Taxing and Spending Powers

views updated

TAXING AND SPENDING POWERS

A principal weakness of the articles of confederation was that Congress had no power of taxation. It could request the states to contribute their fair shares to the national treasury but it had no power to collect when, as often happened, the states did not pay. Hence, the first grant of power to Congress in the Constitution was to "have 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; but all Duties, Imposts and Excises shall be uniform throughout the United States." The Constitution also imposed two other limitations. Congress could not tax exports nor lay a "Capitation, or other direct, Tax" unless "in Proportion to the Census or Enumeration herein before directed to be taken."

The direct limitations on taxing power pose few problems. Congress does not impose capitation or property taxes, which would be direct taxes and require apportionment among the states in accordance with population. Other taxes must be uniform—which means that the same subject or activity must be taxed at the same rate wherever it is found. Congress, like the states, cannot tax exports to foreign countries.

More difficult problems have risen because taxes not only raise revenue but also regulate. A tax on liquor may be designed to raise money but also to discourage consumption. A deduction for interest in computing income tax encourages home ownership. A tax may be high enough to virtually stop the production and sale of a particular product. Before the Civil War the federal government derived most of its revenue from the customs and in many years had no internal revenue beyond that. But beginning with the Civil War, Congress expanded the scope of federal taxation at a time when the Supreme Court had fairly restrictive views as to congressional powers to regulate local activities. The question became how far Congress could use taxation to achieve policies that were forbidden to it through direct regulation.

When Congress imposed a ten percent tax on local banknotes for the purpose of achieving a federal government monopoly in the issuing of currency, the Court in veazie bank v. fenno (1869) indicated that the tax was constitutional but said that in any event no regulatory problem was presented; Congress did have an independent monetary power, and the tax was merely a means of implementing it. Thirty-five years later the Court faced the problem more directly. Congress had imposed a ten cents per pound tax on oleomargarine that was colored and only one-quarter cent per pound if it was white. The Court in mccray v. united states (1904) said that even though Congress did not have the power to pass a statute forbidding the sale of colored oleomargarine, it could still tax it and the courts would not interfere merely on the grounds that the tax was too high. And the Court also held that Congress could impose a tax on distributing narcotic drugs and include in the same statute regulations as to how such drugs were to be distributed. The Court in united states v. doremus (1919) said that a tax was not invalid just because it had regulatory as well as taxation purposes and that the regulations attached to the tax were constitutional as facilitating the collection of the tax.

But in the Child Labor Tax Case (1922) the Court concluded that a tax might really be a regulation and thus invalid. A federal statute prohibiting interstate transportation of goods made by child labor had been held to exceed Congress's power under the commerce clause in hammer v. dagenhart (1918). So Congress imposed a tax of ten percent of the net profits for the year for any manufacturing business that employed children within certain age limits. Here, the court said, the challenge was not merely that the tax was too high. Rather, Congress had imposed a regulation and used the tax as a penalty for violation. "[A] court must be blind not to see that the so-called tax is imposed to stop the employment of children within the age limits prescribed. Its prohibitory and regulatory effect and purpose are palpable." In United States v. Constantine (1935) the Court similarly held invalid a special tax of $1,000 upon anyone dealing in liquor in a state or locality where such dealing was illegal. The Court said that the law clearly was not a tax but rather a penalty for violating state law.

In a series of later cases, however, the Court upheld the taxes. A heavy tax on sale of special weapons such as sawed-off shotguns was upheld in sonzinsky v. united states (1937). In United States v. Sanchez (1950) and United States v. Kahriger (1953) the Court upheld taxes on narcotics and gambling in which taxpayers were required to register with the federal government, even though that registration would make it easier for the states to enforce their gambling and narcotics laws. In Sanchez the Court said: "It is beyond serious question that a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed.… The principle applies even though the revenue obtained is obviously negligible,…or the revenue purpose of the tax may be secondary.…Nor does a statute necessarily fall because it touches on activities which Congress might not otherwise regulate.… These principles are controlling here. The tax in question is a legitimate exercise of the taxing power despite its collateral regulatory purpose and effect." Later, in marchetti v. united states (1968), the Court eliminated the use of the taxing power tocompel violators of state laws to register with the federal government on the grounds that it violates the right against self-incrimination. And since the power of the federal government to regulate has received such major expansion in modern times, there is little need to use the taxing power to expand federal powers. Even though the Child Labor Tax Case may still be good law in defining when a tax ceases to be a tax and becomes a regulation, it is of minor importance. Congress will almost always have power to regulate and can cast its regulation in the form of a tax.

The spending power has also raised constitutional questions. Before the early 1900s, Congress spent money chiefly to defray its routine powers of government. It made a few grants to the states to encourage the construction of roads and universities, granting the money outright with no matching requirements or federal supervision. In 1902 the grants amounted to only seven million dollars per year. Soon, however, Congress began to see that grants could be used to encourage states to take action meeting federal standards even with respect to parts of the economy then thought to be outside congressional power.

The sheppard-towner maternity act of 1921 provided for federal grants to states that would agree to spend the money for reducing maternal and infant mortality. Massachusetts, which had refused the grants, and Frothingham, a citizen and taxpayer, brought suits. The Supreme Court in Massachusetts v. Mellon and frothingham v. mellon (1923) held that neither had standing to litigate the issue. Massachusetts had no real interest at stake, for it had refused the grant. Frothingham had no standing as a taxpayer because her interest in the funds spent was miniscule and shared with all other federal taxpayers. The result of this suit was to make most government spending programs impossible to challenge in court.

As a result, it was not until 1936 that a major question as to the scope of the spending power was settled. Congress has power to levy taxes "to pay the Debts and provide for the common Defence and general Welfare of the United States." What does the general welfare clause mean? james madison had argued that money could be spent only to carry out the other powers given to Congress—that there was not, in essence, any additional power granted by the general welfare language. alexander hamilton had said that the clause granted a substantive power to tax and spend so long as it was for the general welfare of the United States.

The Court finally had an opportunity to decide the issue in 1936 in united states v. butler. The agriculture adjustment act of 1933 had provided for agreements between the secretary of agriculture and farmers to reduce acreage in exchange for benefit payments. The money for the payments came from a tax levied on the processors of the commodity concerned with all of the tax proceeds directed to that purpose. The Court held first that the processors upon whom the tax was levied did have standing to challenge the expenditure, because they paid a substantial tax earmarked for that expenditure. Next, the Court adopted the Hamilton position that the power to spend might be exercised for the general welfare and was not limited to the other direct grants of legislative power. Finally, the Court said it did not have to decide whether the expenditure in this case was for the general welfare, because this law was a regulation, not an expenditure, and invalid as going beyond congressional regulatory power.

The Butler interpretation of the spending power, however, soon became the basis to uphold expenditures. In helvering v. davis (1937) the Court upheld the social security act, concluding that expenditures for old age pensions were expenditures for the general welfare. And in buckley v. valeo (1976) the Court held that expenditures of funds to finance campaigns of presidential candidates was valid as an expenditure for the general welfare. (See campaign financing.) The Court said: "Congress was legislating for the "general welfare'—to reduce the deleterious influence of large contributions on our political process, to facilitate communication by candidates with the electorate, and to free candidates from the rigors of fundraising.… Congress has concluded that the means are "necessary and proper' to promote the general welfare, and we thus decline to find this legislation without the grant of power in Art. I, © 8."

The use of grants to states as a means of federal regulation has proceeded apace, almost totally free of challenge by the courts. Only where the challenge is based on the establishment of religion has the Court recognized standing to challenge by taxpayers. And that holding, in flast v. cohen (1968), is not absolute, as was shown by valley forge christian college v. americans united for separation of church and state (1982). The seven million dollars of such grants in 1902 had risen to seven billion in 1960 and to over one hundred billion in the early 1980s—about one-third percent of state and local receipts from their own sources. Again, however, the constitutional issues have lost their former importance. If the expenditure can be said to be for the general welfare, the intrusion of the federal government into a local area does not matter. Because congressional powers to spend for the general welfare and to regulate under the commerce clause are so broad, there is little prospect of a successful constitutional challenge to federal spending.

Both as to taxation and as to expenditure, no major constitutional problems remain. Congress has such broad regulatory powers that it no longer needs to attempt to get around power limitations by using taxation and expenditure. These methods of regulation are used today as convenient devices for accomplishing goals within congressional power. The major limitations on them are political. If the increase in federal grants to states appears to be slowing and if some recent Presidents have talked about a New Federalism policy to decrease such federal spending, the reasons lie not in constitutional limitations but in governmental policy.

Edward L. Barrett, Jr.
(1986)

(see also: Direct and Indirect Taxes; Economic Regulation; Import-Export Clause; Impoundment of Funds; National Police Power.)