STEWARD MACHINE COMPANY v. DAVIS 301 U.S. 548 (1937)

Plaintiff, an employer, challenged the 1935 social security act unemployment compensation provisions, which imposed a payroll tax on employers and directed that the tax receipts be paid to the general revenue. To offset part of this tax, the act granted employers a credit for taxes paid to a state unemployment fund conforming to federal benefit and solvency requirements. One such requirement was that state funds be held for safekeeping by the secretary of the treasury and invested in federal government securities. Plaintiff invoked united states v. butler (1936), which had invalidated agricultural adjustment act price support provisions that enabled the secretary of agriculture to contract with farmers to reduce agricultural production in exchange for payments funded by a federal tax levied on agricultural commodity processing. Butler had generally addressed the scope of Congress's power "to lay and collect taxes … to … provide … for the general welfare of the United States." While ostensibly rejecting the narrowest reading of the clause, originally proposed by james madison, that the taxation power could be exercised only to carry out specifically enumerated powers, and purporting to adopt a broader, though undefined, interpretation of the taxing and spending power, Butler nevertheless had treated the tenth amendment as a limitation on the federal taxation power. In Steward Machine Co., plaintiff argued that the unemployment taxation scheme, like the agricultural price support provisions, exceeded congressional powers because it infringed the Tenth Amendment's reservation to the states of power not delegated by the Constitution to the United States.

The unemployment compensation scheme was sustained, 5–4. Justice benjamin n. cardozo, writing for the majority, distinguished United States v. Butler on two grounds: the unemployment tax proceeds were to be used for the "general welfare" because they were not earmarked for any special group; and the unemployment compensation plan did not infringe state prerogatives because state participation in this cooperative federal-state program was entirely voluntary. The Court described unemployment as a "problem … national in area and dimensions." Many states wished to develop unemployment compensation programs but feared economic competition from those states without such plans. Hence a federal tax was necessary to enable states to accomplish their general welfare goals.

In its permissive, though vague, interpretation of the term "general welfare," Steward Machine Co. and its companion case, helvering v. davis (1937), seem to repudiate the United States v. Butler view that Congress, in exercising its power to tax for the general welfare, is required by the Tenth Amendment to eschew regulation of matters historically controlled by the states. Steward Machine Co. is also noteworthy for its sympathetic appraisal of joint federal-state welfare ventures. Justice Cardozo amply demonstrated that the competitive pressures of a national economy make it increasingly difficult for the states to perform traditional welfare functions without the national uniformity made possible by federal assistance and regulation.

Grace Ganz Blumberg
(1986)