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

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

3. 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)

4. 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

5. 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

6. 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)

7. 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

8. 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

9. 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?

10. 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

11. 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

12. 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

13. 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

14. 16th Amendment
By 1909, Congress votes overwhelmingly in favor of an income tax amendment to overturn this case
Passes the House , 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

15. United States v. United States Shoe Corporation (1998)
Background
Congress imposed the Harbor Maintenance Tax in 1986
It put a tax of 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

16. 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

17. 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

18. 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

19. Next lecture
We move to Intergovernmental Tax Immunity
Pages