Taxing and Spending Powers (Update)

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TAXING AND SPENDING POWERS (Update)

The distinction between real and sham taxes (so-called taxes that, in substance, are really punishments) was used in bailey v. drexel furniture co. (1922) (also known as the Child Labor Tax Case) and United States v. Constantine (1935) to vindicate the principle of enumerated federal powers. The Supreme Court applied this distinction again in Department of Revenue of Montana v. Kurth Ranch (1994) to invalidate a state's assessment of a tax on possession of prohibited drugs after the possessor had been separately prosecuted for the crime of possession. Holding the "tax" really a penalty, the Court held that assessing it after the possession had already been the subject of criminal prosecution violated the guarantee against double jeopardy.

To mark the always debatable boundary between real and sham taxes, the Court in Kurth Ranch employed some of the same factors used in Constantine and the Child Labor Tax Case. Montana's drug possession "tax" was extremely high in amount (a factor not determinative by itself), and the "tax" was conditioned on the possession's being a crime. This was different from "mixed-motive taxes," imposed not only to raise revenue but also to discourage the activity taxed. With cigarette taxes, for example, deterrence of smoking might be a goal, but that goal is moderated not only by the desire to raise revenue but also by other objectives, such as permitting satisfaction of consumer demand and avoiding severe detriment to tobacco industry employment. The Court said, however, that "when the taxed activity is completely forbidden" the evident motivation is not so mixed, and the so-called tax ceases to be justifiable as a revenue measure because "the legitimate revenue-raising purpose that might support such a tax could be equally well served by increasing the fine imposed upon conviction." When a government "taxes" an activity that is completely unlawful, the "tax" is not a revenue device, but rather a penalty to enforce the prohibition.

The Court in Kurth Ranch also deemed it significant that the "tax" was for possessing property that could not be possessed lawfully and that had been confiscated and destroyed before the tax was assessed. "A tax on 'possession' of goods that no longer exist and that the taxpayer never lawfully possessed has an unmistakable punitive character," the Court said.

In the past, one could remark that this distinction between real taxes and "taxes" that amount to regulatory penalties is "of minor importance," given Congress's legislative power over interstate commerce. However, the Court began reemphasizing the federal government's enumerated powers limitations in united states v. lÓpez (1995). If this emphasis continues, the distinction between real and sham taxes might become important for federal laws again. Even though Kurth Ranch involved only state legislation, it is notable for reinforcing the Justice robert h. jackson description of a tax in United States v. Kahriger (1953) as a "good-faith revenue measure," in contrast to what Justice felix frankfurter characterized in the same case as regulation "merely … wrapped … in the verbal celophane of a revenue measure."

Spending power doctrine has continued to mature as the ramifications of alexander hamilton's classic view of that power have gradually been recognized. For example, in pennhurst state school v. halderman (1981) the Court observed that "legislation enacted pursuant to the spending power is much in the nature of a contract: as consideration for federal funds, the States [or other grantees] agree to comply with federally imposed conditions." Spending conditions thus are enforcible not as legislation (by virtue of some lawmaking power), but rather as contracts (by virtue of consideration and consent). Hamilton understood the very practical point that Congress may spend even for things beyond the scope of its powers to legislate: Because "money talks," federal payments (and promises made in exchange for federal payments) can strongly influence things that the federal government has no power to govern. james madison's mistake was his failure to distinguish between governing behavior and inducing it by payment.

Even the 1937 decisions upholding the social security act, including steward machine company v. davis (1937) and helvering v. davis (1937), repeated Madison's mistake by assuming that in order to uphold social welfare spending, relief of the elderly or unemployed (for example) must be considered an "end legitimately national," one "within the scope of national policy and power." Not until the following decade did the Court fully grasp the point of Hamilton's spending power thesis: The Justices held in Oklahoma v. United States Civil Service Commission (1947) that by grant condition Congress could influence something outside the scope of any national power, a grantee's policy regarding its own employees.

In the Pennhurst case, the contract character of spending conditions led the Court to conclude that in order to be enforcible, conditions must be clear enough in advance "that we can fairly say that the State [or other grantee] could make an informed choice." Where the condition is clear, however, the recipient's acceptance makes it contractually binding regardless of whether Congress would have constitutional power to impose it legislatively. Thus in South Dakota v. Dole (1987) the Supreme Court upheld a condition curtailing highway funds to states refusing to raise the drinking age, "[e]ven if Congress might lack the power to impose a national minimum drinking age directly." However, the Court has explained that because their force derives from contract rather than legislative competence, spending conditions are enforcible only against "those who are in a position to accept or reject those obligations as a part of the decision whether or not to 'receive' federal funds."

Persisting confusion about the spending power can produce anomalous results. For example, because they depend on contract rather than legislative power, spending conditions cannot evoke the supremacy clause; yet as late as 1988 the Court was uncritically assuming that conditions in grants to individuals and local governments could trump laws of states that were not contracting parties.

Similarly, sometimes a "germaneness" restriction on spending conditions has been asserted. Following her dissenting opinion in South Dakota v. Dole, Justice sandra day o'connor wrote for six Justices in new york v. united states (1992) that "conditions must … bear some relationship to the purpose of the federal spending." If this statement means that conditions must relate to some enumerated power, it reiterates Madison's error. On the other hand, if this germaneness rule means that every condition must pertain to an objective of the particular spending program involved (even though, as Hamilton understood, spending objectives need not pertain to any enumerated power), it is supported neither by constitutional text nor by logic or precedent, and it imperils conditions like those against racial discrimination and sex discrimination, which Congress has attached to all spending programs regardless of program objectives. Calls for germaneness disclose a spending power doctrine that is not fully coherent.

One perennial source of confusion is misattributing the spending power to the taxing clause (which contains the "general welfare" phrase). Congress may spend not only tax proceeds, but also the proceeds of fines, sales, gifts, and investments. Money is property, and power to dispose of federal property resides in the legislative branch by virtue of the Constitution's Article IV. This power, however, is a prerogative of ownership, not of sovereignty; the history of land grants has much to contribute toward full understanding of the spending power.

David E. Engdahl
(2000)

(see also: Child Labor Tax Act.)