Tax and Spending Powers Flashcards
McCray v. US (1904)
Background
* Oleomargarine, an alternative to butter, begins to get popular and booms in sale. Dairy indistry (butter makers), get mad and complain to Congress.
* In response, Congress places an excise tax on margarine. Uncolored margarine gets a 0.25c tax and colored margarine gets a 10c tax.
* McCray buys re-sell margarine that was not taxed and he gets fined. McCray challenges the fine and says it was a regulation of production
Issue
* Is the margarine tax a valid excise tax? [Yes]
Reasoning
* This is clearly an excise tax. The actual question is “whether a valid excise tax is being used for an unlawful purpose”
* Congress’s motives for taxation aren’t relevant. They don’t need to provide a purpose. The power to tax is merely one of Congress’s enumerated powers.
* Additionally, if a tax is within the scope of Congress’s enumerated power, then the court can’t declare it void based on the perceived negative consequences or because the tax is believed to be “too high”
* If you don’t like the way Congress is using their powers, then fix it through the political process and not the courts.
* Also, the 10A and 5A doesn’t restrict Congress’s power since Congress has the right to choose what objects to tax. Also, Congress isn’t infringing on any fundamental rights while taxing a butter substitute.
* Overall, Congress has the power to impose taxes, and the courts shouldn’t interfere unless Congress is clearly acting outside its constitutional authority or violating fundamental rights, which, in this case, they argue is not happening.
Bailey v. Drexel Furniture (1922)
Background
* Congress tries to regulate child labor with their taxation powers.
* Place a 10% tax on all profits from companies that use child labor
* Drexel Furniture, a company using child labor, challenges
Issue
* Is the tax on child labor a valid excise tax? [No]
Reasoning
* This case involves a tax acting outside of Congress’s enumerated powers. aka. infringing on the 10A
* In order to figure if a tax violates the 10A, have to look at the intent of the law! Was this a tax or penalty?
* Clearly this is a penalty. It’s obvious that Congress is trying to regulate child labor.
* If taxes can be used as a penalty, then it gives Congress the power to destroy the states and invalidate the 10A
* Overall, not a valid excise tax.
US v. Butler (1936)
Background
* During the Great Depression, there was the overproduction of agricultural products.
* Congress passed the Agricultural Adjustment Act where one of the programs was to pay/provide subsidies to farmers to have them not produce.
* Originally, the gov’t would rent the land to prevent production. But that was too expensive so the government made it so that the subsidies were funded through a tax imposed on agricultural processors.
* Butler refuses to pay the tax and he challenges it.
Issue
* Does the AAA exceed the tax power of Congress? [yes]
Reasoning
* It is always difficult to overturn Congress - but it doesn’t matter what powers Congress SHOULD have, it is about what they ACTUALLY have
* The interstate commerce argument for using tax power automatically fails since the agricultural production is a purely local activity.
* But, maybe the general welfare argument of using the tax power can be used. The tax power can be used broadly after all, and not just on enumerated powers.
* however, the limitations on the “broad” aspect of the power is the potential infringement of other rights. In this case, it is infringement on the 10A, aka. state rights.
* The regulation of purely local, agricultural production is a state power, and the tax is trying to regulate that.
* Takeaway: While Congress has the power to tax and spend for the general welfare, it cannot use the power to regulate matters that are reserved to the states.
Other Opinions
* J1 (dissent): AAA is clearly a tax, which Congress is allowed to do under their broad powers. If you don’t like how Congress is using their tax power, then change it through the political process. Also, this tax is valid and does not actually regulate production or manufacturing. The tax itself isn’t the things that is regulating production, it is the way the tax/money is used that can regulate production and manufacturing.
Steward Machine v. Davis (1937)
Background
* In 1935, after the Great Depression, the Social Security Act (SSA) was passed. It had 3 main parts: senior benefits, benefits for dependents, and unemployment benefits.
* To pay for these benefits, the SSA put an excise tax on businesses with more than 8 employees. However, these businesses can get a tax credit if they contribute to the acceptable state program.
* Steward Machine pays the tax ($46), but demands a refund because they claim that the tax was unconstitutional
Issue
* Is the SSA within the tax power of Congress? [Yes]
Reasoning
* In this case, several objections were made
* Objection 1: Is this a uniform excise tax [yes it was as every business is treated the same under the law. As long as there is no geographical differences, it is okay]
* Objection 2: This is a violation of the DP Clause of 5A [No, it is not. Steward Machine argued that the exemption of some businesses from paying the tax was arbitrary and was unfair discirmination. This is not the case since the exemptions were based on policy considerations and practical convenience]
* Objection 3: This tax is coercing the states. [No, the tax is not. In fact, it is more of a cooperation incentive. The tax is meant to address severe economic and social problems across the nation that both the state and federal level needs to address. The tax encourages the state and federal level to cooperate and address a shared issue]
* Objection 4: The states will be destroyed by this tax. [No, they will not. Congress isn’t asking the states to give up their roles. They are just asking them to cooperate with the federal government]
Other Opinions
Four Justices: The SSA will destroy the states.
South Dakota v. Dole (1987)
Background
* In 1984, Congress makes federal highway funds contingnet on the drinking age of 21. This was to prevent underage drinking and drunk driving.
* South Dakota passes a law that allows 19 year olds and older to buy 3.2% beer. Their argument is that the 21st Amendment allows them to set the drinking ages and that the federal government was using it’s taxing and spending powers unconstitutionally.
Issue
* Does the witholding of highway finds unconstitutionally create federal alcohol regulations? [No]
Reasoning
* The federal government is authorized to spend money, and not just not on enumerated powers. This is because the tax and spending clause is broad and it includes Congress’s ability to place conditions on federal funds.
* But, there are some limitations to conditions on federal funds: it must be for general welfare, there must be clear conditions, and it has to be related to national concerns.
* For this case, all of the above was fullfilled. The purpose of the conditions was to promote safe interstate travel and to promote the general welfare of people. The conditions were clear.
* As long as there is no coercion (the states have a choice), which there wasn’t, then the conditions are constitutional. Mild encouragement through tax and spending clause is okay.
* Takeaway: Congress has the authority to place conditions on funds and use them to encourage states to cooperate with them (as long as it doesn’t cross the line to coercion)
Other Opinions
* J1 (dissent): There are no limits on congressional power if this is okay. The power to spend for general welfare is not unlimited because one of the limitations (that was established in Butler) was to not interfere with roles and powers that were left to the states. This is clearly interfering with the states.
* J2 (dissent): The drinking age is solely up to the states because of the 21A.
NFIB v. Sebelius (2012)
Background
* 2 controversial parts of the ACA
* Controversy 1: “Shared Responsibility Payment” –> if Americans, whose employers did not provide insurance, did not pay for the minimum health-insurance coverage required by the “individual mandate” portion of the ACA, then they would have to pay a “responsibility payment” to the IRS (kinda like a penalty fee)
* Controversy 2: Medicaid Expansion –> ACA wanted to expand medicaid care to ppl whose incomes fell 133% below poverty line. Federal gov’t would pay 90% of costs, and states weren’t required to help pay, but non-particpating states would be given 0 federal medicaid dollars.
* These 2 parts of ACA were challenged.
Issue
* Is the responsibility payment within congressional power to tax and spend? [yes]
* Can Congress withhold all the Medicaid money for non-participating states? [No]
Reasoning
* Part 1: Responsibility Payment
* The responsibility payment is basically a tax that is allowed under Congress’s broad tax and spending authority. It is a payment that is given to IRS when you are filing yearly taxes.
* Although at first glance, it looks like a penalty, but the Court ruled that it is not because in order for a tax to be a penalty, then it has to (1) impose a heavy burden on the state, (2) apply only to a specific group Congress wants to punish, and (3) be enforced by a non-IRS group.
* This wasn’t the case here, as the burden to pay the responsibility payment is cheaper than health insurance, the payment would be required on a broad group of individuals, and the payment is being made to the IRS.
* Overall, this is just a nudge to influence individual behavior. Congress can tax people for doing nothing even if they can’t compel activity via the commerce clause.
* Part 2: Medicaid Expansion
* The 100% withholding of federal funds to non-particpating states is coercion.
* The states are left with no choice, esp when they are reliant on these funds. Also, there is just too much money at stake.
* Yes, Congress can place conditions on funds, but witholding ALL funds is too burdensome and coercive.
Other Opinions
* J1 (concur): I agree with the responsibility payment decision and that it is okay, but I argue that the Medicaid Expansion is also okay too. Congress can incentivize states all the time, and it is being used to spend on general welfare.
* J2 (dissent): This tax is clearly a penalty. If a tax is placed for violating a law, then its a penalty.
