1. Lecture 35 The Power to Tax and Spend
Part 2: Intergovernmental Immunity
and Taxation as a Regulatory Power

2. This lecture We cover Intergovernmental Immunity
Taxation as a Regulatory Power
Pages

3. The Tax Immunity Doctrine
Establishing the Tax Immunity Doctrine
McCulloch v. Maryland (1819)
It also dealt with Congress power to tax
Maryland had sought to tax the national bank
Marshall ruled against it as unconstitutional because it would interfere with the federal government’s operations if states could tax it
Collector v. Day (1871)
Could the federal government tax states?
Day was a probate judge in Massachusetts, and said his income could not be taxed
The Court rules 8-1 in his favor
They basically say it is a two way street
If States cannot tax income of federal officeholders, the federal government could not do the same to state officials

4. Erosion of Tax Immunity
The previous case was part of dual federalism and states right
Helvering v. Gerhardt (1938) overruled Dobbins v. Commissioners of Erie County (1842) and permitted states to tax income of federal officials
Graves v. New York ex rel. O’Keefe (1939) overrules Collector v. Day and allowed the federal government to tax the income of state officials
Income is allowed to be taxed, no matter the source of it
Many other cases allows more taxation by states and federal governments on each other
Alabama v. King and Boozer (1941)- Court allows state taxation on a federal contractor in a cost-plus contract, which essentially was a transfer of the tax onto the federal government

5. South Carolina v. Baker (1988)
Background
Involved a federal law that allowed for the removal of the federal exemption for taxation of state and municipal bonds unless the bonds were in registered form
Registered bonds were still exempt this was an attempt against tax evasion
This case was heard in original jurisdiction
Question:
Did this law violate the tax immunity doctrine?
There was also a Tenth Amendment question

6. South Carolina v. Baker- II
Arguments
For South Carolina (overturn the law)
The government lacks authority violation of 10th Amendment and tax immunity
Allowing this tax will require higher interest rates, thus increase costs for states
The Court should uphold Pollock v. Farmers’ Loan and Trust Company and follow it
For Baker, the Secretary of the Treasury (uphold the law)
The Court should overrule Pollock v. Farmers’ Loan and Trust Company
This law only targets the form of the bonds
The tax is only applied to those doing business with the state
Any administrative costs associated with issuing registered bonds are incidental

7. South Carolina v. Baker- III
Justice Brennan rules for a 7-1 Court
Concurrences by Rehnquist, Scalia, and Stevens
The rational for Pollack has long been repudiated by modern precedent
The Court directly overrules it here
This is not a tax on the states it only taxes bondholders
The Court also directly overrules Pollack
This is a non-discriminatory federal tax
There is no constitutional entitlement for state bondholders to be exempt from federal taxes or states to issue bonds with lower interest rates
The intent of the law was that all bond be in registered form registered bonds still exempt from federal taxes
Also not a 10th Amendment violation

8. South Carolina v. Baker- IV
Justice O’Connor, dissenting
Kennedy did not participate
She would not have overruled Pollack
States are up to Congress as to whether their bonds are tax exempt
She notes how dependent states and localities are on bonds
This will cause them to have to raise interest rates to compensate
It may strike at the heart of state and local governmental activities
She finds a 10th Amendment violation as well

9. Davis v. Michigan Department of the Treasury (1989)
Background
Michigan allowed for a state tax exemption for retirement issued by it or in the state
All other retirement income, including federal or from another state could be taxed
Davis was a federal retiree and challenged the law, and wanted a refund for the state taxes he had paid on his federal retirement income
Davis was a lawyer himself and personally argued the case before the Court
The United States joined with him
Question
Did Michigan violate federal law when they taxed his federal income while it exempted similar income from state and local sources in Michigan?

10. Davis v. Michigan Department of the Treasury- II
Arguments
For Davis (overturn Michigan’s law)
Federal law states that they can tax compensation of federal employees so long as the taxes do not discriminate based on the source
Michigan taxes income from federal retirement programs but not those paid by state ones
This violates intergovernmental tax immunity as well because it treats federal and state retirement income differently

11. Davis v. Michigan Department of the Treasury- III
Arguments
For the Michigan Department of Revenue (uphold the Michigan scheme)
Intergovernmental tax immunity is based on the Supremacy clause and only protects governments, and not individuals from taxation by other governments
There is no evidence it places no burden the federal retirement system
The law only mentions employees, and thus ends when he retired
The state has an interest exempting state employee pensions for fostering state public employment

12. Davis v. Michigan Department of the Treasury- IV
Justice Kennedy rules for a 8-1 majority
Case law has changed over time to allow time
Helvering allowed for the taxation of non-discriminatory taxes on state employee income
The main question after this case and Graves was whether it was discriminatory
Congress passes the Public Salary Tax Act of 1939
It consented to state and local taxation of federal employee income so long as it did not discriminate against the employee based on the source of the pay
Michigan acknowledges the law is discriminatory, but says it does not apply to retirees
They argue it is needed to help it get qualified employees
Michigan’s benefits are much less but for others this may be the opposite
The Court finds this was discriminatory solely on the basis of the pay

13. Davis v. Michigan Department of the Treasury- V
Justice Stevens, dissenting
He would rule in favor of Michigan
It is important for Michigan deciding how to run its own affairs
It treats nearly all Michigan residents the same
But it does exempt its own state retirees
Federal retirees are treated the same as all but these state retirees and workers
Aftermath
Davis got a refund, as did other federal retirees in 14 other states
States lost a lot of money, but had to make the choice of taxing all government retirement income, or taxing all of it

14. Taxation for Regulatory Purposes
Can Congress tax for non-revenue purposes?
The answer is largely yes
Originally, most revenue was raised tariffs
J.W. Hampton, Jr. & Company v. United States (1928)
The law allowed the President to adjust tariffs by as much as 50% for trade policy
The existence of other motives cannot in the selection will not invalidate
Veazie Bank v. Fenno (1869)
A bank tax was upheld to regulate more than it was to raise revenue
It taxed bank notes issued by state banks by 10%
It was designed to weaken state banks to help the new national bank

15. McCray v. United States (1904)
Background
This case involves margarine
As it grew in popularity due to being cheaper, the dairy industry wanted protections
The Oleomargarine Act of 1886, and amended in 1902 placed a ¼ percent tax on uncolored margarine and 10 cents per pound on yellow margarine
The margarine manufactures had to pay the tax, thus raising prices so as to encourage more butter sales
McCray was assessed a $50 penalty for purchasing untaxed margarine for sale
McCray challenges this at the trial court level and loses

16. McCray v. United States- II
Question: Could Congress enact this under its Taxation power?
Arguments
For McCray
It puts an unreasonable burden on this particular product
The Congress has not authority to place a regulatory tax
This tax discriminates against margarine in favor of butter the goal is not to gain revenue, but to destroy margarine in favor of butter
For the United States
This is essentially an excise tax on a product
There are no restraints to the power to levy excise taxes except geographic uniformity

17. McCray v. United States- III
Justice White writes for a 6-3 Court
The power to tax is essentially unrestrained
To question the motives of Congress for passing a tax would act to usurp its power
So long as it does not conflict with any other constitutional provision
This is also under police powers as to stop people from being thought to believe that this product might really be butter
The judiciary is without authority to invalidate an act of Congress under the taxation clause, even if it is a bad law
He makes a judicial restraint argument here

18. Bailey v. Drexel Furniture Co. (1922)
Background
After Hammer v. Dagenhart (1916) disallowed regulation of child labor under the commerce clause, they tried doing it by imposing a tax
The Child Labor Tax Act of 1919 imposed a 10% excise tax on the net profits of any company that had used child labor, defined largely as the Keating-Owen Act
Drexel was found to have violated the act and assessed $6, for the tax year
He paid the amount under protest and sued for a refund
Question:
Did Congress violate the 10th Amendment by trying to regulate child labor, which had been found to be a state concern?

19. Bailey v. Drexel Furniture Company- II
Arguments
For Bailey (uphold the law)
So long as the tax is uniform, it is allowed under the power to tax
Congress should not look to the motive of the law
Federal laws should not be invalidated where there is unquestioned power to act
For the Drexel Furniture (overturn the law)
Child labor is a subject which the federal government is without authority (Dagenhart)
Congress is using the power to tax to regulate an issue reserved for states
This is little more than a criminal statute

20. Bailey v. Drexel Furniture Company- III
Chief Justice Taft writes for an 8-1 majority
He says the law must be construed by its intent of the Congress
The purpose is clear to prevent child labor
The goal was to take over state functions they could not do so in other ways
“To give magic to the word tax would be to break down all the constitutional limitations of the powers of Congress and completely wipe out the sovereignty of states”
This was merely a punishment disguised as a tax
Since regulation of child labor was held to belong to states and out of the realm of the national government under the commerce clause, it fails here as well

21. Subsequent Cases Congress proposed a constitutional amendment
However it failed, but states passed their own laws
United States v. Darby (1941) then gave Congress this authority
Congress had the ability to impose excise taxes for other bad productions
Narcotics
Marijuana
Professional gamblers
However, the power to tax cannot be used to make some give up another right
United States v. Karhriger (1953)- self incrimination
Marchetti v. United States (1968)- Procedures that lead to self-incrimination

22. Next lecture Taxing and Spending for the General Welfare Pages 548-569
Note: This may be broken in half