GRAVES v. NEW YORK EX REL. O'KEEFE 306 U.S. 466 (1939)

For practical purposes the decision in Graves by a 7–2 Supreme Court toppled an elaborate structure of intergovernmental tax immunities, which the Justices had erected from assumptions about the federal system. The right of self-preservation immunized the United States and the states from taxation by competing governments within the system. Obviously the United States cannot tax the Commonwealth of Massachusetts or the state capitol in Sacramento, California, any more than the states can tax a congressional investigation. From a sensible assumption first advanced in mcculloch v. maryland (1819) protecting a national instrumentality from state taxation, the Court made progressively sillier decisions that hampered the taxing power of the state and national governments and allowed many commercial activities to escape taxation. collector v. day (1871) made the salaries of state judges exempt from federal income taxes. In time the Court held unconstitutional a federal tax on the income of a private corporation leasing state land, and a federal sales tax on a motorcycle sold by a private corporation to city police.

By 1939 the Court had already begun to retrench its doctrines of reciprocal tax immunities enjoyed by "government" instrumentalities. In Graves, Justice harlan fiske stone faced the question whether a state tax on the salary of an employee of a federal instrumentality created by Congress violated the principles of national supremacy. Stone observed that the tax was imposed on an employee's salary, not on the instrumentality itself. Because the Constitution did not mandate tax immunity and such immunity should attach only to a government instrumentality, the Court not only sustained the tax but also overruled Day and several related cases. A state may tax the income of officers or employees of the national government, and vice versa. In New York v. United States (1946), the Court upheld a national tax on soft drinks bottled by the state. To the extent that government functions cannot be be taxed by another government the core doctrine from McCulloch endures.

Leonard W. Levy
(1986)