Committee on Economic Security (CES)

Volume VI. Social Insurance

A. Constitutional Issue


DISCUSSION OF CONSTITUTIONALITY OF POSSIBLE FEDERAL-STATE PLANS FOR UNEMPLOYMENT INSURANCE AND OLD AGE PENSIONS

by
Thomas H. Eliot
August 1934


This study is based on two allied schemes, which have been proposed and are interrelated. One is the plan used in the Wagner-Lewis bill, of a tax on employers with a credit against the tax of contributions within the state under a compulsory state law. It might be possible to extend this device to provide for old-age pension funds, but obviously it would be inequitable to compel industry to raise these funds which may benefit non-industrial aged people. It would not only be inequitable but unwise, for an excise tax, the incidence of which is largely shifted to the consumer, is in its nature an unsatisfactory method of taxation to be resorted to only when other considerations-here, the desire for employer contributions-are compelling.

Concerning pensions for aged persons who are now retired or who in the future grow old without having been employed in industry, the funds should be raised by taxation, preferably progressive taxation of incomes or inheritances. It may be worth discussing whether such action by the various states might not be stimulated by the United States levying a direct tax of a specific amount, apportioned among the states, with each state excused from making payment if by income or inheritance taxes it raises an equal amount for its non-industrial old-age pension fund.

The nature and validity of these two taxes, the indirect one on employer and the direct one for collection by the states, will be first discussed. The question of allowing credits against these taxes will then be taken up.

The Constitution's pertinent references to the federal taxing power are: Article I, Par. 2, C1. 3: "Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective members, etc."

Article I, Par. 8, Cl. l: "The Congress shall 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."

Article I, Par. 9, C1. 45: "No Capitation, or other direct tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken. No Tax or Duty shall be laid on Articles exported from any State."

Amendment XVI: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states and without regard to any census or enumeration."

Validity of the Proposed Tax on Employers

I. Breadth of United States' Taxing Power

(a) "The power of Congress to tax is a very extensive power. It is given in the Constitution, with only one exception and only two qualifications. Congress cannot tax exports, and it must impose direct taxes by the rule of apportionment, and indirect taxes by the rule of uniformity. Thus limited, and thus only, it reaches every subject, and may be exercised at discretion." Chase, C.J., in License Tax Cases, 72 U.S. (5 Wall) 462, 471.

(b) "The taxing power is given in the most comprehensive terms. The only limitations imposed are: That direct taxes, including the capitation tax, shall be apportioned; that duties, imposts, and excises shall be uniform; and that no duties shall be imposed upon articles exported from any State. With these exceptions, the exercise of the power is, in all respects, unfettered." Pacific Insurance Co. vs. Soule, 74 U.S. (7 Wall) 433, 446.

(c) "That the authority conferred upon Congress by Par. 8 of Article I ‘to lay and collect taxes, duties, imposts and excises' is exhaustive and embraces every conceivable power of taxation has never been questioned, or, if it has, has been so often authoritatively declared as to render it necessary only to state the doctrine." White, C.J., in Brushaber vs. Union Pac. R.R. Co. 240 U.S. 1, 12.

II. Whether the Proposed tax Must Be Apportioned Among the States.

Components of the proposed legislation have suggested that it levies a direct tax without apportionment. Roger Sherman Hoar of Milwaukee, author of a book called The Wisconsin System of Unemployment Insurance, wrote about the Wagner-Lewis bill: "Doubtless the bill does violate this provision (Article I, Par. 8, C1. 4 of the Constitution), for the same reason that the federal income tax violated it, prior to the adoption of XVI Amendment." It is difficult to understand the basis of this argument, and Mr. Hoar did not expand upon the subject.

There is every indication that in apportionment of direct taxes, the framers of the Constitution were referring to a very limited group of possible taxes. Hamilton said of taxes generally: "Those of the direct kind, which principally relate to land and buildings, may admit of a rule of apportionment.' 21 Federalist p.

Later, discussing internal taxes, he divided them into direct and indirect, and as direct taxes commends land-taxes and condemns poll-taxes. 36 Federalist p.

Mr. Justice Story said that under the term "direct taxes" "are included taxes on land and real property." Story, 1 Constitution Par. 950.

It was said by Chancellor Kent, 1 Com. 257 "The better opinion seemed to be that the direct taxes contemplated by the Constitution were only two: viz. a capitation or poll tax and a tax on land."

Chancellor Kent was commenting on the leading case of Hylton vs. United States, 3 Dall. 171, where the Supreme Court upheld a tax on the use of carriages, refuting the argument that because this was a tax on the use of property it was direct and should be apportioned.

Pollock vs. Farmers' Loan & Trust Co., 157 U.S. 429, 158 U.S. 601, held that insofar as it taxed income derived from property, an income tax was a direct tax on the property itself and hence unconstitutional unless apportioned. But a tax measured by a certain proportion of payrolls, or even immediately on payrolls, is not a direct tax on property. Payrolls are not income from property. They are the amounts paid out by an Employer to his employees. A tax measured by, or on, the transfer of this money is no more a tax on property than is a tax on the transfer of property by gift, which has been upheld as an indirect tax. Bromley vs. McCaughn 280 U.S. 124.

III. Nature of the Proposed Indirect Tax.

The proposed tax may be considered as (1) a tax on the act of paying employees, or (2) a tax on hiring, or (3) a tax on doing business through and/or with employees. The Bromley case, supra, seems to go so much farther than it would be necessary to go to uphold the first of these alternatives, which might be stated as the purpose of the tax. But in fact that is not the purpose, for to proceed on that theory would appear to have the effect of favoring wage reductions. And there is no square authority on the point. The second alternative is weak, for it is not each act of hiring that is taxed. The contract of hire, its duration and its renewals, are disregarded in measuring the tax by a percentage of the total payroll. The measure being unrelated to such a subject, the tax would fall with different weight upon different contracts of hire. The theory upon which the tax is based would seem rather to be the third alternative, making it an excise on the privilege of doing business through and/or with employees.

This raises the question of what is an excise tax. The definitions have varied: "Turning to Blackstone, Vol. 1, p. 318, we find an excise defined: ‘An inland imposition, paid sometimes upon the consumption of the commodity, or frequently upon the retail sale, which is the last stage before the consumption." This definition is accepted by Story in his Constitution of the United States, Par. 953. Cooley in his work on Taxation, page 3, defines it as ‘an inland impost levied upon articles of manufacture or sale, and also upon licenses to pursue certain trades, or to deal in certain commodities.'" Patton vs. Brady, 184, U.S. 608, 617.

"There is no occasion to attempt to define the words duties, imposts and excises to the limits of precise definition. We think that they were used comprehensively to cover customs and excise duties imposed on importation, consumption, manufacture and sale of certain commodities, privileges, particular business transactions, vocations, occupations and the like." Thomas vs. United States, 192, U.S. 370.

The present proposed tax, it may be noted, is likely to have its incidence shift so that it will virtually be a tax on consumption.

The holdings include many decisions sustaining excises, which are simply laid on the privilege of carrying on particular occupations: Patton vs. Brady, supra, on manufacturing goods. Spreckels Sugar Refining Co. vs. McClain, 192, U.S. 397, on refining sugar, oil, etc. Pacific Insurance Co. vs. Soule, supra, on writing insurance. Stratton's Independence vs. Hewbert, 231, U.S. 339, on
mining. McCary vs. United States, 195, U.S. 27, on manufacturing a certain kind of oleomargarine.

Excises laid on the privilege of doing business in a certain manner have likewise been upheld:
Nichol vs. Ames, 173, U.S. 509, on transacting business at the stockyards and the Board of Trade. Flint vs. Stone Tracy Company, 220, U.S. 107, on doing business through the corporate device.

And taxes on the disposing of property, and on practicing a profession or carrying on purely personal activities have been called valid excises: Scholey vs. Dew, 90, U.S. (23 Wall.) 331 on devolution of title to real estate. Knowlton vs. Moore, 178, U.S. 41, on transmission of
property by death. Bromley vs. McGaughn, supra, on making gifts in contemplation of death.
Springer vs. United States, 102, U.S. 586, on earning an income (by practicing as an attorney).
Hylton vs. United States, supra, on the use of carriages. Billings vs. United States, 252, U.S. 261, on the use of foreign-built yachts.

The tax that is here proposed would seem to be levied on the privilege of carrying on an occupation, in a particular way, and disposing of one's property (money) to pay employees who have been hired. The theory must rest upon the fact that in carrying on activities through and/or with employees, exercising the right to hire individuals, and paying them, the employer is availing himself of "privileges" under the law. Cf. Bromley vs. McGaughn, supra, where appellant vainly argued that to make a gift was a right and not a privilege, and hence not a fit subject for an excise; and also Brushaber vs. Union Pacific R.R. Co. supra, where Chief Justice White restates in no uncertain terms the right of the United States to levy income taxes, which are excises (Springer vs. United States, supra) except insofar as the taxation of income derived from property was held to be direct prior to the adoption of the Sixteenth Amendment, Pollock vs. Farmers' Loan and Trust Co., supra.

The mere fact that the regulation of carrying on intrastate business may be a subject exclusively for the states does not mean that the privilege of carrying on business is free from taxation by the United States. The License Tax Cases, 72, U.S. 462. Nicol vs. Ames, supra. Knowlton vs. Moore, supra.

IV. Uniformity and Classification.

The Constitutional requirement of uniformity is met in the suggested tax, for it relates solely to geographical uniformity. (Note: The tax must apply, with offset provisions, etc., to the District of Columbia.) Billings vs. United States, supra. Knowlton vs. Moore, supra. United States vs. Doremus, 249, U.S. 86, 93.

The exemption from the proposed tax of certain classes of employers may give rise to a question as to whether the taxable employers comprise a reasonable class for taxation purposes. There are plenty of decisions upholding the power of Congress to distinguish between classes of taxpayers. Thus, a difference between domestic and foreign corporations was upheld in Barclay & Co., vs. Edwards, 267, U.S. 442. Retailers, but not wholesalers, pain an excise tax on the privilege of selling cigarettes, and the tax was sustained. Cook vs. Marshall County, 196, U.S. 261. Instances of classification for taxation dependent on numbers or amounts are Quong Wing vs. Kirdendall, 223, U.S. 59 and Citizens' Telephone Co. vs. Fuller, 229 U.S. 322.

The Fifth Amendment has no equal protection clause, but the due process clause was invoked to invalidate the tax considered in Heiner vs. Donnan, 285, U.S. 312. Prior to that decision, it has not been supposed that the due process clause limited the United States' taxing power. It was said by Chief Justice White in Brushaber vs. Union Pacific R.R. Co., 240, U.S. 1, 24:
"So far as the due process clause of the Fifth Amendment is relied upon, it suffices to say that there is no basis for such reliance since it is equally well settled that such clause is not a limitation upon the taxing power conferred upon Congress by the Constitution; in other words, that the Constitution does not conflict with itself by conferring upon the one hand a taxing power and taking the same power away on the other by the limitations of the due process clause. Treat vs. White, 181, U.S. 264; Patton vs. Brady, 184, U.S. 608; McCray vs. United States, 195, U.S. 27, 61; Flint vs. Stone Tracy Co., supra; Billings vs. United States, 323, U.S. 261, 282."

And as Mr. Justice Stone points out in his dissenting opinion in Heiner vs. Donnan (285, U.S. at 338): "No tax has been held invalid under the Fifth Amendment because based on an improper classification, and it is significant that in the entire history, the only taxes held condemned by the Fifth Amendment were those deemed to be arbitrarily retroactive. See Nicols vs. Coolidge, 274, U.S. 531; Untemver vs. Anderson, 276, U.S. 440: Coolidge vs. Long, 282, U.S. 582."

To raise any serious question on this point it must at least be necessary to indicate very strongly that the tax is arbitrary and unreasonable. Further study as to classification may therefore be postponed until more is known about what the classification is to be.

Validity of the Proposed Direct Tax.

In view of the only tenuous relationship between dependent old age and the ordinary objects of excise taxation-to which reference has already been made-the feasibility of a direct tax by Congress as a means of inducing states to set up old-age pensions deserves consideration. The precise question, which has been the subject of this study, is to what extent constitutional objections exist to an act of Congress levying a direct tax on the states with a condition subsequent excusing a state from paying its quota, if it has raised a state pension fund equivalent in amount by a special state income or death tax act.

I. Nature of the Tax.

Although there has been but little judicial review of the revenue acts based on this power of Congress to levy direct taxes, Congress in the pre-Civil War era resorted several time to this mode of taxation. The first of these levies was made in 1798 (Act of July 14, 1798, 1 Stat. 597). This Act levied the sum of $2,000,000 and fixed a quota for each state, presumably based upon its population. Under its provisions the state were not made agents for collection. Instead, the Act provided for the appointment of collectors and assessors who should make an evaluation of all the real property and slaves in their respective states and fix the percentage of the tax with reference to the quota for that particular taxing district.

Similar laws were enacted by Congress in 1813 ($3,000,000, 3 Stat. 53), in 1815 ($6,000,000 annually, 3 Stat. 164), in 1816 ($3,000,000, 3 Stat. 255) 1861 ($2,000,000 annually) 12 Stat. 294). In all these instances the subject of direct taxation was real property, the country having been informed by the Supreme Court in Hylton vs. United States, supra, that direct taxes in contradiction to duties, excises and imposts, were real property taxes or capitation taxes.

That these successive Acts of Congress were constitutional, even including the direct taxes levied by the Act of 1861 which were subsequently refunded to the states, there is no doubt. Wailes vs. Smith, 76 Md. 479, 254 Atl. 922. Tax sales made pursuant to their provisions were upheld in De Treville vs. Smalls, 98, U.S. 527 and in Parker vs. Rule's Lessee, 9 Cranch 64, upon compliance with the formalities prescribed by the statute. The operation of the Act of 1861 was suspended by Congress the following year in regard to future levies, and was subsequently repealed in toto by the Act of June 30, 1864, 13 Stat. 303. It appears that 1861 was the last time that Congress resorted to this mode of taxation. It was abandoned not, apparently, because there was any doubt of its unconstitutionality, but because the rule of apportionment placed an unequal burden upon the taxpayers. When the formality prescribed was followed, states whose population were approximately equal but whose total real property valuations might differ greatly, nevertheless had to pay the same quota. For example, if State A and State B were equal in population, but State A was twice as wealthy in natural resources, property owners in that state would pay only one-half the ad valorem rate established in State B. This, rather than any doubt as to constitutionality, was probably the chief reason why Congress abandoned this system in favor of the income tax, for in Pollock vs. Farmers' Loan and Trust Co., 158, U.S. 601 at 634, Chief Justice Fuller said:
"The power to tax real and personal property and the income from both, there being an apportionment, is conceded."

Despite this repugnance of the rule of apportionment, however, to the modern scientific notion of taxation based upon ability to pay, such a tax as a means of encouraging the states to set up old-age pension funds has this merit: The quota from each state being determined by its population should be approximately related to the number of aged dependent persons within its borders.

II. Possibility of Collection by States.

A. Compulsory Delegation of Duty of Collection.

In order satisfactorily to utilize a credit, or offset device for the purpose of inducing state action, the United States should look to the states themselves for the amount of their respective quotas. Obviously a credit to the taxpayers allowing property owners to escape the federal tax in the amount they paid a special state income or inheritance tax, would be highly unfair. But a mere credit to the states themselves would not operate unjustly, and might stimulate state action of the desired sort. Therefore, it would be desirable to force the states to pay over their respective quotas to the United States Treasury. Whether this could be validly done, however, is by no means certain, although in the Pollock case, 158, U.S. at 632, Chief Justice Fuller intimated that this was the intent of the framers of the Constitution: "Cannot Congress, if the necessity exists, raise thirty, forty or fifty millions of dollars in support of the Government in addition to the revenue from duties, imposts and excises, apportion the tax of each State upon the population of a census and thus advise it of the payment which must be paid and proceed to assess that amount upon all the real and personal property and the incomes of all persons in the state and collect the same if the State does not in the meantime assume and pay its quota and collect the amount according to its own system and in its own way?" At another point, 158, U.S. at the 620, the Chief Justice said of the States, which were represented at the Constitutional Convention: "They retained the power of direct taxation and to that they looked as their chief resource, but even in respect of that, they granted the concurrent power, and if taxes were placed by both governments on the same subject the claim of the United States had preference. Therefore they did not grant the power of direct taxation without regard to their own conditions and resources as States, but they granted the power of apportioning direct taxation, a power just as efficacious to serve the needs of the general government, but securing to the States the opportunity to pay the amount apportioned and to recoup from their own citizens in the most feasible way and in harmony with their system of home government."

Suffice it to say, however, that there is no legislative precedent for holding the states primarily liable for their quota assessments. The first Act (Act of 1798) made no provision for the states themselves assuming their tax, but the Act of 1814, and the measures subsequent thereto permitted the states to assume their tax, allowing them a discount if the full quota was paid before the following May or October (3 Stat. 179). Such a provision was also included in the Act of 1861, but it was held that this clause did not make a state a debtor of the United States unless a state assumed the amount apportioned to it, United States, vs. Louisiana, 123, U.S. 32. This holding throws little light upon the constitutionality of creating liability on the part of the states by a direct tax, for the reasoning of the Court was based on a theory that the provisions of the act appointing officers to assess the property of the different freeholders and directing with minute detail the proceedings to be taken to enforce collection, were inconsistent with any theory of the obligation of the states to pay the sums levied. There is, however, a dictum by a state court to the effect that Congress has no authority to interfere with state taxes, either in amount, assessment, collection, or means of payment. Whiteaker vs. Haley, 2 Oregon 128 (1865).

B. Inducing States to Collect.

As has been noted, there is legislative precedent for inducing the states to collect the direct taxes assessed by Congress. The device employed by the Act of 1814 was to give the state, which paid its quota 15 per cent discount if paid by the 10th of February, and 10 per cent if paid before the 1st day of July the same year, provided (Section 7) that notice of intention to make such payment be given to the Secretary of the Treasury one month in advance, and in event the payment was made he was to give notice to the assessors and collectors to discontinue proceedings in such state. This device, with modifications, was subsequently reenacted by the 1815 and 1861 legislation.

Since the effect of these discounts should mean that a state would pay less than its representative quota, it might be argued that such provisions were repugnant to the constitutional requirement of apportionment. While no case has been found passing upon this precise point, the holding of the Supreme Court in De Treville vs. Smalls, supra, indicates that such an argument would be rejected. In that case, a delinquent taxpayer was assessed an additional 50 per cent penalty in accordance with the provisions of act, and protested that the principle of apportionment was violated thereby. He was told that this portion of the Act was valid since the act made a clear distinction between the tax and the discount, and that the latter was not offensive to the principle of apportionment since this feature was preserved by allowing every state an equal opportunity to avail itself of the privilege. The question remains as to whether a clause giving a state the option of paying its quota could be framed so as to compel the state to raise a fund equivalent in amount by resorting to special income and death taxes as sources of revenue. That portion of the above quoted dictum in the Pollock case which reads: "By securing to the States the opportunity to pay the amount apportioned and to recoup from its own citizens in the most feasible way and in harmony with its system of local self-government," indicates that the Supreme Court might frown upon a mandate of Congress prescribing a particular mode of state taxation. This is hardly conclusive when it is remembered that the Court in that instance was speaking of the possibility of Congress levying the direct tax on the states and leaving them to raise enough money to meet the allotment. It is obvious that there is a distinction between this situation and giving the states a privilege, which can be exercised in only a particular way.

Validity of the Credit Device in the Proposed Taxes

I. The Analogy of Florida vs. Melon, 27, U.S. 12, Section 301 of the Revenue Act of 1926 (44 Stat. 9, 69-70) imposed certain graduated inheritance taxes subject to the following provisions:
"The tax imposed by this section shall be credited with the amount of any estate, inheritance, legacy, or succession taxes actually paid to any state or territory or the District of Columbia, in respect of any property included in the gross estate. The credit allowed by this subdivision shall not exceed 80 per centum of the tax imposed by this section, and shall include only such taxes as were actually paid and credit therefor claimed within three years after the filing of the return required by section 304."

The constitutionality of that tax, with the offset provision, was upheld by the Supreme Court unanimously in Florida vs. Mellon, supra, with Mr. Justice Sutherland writing the opinion. This decision was reached in spite of the argument advanced on behalf of the State of Florida that the tax was levied not for the purpose of raising revenue but in order to compel certain actions to be taken by the states. The State's brief, as digested in the U.S. Reports, reads as follows:
"The Constitution never contemplated that Congress could pass an excise tax law which would depend upon affirmative action by the several States to make it uniform in force and effect. It requires that an excise tax law, within itself, shall be uniform throughout the United States."

"The estate-tax provisions of the Revenue Act of 1926 was passed to coerce States into adopting estate or inheritance tax laws. If Congress could rebate 80 per centum, it could just as legally rebate 100 per centum of the tax, and the State not imposing a tax of this kind would be the only State paying such a tax to the Federal Government."

"Each State is supposed to raise revenue from the sources and in the manner most advantageous to itself, its citizens, and its business. These necessary taxes are bound to come from the earnings of its citizens in some form or other. One state may deem it to its advantage to raise a large part of this revenue from death duties, thus relieving other classes of its property and business from the burden. Another may deem it to its advantage to raise its revenue from other sources than death duties. Yet each State imposes its burden on the earning power of its citizens. Florida raises her revenue from other sources than death duties and income taxes. A majority of the States have combined and intend to force Florida to pay death duties, or estate taxes, for the support of the United States Government, when these same death duties, or estates taxes paid by other States go to pay the expenses of State governments. The Constitution never contemplated such a condition. The Federal Government has no power by taxation or otherwise to control the internal affairs of the State in any matter not in conflict with the powers delegated to the United States, or inhibited to the State by the Constitution. Towns vs. White (7 Wall. 700). The estate-tax provision was not passed for the purpose of raising Federal revenue. It was directed primarily at the State of Florida. It was not passed to obtain revenue from the tax-paying estates in Florida, but to nullify a constitutional provision of the State. Pollack vs. Farmers Loan and Trust Co. (157 U.S. 420)

"In the present case we have an Act of Congress operative in Florida against the will of the State and is citizens, to which obedience must be yielded, if it is constitutional. That act directly seeks and requires the removal from the State of property to the extent of several millions of dollars per annum. Its removal will diminish the revenues of the state. The act directly discriminates in its effect against the State of Florida, as compared with other States."

In rejecting these arguments, the Court said: "The contention that the Federal tax is not uniform because other States impose inheritance taxes while Florida does not, is without merit. Congress cannot accommodate its legislation to the conflicting or dissimilar laws of the several States nor control the diverse conditions to be found in the various States, which necessarily work unlike results from the enforcement of the same tax. All that the Constitution (Art. 1, Sec. 8, C1. 1) requires is that the law shall be uniform in the sense that by its provisions the rule of liability shall b the same in all parts of the United States."

There are, of course, several details in which at least the proposed excise tax is not in line with the tax in Florida vs. Mellon. First, there is the desire to achieve uniformity among the states by bringing the three recalcitrant states into line; here the uniformity can be achieved only if at least forty-seven states act. Second, the pertinent section of the Revenue Act of 1926, if it was designated to effectuate any intent beyond uniformity, was intended only to promote a certain type of state taxation, and was not concerned with the use made by the states of the money thus raised. In the instant case, however, the purpose of Congress would go beyond that, seeking not only an assessment by the states upon employers but also a specific use of the resulting fund, under conditions initially prescribed by the Congress. In both cases, there would seem to be, if not an invasion of the power reserved to the states under the Tenth Amendment, at least an apparent eagerness to influence the states in their exercise of those powers. The distinction between the cases is small and perhaps unimportant. But, rephrasing it, the unwritten purpose of the 1926 Act was to force three state governments to impose certain taxes, so that those states would not attract property and large estates from other states. The unwritten purpose of the present proposed excise tax is to force 47 or 48 state governments to impose certain taxes (or exact certain contributions) and to use the funds thus raised in a specific way, so that all states would affirmatively develop social insurance systems, and no state would lose anything, in competition with other states, by doing so.

There remains the question as to whether the offset device could validly be applied to the direct tax. Or to cite the problem more concretely-could the United States Government credit against the assessment apportioned to a particular state the amount which that state had raised by special revenue acts of its own for a pension fund. Two possible arguments might be advanced against such a proposal. The first--the objection that Congress would thereby in effect be prescribing a mode of state taxation--has already been touched upon. The analogy to Florida vs. Mellon is again close. In that case the tax primarily fell upon the executor, just as in the proposed direct tax it would fall upon the real estate owner. The executor's immunity from federal taxation depended upon the existence of a certain kind of state revenue law-a death tax. Under the proposed act, the immunity of the freeholder depends similarly on state legislation. In either case of the states do not have the prescribed kind of taxing statutes the liability of both classes of taxpayers to the federal treasury is complete. Therefore, in both instances the operation of the federal statute would be to stir a state into diverting to its own coffers the stream of revenue from its inhabitants, which would otherwise flow to Washington. In both cases, the degree of compulsion upon the states is approximately the same. If Florida vs. Mellon is authority for the first situation (there may be some doubt as to whether that decision rested on the merits or upon purely jurisdictional grounds) it would seen to cover both. There is, of course, this difference: the revenue obtained by laws enacted under the whip of the Florida vs. Mellon statute would go into the general treasury of the state, whereas the returns from the revenue acts would have to be devoted to a specific purpose. This aspect of the case, however, has been discussed previously.

Another distinction might also be made between the two cases. In the Florida vs. Mellon situation, if the prescribed state statute exists, the benefit of the offset inures to the taxpayer, who would otherwise nave to pay the full federal assessment, viz., the executor or administrator. But that benefit depends upon that same individual paying the state tax.

Through the proposed offset to the direct tax, however, the exemption inuring to the real estate owner does not depend upon his paying a similar amount to the state. In fact, unless he has a taxable income, he will pay nothing in a state, which fulfills the requirements of the offset section. In other words, while the credit inures to one class of taxpayers, the corresponding burden falls upon another.

Upon analysis, this distinction is more apparent than real. It is true that both the Federal Estate Tax and the state death tax fall upon the same taxpayer, the administrator. But he is not the real party in interest. Like the state, which assumes to escape its quota by raising its own pension fund, he is merely the primary agent for collection. The burden of the tax ultimately falls upon someone else. The credit allowed by the statute involved in Florida vs. Mellon, (Sec. 301 (b) of the Revenue Act of 1926, Title 26, Sec. 1093 U. S. C.; 44 Stat. 70) is not only for sums exacted by state estate taxes, but also by "inheritance, legacy, or succession taxes actually paid to any State .... in respect Of any property included in the gross estate."

This section applied to both testate and intestate succession. And since most state death taxes take the form, of legacy or inheritance acts, the benefit of the offset will frequently redound to one class of legatees by virtue of a state tax whose burden fell upon another class. This may be illustrated by the two following examples:

Assume in both instances that there is a Federal estate tax of 10 per cent, a will giving the devolution of an estate of the net value of $1000,000, leaving a general legacy to A of $90,000 and the residue to B. In Florida where there are no inheritance taxes, the executor will pay the full $100,000 to the Federal government. This will leave $90,000 in the estate. Since general legacies take precedence the executor will pay the entire balance to A. B gets nothing.

But if the estate is being probated in a state, which has an inheritance tax, imposing a 10 per cent rate on legacies, the executor will deduct $9,000 from A's girt, and $1,000 from B's girt to pay the state tax. Since the amount of $10,000 has now been paid under a state inheritance tax law, the federal government will give the estate an 80 per cent credit. The executor will then liquidate the estate by paying A $81,000, paying the United States $2,000 out of B's share, and turning over the balance of the residue, or $7,000 to B.

II. Excise Taxes Upheld Despite Ulterior Purpose.

Usually the Supreme Court has refused to allow the validity of a tax to be questioned because Congress possessed another motive besides the desire to raise revenue. Thus Congress, through the use of the taxing power, has often advanced social or economic ends not properly within its sphere, viz: McCray vs. United States, 195 U.S. 27, a tax on oleomargarine whose chief purpose was to protect producers of real butter. Billings vs. United States, 232 U.S. 261, a tax on foreign-built yachts, to encourage a domestic yacht-building. License Tax Cases, supra, tax on dealers in liquors and lottery tickets, to discourage the increase of these dealings. United States vs. Doremus, 249 U.S. 86, tax on dealers in narcotic drugs, aiming to eliminate or regulate the narcotic trade. Veazie vs. Fenno, 8 Wall 533, tax on state bank notes intended to destroy circulation of such notes.

These were cases where the extension of federal authority was challenged. In a very recent case involving a heavy tax on butter substitutes levied by the State of Washington, it was argued that the tax was so excessive that it was obviously intended to destroy an existing industry and hence violated the due process clause. Mr. Justice Sutherland, speaking for a unanimous court, said that the due process clause could strike down a tax, but "Only if the Act be so arbitrary as to compel the conclusion that it does not involve an exertion of the taxing power, but constitutes, in substance and effect, the direct exertion of a different and forbidden power, as, for instance, the confiscation of property."

He then continued by considering the McCray and Veazie Bank cases, obviously assuming that violation Or due process and violation of the Tenth Amendment were equally valid reasons for assailing a tax, and that neither would be invoked by the Court except under special circumstances, the latter being judged according to similar standards whichever constitutional clause was invoked. The opinion ends:

"The statute here under review is in form plainly a taxing act, with nothing in its terms to suggest that it was intended to be anything else. It must be construed, and the intent and meaning of the Legislature ascertained, from the language of the act, and the words used therein are to be given their ordinary meaning unless the context shows that they are differently used. Child Labor Tax Case. If the tax imposed had been 5 cents instead of 15 cents per pound, no one, probably, would have thought of challenging its constitutionality or of suggesting that under the guise of imposing a tax another and different power had in fact been exercised. If a contrary conclusion were reached in the present case, it could rest upon nothing more than the single premise that the amount of the tax is so excessive that it will bring about the destruction of appellant's business, a premise which, standing alone, this court heretofore has uniformly rejected as furnishing no juridical ground for striking down a taxing act. As we have already seen, it was definitely rejected in the Veazie Bank Case, where it was urged that the tax was so excessive as to indicate a purpose on the part of Congress to destroy the franchise of the bank'; in the McCray Case, where it was said that the discretion of Congress could not be controlled or limited by the courts because the latter might deem the incidence of the tax oppressive or even destructive; in the Alaska Fish Case, from which we have just quoted; end in the Child Labor Tax Case, where it was held that the intent of Congress must be derived from the language Of the act, and that a prohibition instead of a tax was intended might not be inferred solely from its heavy burden.

"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. Those decisions, as the foregoing discussion discloses, rule the present case." A. Magnano & Co. vs. Hamilton-U.S. 54, S. Ct. 559,602.

From these cases, and Florida vs. Mellon, it would appear that the present bill would be upheld in spite of its ulterior motive. However, the courts have not always been willingly blind.

III. The Child Labor Tax Case, 259 U.S. 20 and Hill vs. Wallace, 259 U.S. 44.

These are the leading cases, indicating that the Supreme Court may occasionally go behind the face of a tax statute and decide that no account of the actual purpose of the act being beyond the scope of the United States Government's powers, the act is unconstitutional in spite of its appearance as a valid taxing measure. The cases seem to be distinguishable, however, from the present case, and are therefore important chiefly as showing that merely putting legislation into the form of a taxing act does not insure its validity.

In the Child Labor Tax Case as excise was levied in the privilege of employing children, but the amount of the tax seemed wholly unrelated to the act of employing children. A flat 10 per cent tax on net profits was imposed on every employer employing child labor. He may have employed one child or a thousand; his tax was the same. The measure of the tax was obviously unconnected with the subject of the tax it could not, even on its face, be called an excise, but was rather an act to penalize any employer who employed a child or children-who broke, in other words, an unwritten criminal law prohibiting the employment of children.

Similarly, the tax of 20 cents a bushel on all contracts for the sale of grain for future delivery except those made at places and under conditions approved by the Secretary of Agriculture, was in both form and substance a regulatory act, invading the reserved powers of the states, and was held invalid in Hill vs. Wallace. The Court based this decision squarely on the Child Labor Tax Case. Chief Justice Taft overlooked one possible distinction between the case, namely, that whereas in the Child Labor Tax Law Case subject and measure were so unrelated that it was easy to say that the tax was not a valid excise, in Hill vs. Wallace, the tax, taken by itself, appeared on its face to be a proper excise on the privilege of selling for future delivery. But the rest of the future Trading Act indicated a clear intention to regulate, with elaborate machinery set up for such regulation, and the excise tax was so high that it would have been virtually impossible to do business and escape federal regulation.

The core of these decisions is found in the language of the Chief Justice at 259 U.S. 67, where it is said that the Child Labor Tax and the Future Trading Act show on their faces:
"detailed regulation of a concern or business wholly within the police power of the State, with a heavy exaction to promote the efficacy of such regulation,"

A distinction may be urged between those cases and the present one, that there the purpose was detailed regulation of business within a state, and that here the purpose is merely to influence the states in their proper duties or regulation. If this amounts to an indirect regulation by the federal government, at least it makes the regulation motive less plain on the face of the statute, and it is only because the object of regulation was extremely obvious and the method Or attaining it clear and direct that the Child Labor Tax Cases and Hill vs. Wallace can be distinguished from the line of cases of which McCray vs. United States is an example.

IV. Justification of the Indirect Regulatory Purpose.

While the United States' power to discourage the sale of artificially-colored oleomargarine or the use Of foreign-built yachts has been upheld and its power to discourage child labor or future trading denied, in none Of those cases was it trying to take or stimulate action in accordance with the original concept of the division of powers under the Constitution. It was effectuating regulation, or seeking to do so, in the field reserved to the states. But in the present proposed bill, even if an indirect intention to regulate does appear, that intention is an appendage to the fundamental purpose of restoring at least a part of the Constitution's original design.

The fundamental purpose is to provide for the unemployed and the aged, and to see to it that provision is made for them by the states. Relief, unless we adopt a new interpretation of the welfare clause, is a function delegated to the federal government not by the Constitution, but by necessity. The states, reserving the power to care for their own destitute, found it impossible to exercise that power. To prevent suffering end starvation, the United States Government came to the rescue. Obviously it was justified in disregarding constitutional niceties. But it is equally clear that it is justified in seeking to rid itself of this duty that has been thrust upon it, and to encourage the states to resume the functions which should be theirs.

Insofar as a specific form of relief is prescribed, and insofar as the contemplated system is designed to cover certain risks regardless of need, this argument is weakened. It might be well, nevertheless, to obtain the facts and figures relating to local, state and federal relief, not only in this depression but at previous times, and also the amounts no: being paid out in state old age pensions as compared to the amounts of federal relief going to the dependent aged. Further study on this point, factual and theoretical, may lead to a strong argument supporting a frank statement of the real intention of the bill.

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