Purposes of Taxation
SECTION 8. Clause 1. The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.
Regulation by Taxation
Congress has broad discretion in methods of taxation, and may, under the Necessary and Proper Clause, regulate business within a state in order to tax it more effectively. For instance, the Court has sustained regulations regarding the packaging of taxed articles such as tobacco581 and oleomargarine,582 which were ostensibly designed to prevent fraud in the collection of the tax. It has also upheld measures taxing drugs583 and firearms,584 which prescribed rigorous restrictions under which such articles could be sold or transferred, and imposed heavy penalties upon persons dealing with them in any other way. These regulations were sustained as conducive to the efficient collection of the tax though they clearly transcended in some respects this ground of justification.585
Even where a tax is coupled with regulations that have no possible relation to the efficient collection of the tax, and no other purpose appears on the face of the statute, the Court has refused to inquire into the motives of the lawmakers and has sustained the tax despite its prohibitive proportions.586 “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 tax statute necessarily fall because it touches on activities which Congress might not otherwise regulate. As was pointed out in Magnano Co. v. Hamilton, 292 U. S. 40, 47 (1934): ‘From the beginning of our government, the courts have sustained taxes although imposed with the collateral intent of effecting ulterior ends which, considered apart, were beyond the constitutional power of the lawmakers to realize by legislation directly addressed to their accomplishment.’”587
In some cases, however, the structure of a taxation scheme is such as to suggest that the Congress actually intends to regulate under a separate constitutional authority. As long as such separate authority is available to Congress, the imposition of a tax as a penalty for such regulation is valid.588 On the other hand, where Congress had levied a heavy tax upon liquor dealers who operated in violation of state law, the Court held that this tax was unenforceable after the repeal of the Eighteenth Amendment, because the National Government had no power to impose an additional penalty for infractions of state law.589
Discerning whether Congress, in passing a regulation that purports to be under the taxing authority, intends to exercise a separate constitutional authority, requires evaluation of a number of factors.590 Under the Child Labor Tax Case,591 decided in 1922, the Court, which had previously rejected a federal prohibition of child labor laws as being outside of the Commerce Clause,592 also rejected a tax on companies using such labor. First, the Court noted that the law in question set forth a specific and detailed regulatory scheme—including the ages, industry, and number of hours allowed— establishing when employment of underage youth would incur taxation. Second, the taxation in question functioned as a penalty, in that it was set at one-tenth of net income per year, regardless of the nature or degree of the infraction. Third, the tax had a scienter requirement, so that the employer had to know that the child was below a specified age in order to incur taxation. Fourth, the statute made the businesses subject to inspection by officers of the Secretary of Labor, positions not traditionally charged with the enforcement and collection of taxes.
More recently, in National Federation of Independent Business (NFIB) v. Sebelius,593 the Court upheld as an exercise of the taxing authority a requirement under the Patient Protection and Affordable Care Act (ACA)594 that mandates certain individuals to maintain a minimum level of health insurance. Failure to purchase health insurance may subject a person to a monetary penalty, administered through the tax code. Chief Justice Roberts, in a majority holding,595 used a functional approach in evaluating the authority for the requirement, so that the use of the term “penalty” in the ACA596 to describe the enforcement mechanism for the individual mandate was found not to be determinative. The Court also found that the latter three factors identified in the Child Labor Tax Case (penal intent, scienter, enforcement by regulatory agency) were not present with respect to the individual mandate. Unlike the child labor taxation scheme, the tax level under the ACA is established based on traditional tax variables such as taxable income, number of dependents and joint filing status; there is no requirement of a knowing violation; and the tax is collected by the Internal Revenue Service.
The majority, however, did not appear to have addressed the first Child Labor Case factor: whether the ACA set forth a specific and detailed course of conduct and imposed an exaction on those who transgress its standard. The Court did note that the law did not bear characteristics of a regulatory penalty, as the cost of the tax was far outweighed by the cost of obtaining health insurance, making the payment of the tax a reasonable financial decision.597 Still, the majority’s discussion suggests that, for constitutional purposes, the prominence of regulatory motivations for tax provisions may become less important than the nature of the exactions imposed and the manner in which they are administered.
In those areas where activities are subject to both taxation and regulation, the taxing authority is not limited from reaching activities otherwise prohibited. For instance, Congress may tax an activity, such as the business of accepting wagers,598 regardless of whether it is permitted or prohibited by the laws of the United States599 or by those of a state.600 However, Congress’s authority to regulate using the taxing power “reaches only existing subjects.”601 Thus, so-called federal “licenses,” so far as they relate to topics outside Congress’s constitutional authority, merely express, “the purpose of the government not to interfere . . . with the trade nominally licensed, if the required taxes are paid.” In those instance, whether the “licensed” trade shall be permitted at all is a question that remains a decision by the state.602
Promotion of Business: Protective Tariff
The earliest examples of taxes levied with a view to promoting desired economic objectives in addition to raising revenue were, of course, import duties. The second statute adopted by the first Congress was a tariff act reciting that “it is necessary for the support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufactures, that duties be laid on goods, wares and merchandise imported.”603 After being debated for nearly a century and a half, the constitutionality of protective tariffs was finally settled by the Supreme Court’s unanimous decision in J. W. Hampton, Jr. & Co. v. United States, which rejected a contention “that the only power of Congress in the levying of customs duties is to create revenue, and that it is unconstitutional to frame the customs duties with any other view than that of revenue raising.”604
Chief Justice Taft, writing for the Court in Hampton, observed that the first Congress in 1789 had enacted a protective tariff. “In this first Congress sat many members of the Constitutional Convention of 1787. This Court has repeatedly laid down the principle that a contemporaneous legislative exposition of the Constitution when the founders of our Government and framers of our Constitution were actively participating in public affairs, long acquiesced in, fixes the construction to be given its provisions. . . . The enactment and enforcement of a number of customs revenue laws drawn with a motive of maintaining a system of protection, since the revenue law of 1789, are matters of history. . . . Whatever we may think of the wisdom of a protection policy, we cannot hold it unconstitutional. So long as the motive of Congress and the effect of its legislative action are to secure revenue for the benefit of the general government, the existence of other motives in the selection of the subjects of taxes cannot invalidate Congressional action.”605
581 Felsenheld v. United States, 186 U.S. 126 (1902).
582 In re Kollock, 165 U.S. 526 (1897).
583 United States v. Doremus, 249 U.S. 86 (1919). Cf. Nigro v. United States, 276 U.S. 332 (1928).
584 Sonzinsky v. United States, 300 U.S. 506 (1937).
585 Without casting doubt on the ability of Congress to regulate or punish through its taxing power, the Court has overruled Kahriger,Lewis,Doremus,Sonzinsky, and similar cases on the ground that the statutory scheme compelled self-incrimination through registration. Marchetti v. United States, 390 U.S. 39 (1968); Grosso v. United States, 390 U.S. 62 (1968); Haynes v. United States, 390 U.S. 85 (1968); Leary v. United States, 395 U.S. 6 (1969).
586 McCray v. United States, 195 U.S. 27 (1904).
587 United States v. Sanchez, 340 U.S. 42, 45 (1950). See also Sonzinsky v. United States, 300 U.S. 506, 513–14 (1937).
588 Sunshine Anthracite Coal Co. v. Adkins, 310 U.S. 381, 393 (1940). See also Head Money Cases, 112 U.S. 580, 596 (1884).
589 United States v. Constantine, 296 U.S. 287 (1935).
590 Hill v. Wallace, 259 U.S. 44 (1922); Helwig v. United States, 188 U.S. 605 (1903).
591 Bailey v. Drexel Furniture Co. (Child Labor Tax Case), 259 U.S. 20 (1922).
592 Hammer v. Dagenhart, 247 U.S. 251 (1918).
593 567 U.S. ___, No. 11–393, slip op. (2012).
594 Pub. L. 111–148, as amended.
595 For this portion of the opinion, Justice Roberts was joined by Justices Ginsburg, Breyer, Sotomayor and Kagan.
596 26 U.S.C. §§ 5000A(c), (g)(1).
597 567 U.S. ___, No. 11–393, slip op. at 35–36 (2012).
598 United States v. Kahriger, 345 U.S. 22 (1953). Dissenting, Justice Frankfurter maintained that this was not a bona fide tax, but was essentially an effort to check, if not stamp out, professional gambling, an activity left to the responsibility of the States. Justices Jackson and Douglas noted partial agreement with this conclusion. See also Lewis v. United States, 348 U.S. 419 (1955).
599 United States v. Yuginovich, 256 U.S. 450 (1921).
600 United States v. Constantine, 296 U.S. 287, 293 (1935).
601 License Tax Cases, 72 U.S. (5 Wall.) 462, 471 (1867).
602 License Tax Cases, 72 U.S. at 471 (1867).
603 1 Stat. 24 (1789).
604 276 U.S. 394, 411 (1928).
605 276 U.S. at 412.