instrumentality. Concomitantly, in Collector v. Day (1871), the court found that a federal tax on the income of a state judge violated the Constitution because the federal and state governments are "separate and distinct sovereignties, acting separately and independently of each other, within their respective spheres." The argument was that the tax on the wages of the state judge was really a tax on the state. After a number of decades dealing with the implications of the intergovernmental tax immunity doctrine, the Supreme Court reversed course in Helvering v. Gerhardt (1938), holding that the federal government could tax the income of state employees. Earlier Pollock v. Farmers' Loan & Trust Co. (1895) had held that the tax on the interest of a state or municipal bond is a tax on the state or municipality. For some time after Gerhardt, the federal government continued to exempt interest from state issued bonds from federal taxation. Finally, in South Carolina v. Baker (1988), the Court formally overruled Pollock and held that such interest has no immunity from federal taxation, effectively ending, for constitutional purposes, state immunity from federal taxation. The federal government, by statute however, exempts from federal income tax the interest of state and municipal bonds in some circumstances. 

the question still remained, when the federal government does not use a tax as a means to effectuate a delegated power, but only as a tax designed to obtain revenue, what constitutional limits apply? In the 1860s a French chemist invented a cheap butter substitute called "oleomargarine." American dairy farmers lobbied for a ten-cent per pound tax to drive oleo out of the market. In 1886, Congress enacted a milder two-cent tax, and required manufacturers and sellers to purchase federal licenses and clearly to package and label their product as "oleomargarine." President Grover Cleveland reluctantly signed the bill. He noted that if he had been truly convinced that the revenue aspect was simply a pretext "to destroy...one industry of our people for the protection and benefit of another," he would have vetoed it. The Supreme Court unanimously upheld the oleomargarine tax as akin to excises on tobacco or alcohol. In re Kollock (1897). Chief Justice Melville Fuller declared, "The act before us is on its face an act for levying taxes, and although it may operate in so doing to prevent deception in the sale of oleomargarine as and for butter, its primary object must be assumed to be the raising of revenue."

In 1902, Congress amended the 186 act and adopted a prohibitive ten-cent tax on artificially colored oleo, and reduced the tax on the less palatably looking uncolored or naturally colored oleo to one-quarter cent. Though many members to Congress objected to this use of the taxing power for unenumerated ends, Maryland Representative William H. Jackson had no such qualms. He replied, "this government, sir, is all powerful; this government is the people, and the people can do anything with their government that they desire.... This is an age of progress." In McCray v. United States (1904), the Supreme Court upheld the new tax. Justice Edware White observed that Congress's power to enact such an excise "is so completely established as to require only statement." The Court, Justice White observed, had unanimously upheld the 1886 oleo tax as a revenue measure, even though "it may operate in so doing to prevent deception in the sale of oleomargarine." The amount of the tax was not for the Court to judge. However, Justice White warned that a tax "so extreme as to be beyond the principles which we have previously stated, and where it was plain to the judicial mind that the power had been called into play not for revenue, but solely for the purpose of destroying rights which could not be rightfully destroyed consistently with the principles of freedom and justice upon which the Constitution rests," would be unconstitutional. After McCray, the federal tax power was applied to limit the manufacture and sale of phosphorous matches, opium, and other narcotics.

In the progressive era, Congress attempted to expand its regulatory powers principally via the interstate commerce clause rather than the taxing power. However, when the Court held that Congress could not prohibit the interstate shipment of goods produced by child labor, Hammer v. Dagenhart (1918), Congress swiftly countered by enacting a prohibitive tax on the profits of manufacturers who used child labor. In Bailey v. Drexel Furniture Co. (1922), the Court struck down the act. The "tax," the Court argued, was in reality a criminal penalty. It required "knowing" violation of the act; was notably heavy (ten percent of net profits) without regard to the extent of the infraction; and the Department of Labor (not the Department of the Treasury) collected part of the tax. "A Court must be blind not to see that the so-called tax is imposed to stop the employment of children within the age limits prescribed. Its prohibitory and regulatory effect and purpose are palpable. All others can see and understand this," Chief Justice William Howard Taft wrote. "How can we properly shut our minds to it?"

On the same day, the Court unanimously struck down the Futures Trading Act of 1921 by which Congress had attempted to steer commodity futures trading to certain markets by enacting a prohibitory tax on trades in unregulated markets. Hill v. Wallace (1922). But reversing the order of the attempt to ban child labor, Congress then enacted a revised version of regulating commodity markets by using the commerce power, which the Court upheld in Board of Trade of City of Chicago v. Olsen (1923). 

The Court continued to scrutinize tax measures that Congress was attempting to use for regulatory rather than income purposes. In 1933, the Court voided the Agricultural Adjustment Act fo 1933, which provided subsidies to farmers from taxes on the processors of food and fiber. United States v. Butler (1936). Justice Owen Roberts' opinion focused on the agricultural processing tax as an attempt to achieve the unconstitutional end of regulating agricultural production, and "the expropriation of money from one group for the benefit of another," rather than for any public purpose. 

The Court also held the Bituminous coal Conservation Act of 1935 unconstitutional, which attempted to regulate coal production through heavy taxes that were rebated to producers who agreed to production limits and labor provisions. Carter v. Carter Coal Company (1936). Subsequently, Congress uncoupled the taxing provisions from the spending provisions in the Agricultural Adjustment Act and other acts, and never again did the Court hold that a purported tax was not a tax within the meaning of the Constitution.

Finally, in 2012 the Court made a curious inversion of the Bailey decision when it upheld the "individual mandate" of the 2010 Patient Protection and Affordable Care Act, which imposed a "penalty" on non-indigent persons who did not purchase health insurance. Members of Congress and President Barack Obama sedulously denied that the mandate was a tax, but the Court, speaking through Chief Justice John Roberts, upheld it as such: "the reasons the Court in Drexel Furniture held that was called a 'tax' there was a penalty support the conclusion that what is called a 'penalty' here may be viewed as a tax."

Paul Moreno

William and Berniece Grewcock Chair in Constitutional History, Hillsdale College

Robert E. Cushman, The National Police Power Under the Taxing Clause of the Constitution, 4 Minn. L. Rev. 247 (1920)

James Willard Hurst, A Legal History of Money in the United States, 1774-1970 (1973)

R. Alton Lee, A History of Regulatory Taxation (1973)

Edward Stanwood, American Tariff Controversies in the Nineteenth Century, 2 vols. (1903)

Frank W. Taussig, The Tariff History of the United States (8th ed. 1967)

Stephen B. Wood, Constitutional Politics in the Progressive Era: Child Labor and the Law (1968)

McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819)

Briscoe v. Bank of Kentucky, 36 U.S. (11 Pet.) 257 (1837)

Veazie Bank v. Fenno, 75 U.S. (8 Wall.) 533 (1869)

Collector v. Day, 78 U.S. (11 Wall.) 113 (1871)

Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, aff'd on reh'g, 158 U.S. 601 (1895)

In re Kollock, 165 U.S. 526 (1897)

Schollenberger v. Pennsylvania, 171 U.S. 1 (1898)

McCray v. United States, 195 U.S. 27 (1904)

Hammer v. Dagenhart, 247 U.S. 251 (1918)

Bailey v. Drexel Furniture Co., 259 U.S. 20 (1922)

Hill v. Wallace, 259 U.S. 44 (1922)

Bd. of Trade of the City of Chicago v. Olsen, 262 U.S. 1 (1923)

J.W. Hampton, Jr. & Co. v. United States, 276 U.S. 394 (1928)

United States v. Butler, 297 U.S. 1 (1936)

Carter v. Carter Coal Co., 298 U.S. 238 (1936)

Helvering v. Gerhardt, 304 U.S. 405 (1938)

Graves v. New York ex. rel. O'Keefe, 306 U.S. 466 (1939)

South Carolina v. Baker, 485 U.S. 505 (1988)

National Federation of Independent Business v. Sebelius, 132 S. Ct. 2566 (2012)