Lecture 34 The Power to Tax and Spend Part 1: Constitutional Authority and Taxation of Exports

This lecture We will cover the beginning of this chapter Overview Constitutional Authority Taxation of Exports

Cases this Chapter Pollock v. Farmers’ Loan & Trust Company (1895) United States v. United States Shoe Corporation (1998) South Carolina v. Baker (1988) Davis v. Michigan Department of the Treasury (1989) McCray v. United States (1904) Bailey v. Drexel Furniture Company (1922) United States v. Butler (1936) Steward Machine Company v. Davis (1937) South Dakota v. Dole (1987) National Federation of Independent Business v. Sebelius (2012) Michelin Tire Corporation v. Wages (1976) Complete Auto Transit v. Brady (1977) Quill Corporation v. North Dakota (1992) Oregon Waste Systems, Inc. v. Department of Environmental Quality of Oregon (1994)

This Chapter Constitutional Power to Tax and Spend Direct Taxes and the Power to Tax Income Taxation of Exports Intergovernmental Tax Immunity Taxation as a Regulatory Authority Taxing and Spending for the General Welfare Restrictions on the Revenue Power of States

The Power to Tax and Spend- Constitutional Authority The General Grant Article I, Section 8, Clause 1 Congress shall have the power to lay and collect taxes, duties, imposts and excises to pay the debts and provide for the common defense and general welfare of the United States; Limitations but all duties, imposts, and excises shall be uniform through the United States Article I, Section 9, Clause 4 No capitation or other direct, tax shall be laid, unless in proportion to the Census or Enumeration herein before directed to be taken Article 1, Section 9, Clause 5 No tax or duty shall be laid on articled exported from any state Article 1, Section 10, Clause No state shall, without the consent of Congress, lay any imposts or duties on imports or exports

Direct Taxation What a direct tax allocation consists of was difficult It had to be apportioned on states on the basis of population Rural states had back this so they did not get a disproportionate share of taxes on it The 3/5 clause also acted to reduce taxes on the South Finding a definition of direct taxation Hylton v. United States (1796) Challenge was to a carriage tax applied to the same rate on carriages nationwide It was challenged because it had not been apportioned by population- but excise? Hamilton convinces the Court it was an excise tax He also noted how difficult appointing taxes on the basis of income would be Only two taxes fell into this category of direct- land (property) or capitation (head)

The Income Tax The Civil War changes taxation In order to keep from high deficit spending, Congress taxed individual incomes Springer v. United States (1881) Only head taxes and property taxes counted as direct taxation Income taxes are not one of those, so not a direct tax Congress repeals the income tax in 1872, and relies mainly on tariffs Congress enacts the Wilson-Gorman Tariff Act of 1894 It set a 2% tax on all corporate profits and individual income There was also a $4,000 exemption of the first income This meant the tax was paid mainly by the wealthy

Pollock v. Farmers’ Loan & Trust Company (1895) Background Arguments against the law Taxing income from state and city bonds was an unconstitutional encroachment on state’s power to borrow money A tax of income from real property was a direct tax, thus must be apportioned by income These taxes were so integral to the whole act, the whole law should be struck down This case was heard twice- a Justice was ill the first time Tax on state and municipal bonds unconstitutional This was a direct tax, so it had to be apportioned by population But they tied on whether the entire law was to be struck down

Pollock v. Farmers’ Loan & Trust Co.- II More background The Court had to decide the third question on rehearing (and the others again) The United States had to intervene to support the law this time It was a battle between the wealthy and business against reformers Jackson thought he would be the deciding vote to uphold the law, but Justice Shiras switched his vote from the first case Question: Was the income tax a direct tax in violation if Article 1, Section 9?

Pollock v. Farmers’ Loan & Trust Co.- III Arguments For Pollock (strike down the law) Taxes on property or the income from a property are direct taxes to be apportioned These are not apportioned on the basis of population Taxes on the state and local bonds is a tax on states These provision are so integral that the whole statute must fall together For Farmers Loan & Trust and the United States (uphold the law) An income tax is an excise tax, not a direct tax Tax on income, even if derived from property is not a tax on land, thus not a direct tax It taxes total income of an individual and does not target bond income If one part is struck down the rest should remain in place

Pollock v. Farmers’ Loan & Trust Co.- IV A 5-4 opinion by Chief Justice Fuller One thing to notice- does this fit with the Industrial Revolution cases under the Commerce Clause? The government’s position loses on all three points The provision on bonds was unanimous on other grounds No direct tax should be levied except in proportion to its population This is part of the compromise to get the Constitution This is a direct tax, not a duty Income derived from real estate and real property are direct taxes

Pollock v. Farmers’ Loan & Trust Co.- V More from the Chief Justice Last is the question of whether the entire bill fails If independent provision the constitutional part fails However, if the different parts “are so mutually connected with and dependent upon each other, as to warrant a belief that the legislature intended them as a whole, and that, if all could not be carried into effect, the legislature would not pass the residue independently, and some parts are unconstitutional, all the provisions are dependent, conditional or connected, must fall with them” The scheme must be considered as a whole, not in parts The whole bill could not survive without these key provisions

Pollock v. Farmers’ Loan & Trust Co.- V Justice, Harlan, dissenting Joined by Brown, Jackson and White, each also dissented separately A tax on income, even if derived from real property has never been regarded as a direct tax on property before Hylton and Springer would say the opposite He said this reestablishes the helplessness the federal government found itself in with the Articles of Confederation by denying the government income It would again be dependent on states It would be difficult to apportion the taxes among states He suggests a constitutional amendment to overturn this decision

16th Amendment By 1909, Congress votes overwhelmingly in favor of an income tax amendment to overturn this case Passes the House 318-14, and 77-0 in the Senate It got the necessary ¾ vote from the states by 1913 Southern states were initially the first to ratify The language is rather straightforward The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration Congress adopts a 1% income tax in excess of $3,000 for an individual and $4,000 for a couple Brushaber v. Union Pacific Railroad (1916)- The Court upholds the law

United States v. United States Shoe Corporation (1998) Background Congress imposed the Harbor Maintenance Tax in 1986 It put a tax of 0.125 of all commercial cargo value when it went into a port Exporters, importers, and domestic shippers were responsible for paying it It would go into a fund to pay for harbor maintenance and projects The company here paid the tax, but then protested it was unconstitutional to the part of it taxing exports The government said it was a user fee

United States v. United States Shoe Corporation- II Question: Did this law violate the export clause by taxing an export? Arguments For the United States (uphold law) This is essentially a fee for the use of American ports This is to compensate for benefits supplied thus not against the export clause All pay the fee regardless of who they are Monies go into a trust fund only to be used for purposes of maintenance of ports

United States v. United States Shoe Corporation- III Arguments For the U.S. Shoe Corp. (overturn law) There are no exceptions to the prohibitions under the Export Clause This fee would have to be extremely narrow no greater than necessary to compensate for the services rendered Ad valorem assessments are taxes not fees because they are based on the value of the cargo, not the size of the ship It is not remotely related to the exporter’s use of harbor services

United States v. United States Shoe Corporation- II Justice Ginsburg writes for a unanimous Court The Export Clause rules out taxes, but not user fees- U.S. v. IBM (1996) The fact that it taxes the amount of goods, not the fair approximation of services, facilities, or benefits makes this a tax, not a fee The government argues this is more of a toll The Court had upheld ad valorem taxes in several cases before, but they did not involve the Export Clause Pace v. Burgess (1876) involved a stamp costing 25 cents per package of tobacco Two elements had to be proved to make it a duty The charge bore no connection with the value The fee was not excessive Here the charge was based on value, so it was essentially a tax

Next lecture We move to Intergovernmental Tax Immunity Pages 533-548