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Steward MacHine Co. v. Davis
Citations: 301 U.S. 548; 57 S. Ct. 883; 81 L. Ed. 1279; 1937 U.S. LEXIS 1199Docket: 837
Court: Supreme Court of the United States; May 24, 1937; Federal Supreme Court; Federal Appellate Court
The Court, led by Mr. Justice Cardozo, addressed the validity of a tax imposed on employers with eight or more employees under the Social Security Act. An Alabama corporation, which paid the tax, sought a refund, claiming the statute conflicted with the U.S. Constitution. The District Court dismissed the complaint, a decision upheld by the Fifth Circuit Court of Appeals, aligning with rulings from Massachusetts, California, and Alabama, but conflicting with a dissenting opinion from the First Circuit. The Court granted certiorari due to the constitutional issues raised. The relevant portions of the Social Security Act include Titles IX and III. Title IX, titled "Tax on Employers of Eight or More," mandates that most employers pay an excise tax based on a percentage of total wages, starting from 1936 at 1% and increasing to 2% in 1937 and 3% thereafter. Employers must have eight or more employees to qualify under the act, and certain employment types are excluded. The tax proceeds go to the U.S. Treasury without specific earmarking, although credits against the tax are permitted for contributions to state unemployment funds, subject to limits and certification by the Social Security Board. Title III, challenged for its validity, provides for federal grants to states to assist in administering unemployment compensation laws, with appropriations set at a maximum of $4 million for the fiscal year ending June 30, 1936, and $49 million for each subsequent fiscal year. No current appropriation is made, with the title only enabling future appropriations. For 1936, $2,250,000 of the $4,000,000 authorized was appropriated, and for the subsequent year, $29,000,000 of the $49,000,000 authorized was appropriated. These appropriations were not specifically drawn from the employment tax but from any Treasury funds. Additional sections outline payment methods to states and conditions that must be met for the Social Security Board's certification of payments to the Secretary of the Treasury, ensuring that federal funds are used solely for legitimate unemployment compensation purposes. Challenges to the statute arise from various assertions: the tax is not an excise, lacks uniformity, has arbitrary exceptions violating the Fifth Amendment, serves no revenue purpose, and unlawfully invades state powers. Critics argue that employment is a right, not a privilege, and thus not subject to an excise tax. However, historical precedents illustrate that excise taxes have been levied on various services and activities beyond mere commodities, including a 1695 act in England taxing marriages, births, and deaths, as well as a 1777 duty on employers for male servants. These examples undermine the argument that excise taxes are exclusively tied to commodities, indicating a broader application of such taxes throughout history. Colonial understanding of taxation emphasized that employment, viewed as a natural right, is subject to taxation alongside less significant rights. Taxation is applicable to both business operations and property, as business activities are legitimate subjects for tax powers. The authority to tax encompasses the entirety of business relations and activities, with Congress having comprehensive power to impose taxes, duties, imposts, and excises. The distinction between these forms of taxation is less critical than the assurance that they fall under the scope of sovereign powers. Historical interpretations confirm that terms like "duties, imposts, and excises" cover a wide range of business transactions and activities. Claims suggesting Congress lacks the authority to tax privileges established by state law have been dismissed. Congress can impose taxes on property transmission and corporate franchises, regardless of state origin. The power to tax activities of common right is maintained at both state and federal levels. The excise tax must adhere to the principle of uniformity across geographical regions in the U.S., not based on intrinsic value, and the statute’s exemptions do not violate the Fifth Amendment, as it excludes employers with fewer than eight employees. Exemptions from taxation do not apply to agricultural labor, domestic service in private homes, or certain less significant categories. The petitioner argues that these restrictions constitute arbitrary discrimination, undermining the tax's validity. The Fifth Amendment lacks an equal protection clause, unlike the Fourteenth Amendment; however, states can create varied tax measures without strict uniformity, including different rates for property and business operations. This flexibility also extends to Congress, which operates under fewer constraints. The classifications and exemptions in the contested statute are supported by policy considerations and practical convenience, and would be upheld even if challenged under the Fourteenth Amendment, as seen in recent Alabama cases. The act of Congress is valid concerning its exemptions, even if discrimination were severe enough to be deemed confiscatory under the Fifth Amendment. The excise tax does not violate the Tenth Amendment, as its proceeds are allocated like public funds, with no presumption of misapplication. The petitioner claims an ulterior, unlawful aim within the act, particularly criticizing the 90 percent credit. To succeed in challenging the statute, the petitioner must demonstrate that the revenue provisions cannot stand alone and that the combination of tax and credit acts as coercion against state autonomy. The second proposition is addressed first, acknowledging the historical context of unemployment during the Great Depression, where states struggled to provide necessary relief, indicating the national scale of the issue. Urgent national assistance was necessary to prevent starvation among the unemployed and their dependents. Between January 1, 1933, and July 1, 1936, states incurred obligations of approximately $689 million for emergency relief, while local governments added about $775 million. During the same period, the federal government incurred about $2.9 billion in obligations, significantly exceeding those of state and local agencies combined. For the fiscal years 1934 to 1936, the federal expenditure for public works and unemployment relief reached approximately $8.68 billion. The principle of parens patriae justifies the government's role in planning for disaster mitigation due to fiscal, economic, social, and moral reasons. The constitutionality of the adopted remedial measures is questioned, with critics arguing that the statute coerces state legislatures into enacting unemployment compensation laws under economic pressure from the federal government. Proponents contend that the statute fosters cooperation to address a shared crisis. Prior to federal action, unemployment compensation was largely unimplemented, with Wisconsin being the first state to adopt legislation in 1931. By 1936, a total of thirty-six states had enacted such laws, though many states had hesitated due to fears of economic disadvantage. This hesitation led to a failure to contribute adequately to the national relief effort, resulting in a disproportionate burden on federal resources. The Social Security Act aims to create a collaborative approach among public agencies to tackle unemployment. The expectation is that federal taxes will support state efforts, alleviating pressures on local resources. Congress retained the discretion to allocate funds as deemed necessary, while also considering the fairness of taxing localities that contribute to relief efforts. The statute in question does not coerce taxpayers or the state; rather, it reflects the state's voluntary enactment of its unemployment law without duress. The petitioner’s argument conflates motive with coercion, as every tax inherently has a regulatory effect and can present economic obstacles compared to untaxed activities. Similarly, tax rebates conditioned on specific conduct represent inducements rather than coercion. The distinction between persuasion and undue influence remains essential, particularly in the relationship between state and federal law. Alabama's decision to administer relief under its own laws rather than federal laws demonstrates a choice made freely, without undue pressure. The court acknowledges that while it does not establish a definitive boundary for the extent of lawful inducement, the statute operates within permissible limits by offering a tax credit that aligns with fiscal needs. The case also references Section 301 of the Revenue Act of 1926, which taxes estate transfers while providing a credit for state inheritance taxes. Florida's challenge to this provision highlights its position that the federal tax aimed to coerce states into adopting inheritance tax laws, a claim the court evaluates in light of the broader context of state autonomy and federal authority. The implementation of an 80 percent credit led to significant changes in laws across 36 states, which were upheld as valid despite challenges. The case of *United States v. Butler* is referenced, where a tax imposed on processors of farm products was deemed invalid due to its earmarked proceeds for farmers and coercive contracts. In contrast, the current tax's proceeds are not designated for a specific group, and the unemployment compensation law tied to the credit has received state approval. States retain the ability to repeal their unemployment laws, and the objectives pursued are lawful, aimed at alleviating unemployment. The statute does not require states to relinquish essential powers. While the act outlines minimum criteria for state compensation systems, not all are deemed unlawful, and states have significant discretion in designing their unemployment laws. They may choose various systems, including merit ratings and varying burdens on employers or employees. However, to earn the credit, states must adhere to Congress-defined fundamental standards. Even with differing opinions on these standards, such differences do not invalidate the statute. If any condition is found to be unenforceable, it can be severed without affecting the validity of the remaining provisions. Conditions for credit approval by the Board are statutory terms, not contractual provisions, and can be modified or revoked by the state. The state is not obligated to maintain the law or keep federal funds indefinitely. The Secretary of the Treasury has the authority to withdraw funds upon requisition by state officials, and if the statute is repealed or funds are misused, credit approval will cease after notifying the state agency and allowing for a hearing. Claims of abdication of state power due to funding agreements are unfounded; the state retains the discretion to disregard or fulfill disbursement conditions. The state is not bound by agreements concerning the specific use of withdrawn funds, such as unemployment relief, and maintaining a compensation law is not enforced by the national government. The Secretary is permitted to hold and invest state unemployment funds, but this does not equate to a loss of state sovereignty. The state retains the right to revoke consent, repeal the relevant statute, and withdraw its deposits. Utilizing the Secretary of the Treasury as a fund custodian can enhance fiscal stability and security. A report from the Ways and Means Committee clarifies that the Treasury's credit backs deposits, ensuring withdrawal rights are secure, similar to a standard bank checking account. The notion of abdication of rights dissipates when viewing deposits as reliant on statutory consent rather than a binding contract. Even sovereign states can contract without losing their sovereignty, and they may form agreements with each other and Congress, provided their statehood remains intact. Alabama’s pursuit of a significant credit from the national Treasury does not violate any constitutional restrictions on assenting to conditions for fair compensation. Title III of the act allows future appropriations to assist states without directly appropriating public funds and is separable from Title IX; thus, both titles may stand independently. The judgment is affirmed, though a dissenting opinion asserts that part of the Social Security legislation exceeds Congress's powers and infringes on state governance. The opinion references the historical context of state sovereignty under both the Articles of Confederation and the Constitution, emphasizing that states retain all powers not specifically delegated to the federal government. The passage emphasizes that each State is an independent entity with its own government, essential for the existence of the United States as a political body. The union under the Constitution does not diminish the States' autonomy; rather, the Constitution is designed to preserve both the States and the Union. The author expresses concern that recent decisions threaten this autonomy by allowing the Federal Government to interfere with state powers. A historical reference is made to President Franklin Pierce’s veto of a bill concerning land grants for the benefit of indigent insane persons, highlighting his objections based on the principles of the federal compact. The bill proposed granting 10 million acres of land to States based on their size and representation, with specific provisions regarding land selection and scrip issuance for States without public lands. Pierce's message reflects a commitment to upholding the Constitution as vital for maintaining representative liberty. Management and supervision expenses for the lands and related funds are to be covered by the respective State treasuries. The gross proceeds from sales of these lands or land scrip must be invested by the States in safe stocks, creating a perpetual fund, with the principal untouched and interest allocated for the care of indigent insane individuals. States are required to submit annual reports on sold lands or scrip to the Secretary of the Interior, and the entire grant is subject to specific conditions mandated by legislative acts of the States. The bill contemplates the Federal Government providing for the care of indigent individuals, raising constitutional concerns about whether such involvement is permissible. If Congress can assist the indigent insane, it could argue for broader responsibility for all poor individuals, potentially leading to federal control over public welfare initiatives currently managed by States or private entities. This raises a significant question about the extent of federal power in social welfare, suggesting that once a precedent is set for one charitable cause, it could extend to all forms of public philanthropy. The author expresses a strong belief that while aiding the needy is a noble duty, the Constitution does not grant the Federal Government authority to act as a national provider of public charity, which would undermine the foundational principles of state sovereignty and the Union. The excerpt emphasizes that transferring the management of charitable activities from individual States to the Federal Government could be detrimental. It asserts that the Federal Union is a creation of the States, which were independent prior to the Revolution. Each State gained its sovereignty through a Congress that was formed to ensure local governance remained with the States. The Constitution was designed to delegate specific powers to the Federal Government while reserving all other powers for the States or the people. The text argues that the majority of governmental functions related to social relations, internal organization, and local welfare remain with the States, as the Constitution does not expressly transfer these powers to the Federal Government. The powers granted to the Federal Government pertain only to federal relations and maintaining harmony among the States, particularly for defense and common interests. The author dismisses the argument for broader federal powers under the Constitution's welfare clause, asserting that its interpretation should strictly relate to tax collection for defense and welfare, rather than extending to local governance. The excerpt emphasizes that the power to raise money through taxes and duties is limited and does not grant the federal government broad authority over the welfare of the United States. Instead, it argues that the Constitution contains specifically enumerated powers designed to prevent the federal government from overpowering the states, thus preserving their sovereignty. The text warns against interpreting the Constitution in a way that would allow Congress to dominate state governance, which could lead to the erosion of state rights. Historical perspectives from key figures like Presidents Madison, Jefferson, and Jackson reinforce the notion that the federal government’s powers are limited, while states retain significant authority over local matters. The excerpt concludes that public charities should be managed by state authorities, aligning with the bill's provision that does not allocate funds to any other governing body. If Congress enacts the proposed bill, it could lead states to believe that the federal government will assume responsibility for local charitable initiatives, potentially diminishing state efforts to address their own social issues. The speaker argues that this shift could make states dependent on federal funding, undermining their autonomy and altering the constitutional relationship between state and federal powers. The speaker highlights that there is no constitutional distinction between appropriating funds directly from the Treasury and using public lands for similar purposes. They contend that if Congress can allocate public lands for state needs, it could extend to controlling state expenditures, including salaries for state officials, which would contravene constitutional limitations. The implication of such power would effectively nullify significant constitutional provisions. The speaker emphasizes that the proposed legislation lacks emergency justification and would impose federal oversight on state matters, eroding state independence. They note that Alabama residents would face a substantial tax burden under the act, with all funds going to the federal government unless the state complies with federal directives, reinforcing the argument against the bill's constitutionality and its implications for state autonomy. Denial of Congress's actions as coercive, impairing state governance, is contrary to practical experience, particularly given the current risks to the federal system. Justice Sutherland concurs that the payroll tax is an excise tax within Congressional power and that the allocation of up to 90% of the tax to states with similar unemployment taxes is constitutional. He agrees that states are not coerced into adopting unemployment laws, viewing the federal provisions as inducements rather than coercive mandates. However, he expresses concern regarding whether the act's administrative provisions infringe upon the states' reserved powers under the Tenth Amendment. States cannot relinquish their governmental powers to other states or the federal government, just as the federal government cannot cede its powers to foreign entities. Taxation is a fundamental governmental power essential for state existence, along with the authority to manage tax revenue and related laws. The Constitution mandates a clear division of powers, affirming state independence within their jurisdiction. The federal government cannot encroach upon this domain, just as states must respect national powers. The Constitution aims to protect both state and federal governance from inappropriate interference, necessitating careful judicial scrutiny of any legislation perceived as overstepping these boundaries. The key question is whether a congressional act requires states to surrender any governmental power regarding their unemployment laws or payroll tax funds to the federal government. The conclusion is that such a surrender is indeed required. While states have the authority to choose depositories for their funds, agreeing to withdraw funds for specific purposes aligns more with a restriction than mere cooperation. The act allows federal funds for state-administered old-age assistance without mandating states to deposit their funds in the federal treasury, preserving state control. In contrast, the current situation compels states to deposit tax proceeds into the federal treasury, resembling a forced loan with federal restrictions on fund usage. The funds must be used solely for compensation payments, and while states can amend their compensation laws, they cannot unconditionally withdraw funds from the federal treasury. Furthermore, the federal board oversees state compliance with the act, acting as a regulator of state legislation and determining the state's adherence to federal standards, thereby limiting state autonomy. The provisions in question create significant uncertainty regarding a state’s ability to withdraw its funds under the act, as such withdrawals are contingent upon specific statutory conditions. While subsection (f) of 904 permits the Secretary of the Treasury to pay state agencies amounts they requisition, this is limited to the funds available to those agencies at the time, indicating no general right for states to withdraw funds freely. The act allows federal agencies to oversee and restrict state administrative powers, undermining the state's autonomy and constitutional independence. Judicial precedents highlight that states possess sovereignty over their internal affairs, with the federal government having no authority over those matters unless expressly delegated. Notable cases emphasize that while both levels of government operate independently within their jurisdictions, the federal government holds supremacy in conflicts. However, states retain exclusive areas of authority that the federal government cannot invade, reinforcing the checks and balances inherent in the system. The dual distribution of powers ensures that what is reserved for the states cannot be encroached upon by federal authority, and vice versa. The Framers and ratifying conventions intended to uphold complete state self-government in areas not assigned to the federal government. This intent must be honored by both federal and state authorities. States cannot relinquish or have their powers taken away, as established in Carter v. Carter Coal Co. The Constitution's purpose is clear and cannot be compromised by internal surrender or external invasion. Expectations of public benefits from federal involvement cannot replace constitutional authority. The act in question could achieve its goals for unemployment relief without requiring states to cede any powers. Maintaining the balance of power between national and state governments is crucial to prevent further encroachments on state functions. The opinion concludes that the lower judgment should be reversed. Additionally, the Social Security Board must approve any state law within thirty days if it meets specific criteria, including requirements for compensation payment, restrictions on unemployment compensation timing, fund management, and conditions under which compensation cannot be denied. The state legislature retains the authority to amend or repeal such laws. After approval, the Board will notify the state's Governor. On December 31 of each taxable year, the Board must certify to the Secretary of the Treasury each State whose laws have been previously approved, except for those States that have changed their laws in a way that no longer complies with specified provisions or have failed to comply substantially for that taxable year. If the Board suspects a State may not be certified, it must notify the Governor of that State promptly. A trust fund known as the “Unemployment Trust Fund” is established in the U.S. Treasury, with the Secretary authorized to receive and hold deposits from State unemployment funds, either directly or through designated banks. The Secretary must invest any portion of the Fund that is not needed for current withdrawals in U.S. government obligations, which may be purchased at par or market price. Special obligations may be issued specifically for the Fund at par, bearing interest based on the average rate of existing obligations, adjusted to the nearest lower one-eighth of one percent if necessary. The Fund's obligations, except for special obligations, can be sold at market price, while special obligations can be redeemed at par plus accrued interest. Interest and proceeds from these obligations form part of the Fund. The Fund is managed as a single entity, but the Secretary must maintain separate accounts for each State agency. Quarterly, earnings are credited to each State account based on the average daily balance. The Secretary is also authorized to pay State agencies amounts they requisition, up to the balance in their respective accounts. The document details a comprehensive list of services associated with various roles, including Maitre d’Hotel, Valet de Chambre, Butler, and others, as well as specific helpers in stables and gardening, excluding day laborers and certain other roles. It references a series of historical statutes from 1803 to 1869 that have been amended but retain their fundamental structure. Additionally, it cites various laws imposing occupation taxes across different states, highlighting flat license taxes and gross receipts taxes enacted in the 1930s. The estimated revenue from these measures is projected to grow significantly, from $225 million in the first year to over $900 million in seven years. It notes Massachusetts’ legislative actions, which required certain conditions to be met for its tax provisions to take effect, reflecting concerns about competition with other states. California, Idaho, and Mississippi laws from the mid-1930s provide a legal framework for managing unemployment reserve funds. The provision highlighted ensures these funds are safeguarded and utilized to promote business stability, particularly during economic downturns when demand for these funds increases. To prevent deflation, the bill mandates that all reserve funds be managed by the U.S. Treasury, with investments overseen by the Secretary of the Treasury. This includes the issuance of special nonnegotiable obligations to the unemployment trust fund when market conditions are unfavorable for open market investments. Additionally, during periods of high unemployment claims, the Treasury can absorb the securities rather than liquidate them on the market, thus maintaining purchasing power without contributing to deflation. This approach aims to address the challenge of transferring purchasing power from prosperous times to periods of economic distress, effectively supporting the economy during downturns.