Taxing and Spending Clause

Template:Infobox US Constitution Article I, Section 8, Clause 1 of the United States Constitution, is known as the Taxing and Spending Clause. It is the clause that gives the federal government of the United States its power of taxation. Component parts of this clause are known as the General Welfare Clause and the Uniformity Clause.

Text

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.

Background

One of the most glaring deficiencies of the Articles of Confederation was its lack of a grant to the central government of the power to lay and collect taxes. Without the power to raise revenue, the Congress was forced to rely upon requisitions placed upon the governments of its member states. However, some states weren't giving Congress the funds for which it asked, by either paying only in part, or by altogether ignoring the request from Congress. Without the revenue to enforce its laws and treaties, or pay its debts, the Confederation was practically rendered impotent and was in danger of falling apart.

The Congress recognized this problem and proposed amendments to the Articles in an effort to correct it. However, nothing ever came of those proposals until the Philadelphia Convention.

Meaning

Power to tax and spend

The powers to tax and spend are concurrent powers of the federal government and the individual states. These two powers have been received over time to be very broad, but have also, on occassion, been abridged by the courts. They are also independent powers, not subject to the limitations imposed by the other enumerated powers of Congress. Congress has also employed the taxing power in uses other than solely for the raising of revenue, such as:

• taxing to regulate commerce;
• taxing to discourage, suppress, or even exterminate commerce; and finally,
• taxing as a means of protectionism.

With the power to tax, necessarily, must come the power to spend the revenues raised by such taxation. However, to what extent this power ought to be utilized by the Congress has been the source of continued dispute and debate since the inception of the federal government, as will be explained below.

Limitations on power

In various places within the Constitution, and in one amendment, there are to be found several clauses related to Congress' power to tax and spend. These include both requirements for the apportionment of direct taxes and the uniformity of indirect taxes, the disallowal of taxes on exports, the General Welfare requirement, the limitation on the release of funds form the treasury except as provided by law, and the apportionment exemption of the Sixteenth Amendment.

General Welfare Clause

Of all the limitations upon the power to tax and spend, the General Welfare clause appears to have achieved notoriety as the most contentious. The dispute over the clause arises from the disagreement over what exactly is meant by the phrase general welfare. The two primary authors of the Federalist Papers essays set forth two seperate, conflicting theories:

• the narrower view of James Madison that spending must be at least tangentally tied to one of the other specifically enumerated powers, such as regulating interstate or foreign commerce, or providing for the military, as the General Welfare Clause is not a specific grant of power, but a statement of purpose qualifying the power to tax; and
• the broader view of Alexander Hamilton that spending is an enumerated power that Congress may exercise independently to benefit the general welfare, such as to assist national needs in agriculture or education, provided that the spending is general in nature and does not favor any specific section of the country over any other.

Though the essays were not reliably distributed outside of New York, they eventually became the dominant reference for interpreting the meaning of the Constitution as the essays provided the reasoning and justification behind the Framers' intent in setting up the federal government. Associate Justice Joseph Story relied heavily upon the Federalist Papers as a source for his Commentaries on the Constitution of the United States.

Until 1936, the United States Supreme Court had imposed a narrow interpretation on the Clause, as demonstrated by the holding in Bailey v. Drexel Furniture Co., in which a tax on child labor was an impermissible attempt to regulate commerce beyond that Court's equally narrow interpretation of the Commerce Clause.

This narrow view was later overturned in United States v. Butler. There, the Court held that the power to tax and spend is an independent power; that is, the General Welfare Clause gives Congress power it might not derive anywhere else. However, the Court did limit the power to spending for matters affecting only the national welfare. The tax imposed in Butler was nevertheless held unconstitutional as a violation of the Tenth Amendment reservation of power to the states. The Court wrote:

[T]he [General Welfare] clause confers a power separate and distinct from those later enumerated, is not restricted in meaning by the grant of them, and Congress consequently has a substantive power to tax and to appropriate, limited only by the requirement that it shall be exercised to provide for the general welfare of the United States. … It results that the power of Congress to authorize expenditure of public moneys for public purposes is not limited by the direct grants of legislative power found in the Constitution. … But the adoption of the broader construction leaves the power to spend subject to limitations. … [T]he powers of taxation and appropriation extend only to matters of national, as distinguished from local, welfare.

Shortly after Bulter, the Supreme Court interpreted the clause even more expansively, giving Congress a plenary power to impose taxes and to spend money for the general welfare subject almost entirely to their own discretion in Helvering v. Davis. Even more recently, the Court has included the power to force the states to abide by national standards by threatening to withhold federal funds in South Dakota v. Dole.

To date, the Hamiltonian view of the General Welfare Clause predominates in case law. Historically, however, the Anti-Federalists were wary of such an interpretation of this power during the ratification debates in the 1780s. Due to the objections raised by the Anti-Federalists, Madison was prompted to author his contributions to the Federalist Papers, attempting to quell the Anti-Federalists' fears of any such abuse by the proposed national government and to counter Anti-Federalist arguments against the Constitution. Proponents of the Madisonian view also squarely point to the extensive absense of Hamilton from the Constitutional Convention, particularlly during the time frame in which this clause was crafted as further evidence of his lack of authority.

Indirect tax uniformity

The last phrase of the Taxing and Spending Clause requires that "all duties, imposts, and excises shall be uniform throughout the United States." Justice Story described this requirement as such:

It was to cut off all undue preferences of one state over another in the regulation of subjects affecting their common interests. Unless duties, imposts, and excises were uniform, the grossest and most oppressive inequalities, vitally affecting the pursuits and employments of the people of different states, might exist.

In other words, it was another check placed on the government in order to keep a larger group of states from "ganging up" to make laws for their own benefit which would be detrimental to the remaining, smaller group of states.

Apportionment of direct taxes

Language elsewhere in the Constitution also expressly limits the taxing power. Article I, Section 9 has more than one clause so addressed. Clause 4 states:

No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.

Any direct tax is subject to the apportionment rule and must be imposed among the states in proportion to each state's population in respect to that state's share of the whole national population. This means that the dollar amount of such taxes imposed on the taxpayers within any given state would be required to bear an arithmetical relationship to the total dollar amount of such taxes imposed in the entire nation that would be equal to the ratio of that state's population to the total population of the nation.

Income tax exemption

Before 1895, direct taxes were understood to be limited to "capitation or poll taxes" (Hylton v. United States) and "taxes on lands and buildings, and general assessments, whether on the whole property of individuals or on their whole real or personal estate" (Springer v. United States). The decision in Springer went further in declaring all income taxes were indirect taxes, or more specifically, "within the category of an excise or duty." However, in 1895 income taxes derived from property such as interest, dividends, and rent were again designated as direct taxes by the Supreme Court in Pollock v. Farmers' Loan & Trust Co. and ruled subject to the requirement of apportionment. As the income taxes at the time were not apportioned in such a manner, they were held unconstitutional. It is important to note that it was not the income tax per se, but the the lack of a provision for its apportionment as a direct tax which made it unconstitutional.

The case law prohibition on unapportioned income taxes was later eliminated by the ratification of the Sixteenth Amendment in 1913. The text of the amendment was clear in its aim:

The Congress shall have power to lay and collect taxes on income, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

Shortly after, in 1916, the U.S. Supreme Court ruled in Brushaber v. Union Pacific Railroad that, under the Sixteenth Amendment, income taxes were constitutional even though unapportioned, as the Sixteenth Amendment had provided. In subsequent cases, the courts have interpreted the Sixteenth Amendment and the Brushaber decision as standing for the rule that the amendment allows income taxes on "wages, salaries, commissions, etc. without apportionment."

No taxes on exports

Article I, Section 9, Clause 5 provide additional limitations:

No Tax or Duty shall be laid on Articles exported from any State.

This provision was an important protection for the southern states secured during the Constitutional Convention. With the grant of absolute power over foreign commerce given to the federal government, the states whose economies relied chiefly on exports realized that any tax laid by the new central government upon a single item of export would apply very unevenly amongst all the states and favor states which did not export that good.

The Supreme Court has reaffirmed this provision as recently as 1997 in United States v. United States Shoe Corp. As part of the Water Resources Development Act of 1986, a harbor maintenance tax (26 U.S.C. § 4461) was imposed at the ad valorem (percentile) rate of 0.125% the value of the cargo instead of at a rate dependent entirely upon the cost of the service provided by the port. The Court unanimously affirmed the ruling of the lower Federal Circuit Court that a "user fee" imposed in such a manner is, in fact, a tax on exports and unconstitutional.

Restriction on spending

Article I, Section 9, Clause 7 imposes accountability on Congressional spending:

No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.

This clause indicates that Congress must have appropriated by law the funds to be spent before the funds can be released from the Treasury. It serves as a powerful check of the legislature on the executive branch, as it further secures Congress' power of the purse.