The Taxing Clause

The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises.

—Andy Grewal

Introduction

Under the Articles of Confederation, the legislature could only request money from the states. In contrast, the federal Constitution allows Congress to impose taxes directly on people. Congress’s first enumerated power is the “Power To lay and collect Taxes, Duties, Imposts and Excises.” This provision broadly refers to taxes and then three subsets of taxes: duties, imposts, and excises. Duties and imposts are taxes the government applies to the import or export of goods.¹ Excises are taxes levied on the enjoyment of a privilege, such as the right to produce a good or pursue a specific occupation.

While broad, the taxing power faces several specific constitutional limits. Under the Direct Taxes Clause, taxes, when “direct,” must be apportioned according to population.² (See Essay No. 71.) Under the Uniformity Clause, “Duties, Imposts and Excises” must be “uniform” throughout the United States.³ (See Essay No. 41.) And under the Export Taxation Clause, Congress faces a flat ban on the taxation of exports.⁴ (See Essay No. 72.) Early Supreme Court decisions closely examined federal taxes to determine whether they circumvented other limits on congressional power or violated state sovereignty. More recently, the Court has largely deferred to Congress.

History Before 1787

The Confederation Congress had no authority to tax individuals; it could only make requests, or “requisitions,” to the states for funds.⁵ These requests were often unsuccessful. For example, in 1786, the national Board of Treasury mandated that the states collectively contribute $3.8 million to the federal purse, but the states paid only $663.⁶ In Federalist No. 15, Alexander Hamilton observed that the Confederation Congress had “an indefinite discretion to make requisitions for . . . money” but “no authority to raise” money “by regulations extending to the individual citizens. . . .” Hamilton added that attempts to raise revenue could prove fruitless because the states could “observe or disregard [the requisitions] at their option.”

The Constitutional Convention

During the Constitutional Convention, two key plans embraced different visions for the federal taxation power. The New Jersey Plan “authorized [Congress] to pass acts for raising a revenue, by levying a duty or duties” on imports, stamps, and postage.⁷ The New Jersey plan would also make federal law, including federal tax law, the “supreme law,”⁸ enforceable against individuals.⁹ As a result, Congress would have broad taxation authority over individuals and would no longer need to seek revenues from the states.

Under the Virginia Plan, the national legislature could impose “Quotas of contribution” on states.¹⁰ Those quotas, similar to requisitions, would affect a state’s representation: A higher quota would lead to higher “rights of suffrage in the National Legislature.”¹¹ The Virginia Plan, unlike the New Jersey plan, did not provide for federal taxation of individuals.¹²

The “Connecticut Compromise” resolved several debates, including those related to the federal taxation power. The compromise, which was ultimately reflected in the final Constitution, established a bicameral legislature with proportional representation in the House of Representatives and equal representation for each state in the Senate.¹³ Taxation would not affect this design. That is, representation would not turn on quotas or requisitions.¹⁴ However, after the compromise, the Constitution included the Taxing Clause and thus the power to tax individuals.¹⁵

The Ratification Debates

In Federalist No. 30, Hamilton emphasized that the revenue scheme established under the Articles of Confederation was a “fallacious and delusive system of quotas and requisitions.” Hamilton believed that the new government established by the Constitution should “raise its own revenues by the ordinary methods of taxation authorized in every well-ordered constitution of civil government.” Those methods included the power to tax individuals.

Anti-Federalists scoffed at the new federal taxation power. George Mason of Virginia feared that the power to tax individuals directly, including through duties, imposts, and excises, “does of itself, entirely change the confederation of the states into one consolidated government.”¹⁶ Mason claimed that the new taxing power would be “at discretion, unconfined, and without any kind of control,” making it “totally subversive of every principle” that had previously governed the country.¹⁷ In Pennsylvania, dissenters from the state’s ratification convention argued that the Taxing Clause would force people to pay even the most “oppressive” taxes because “all resistance will be in vain.”¹⁸ The dissenters feared that the “standing army and select militia”¹⁹ would be deployed to collect federal taxes.

The Federalists tried to assuage these concerns. They cautioned that heavy taxation of individuals would be unnecessary under the new government.²⁰ For example, James McHenry of Maryland said that the “government would seldom have recourse to direct Taxation” of individuals.²¹ Rather, taxes on imports, such as duties and imposts, as well as excise taxes would provide adequate revenue.²²

Edmund Randolph of Virginia argued that practical considerations supported the Taxing Clause. The new government would need to borrow to survive, and to borrow “any sum of a considerable amount,” the government would need the “full scope, and complete command over the resources of the Union” as provided by the Taxing Clause.²³

Early Practice

Shortly after ratification, Congress had to decide whether it could use its taxation authority for purposes other than just raising revenue. The first Congress believed that it could. The Tariff Act of 1789 laid duties on imports not only for the “support of government,” but also for the “protection of manufactures.”²⁴ During congressional debates, the act raised policy concerns but no constitutional objections.²⁵

Four decades later, Congress enacted tariff measures with strong protectionist purposes. This time, the tariffs generated constitutional objections from southern states.²⁶ Senator John C. Calhoun of South Carolina and his allies claimed that Congress could tax imports only for revenue, not to regulate trade.²⁷ They also argued that the states could nullify unconstitutional federal tariffs. Senator Henry Clay of Kentucky defended tariffs on policy grounds, arguing that their introduction had led to “the greatest prosperity which this people have enjoyed since the establishment of their present Constitution.”²⁸ James Madison observed that the constitutional power to regulate commerce with foreign nations implied a power to tax imports.²⁹ Ultimately, under the Compromise of 1833, Congress would gradually reduce federal tariffs.³⁰

Judicial Precedent

The U.S. Supreme Court has understood the taxing power expansively. J.W. Hampton, Jr. & Co. v. United States (1928) concluded that customs duties could be imposed for purposes other than the raising of revenue.³¹ The Court added that the Constitution allows Congress to use its taxing power “‘with the incidental motive of discouraging [specific activities] by making their continuance onerous.’”³²

The Court has scrutinized tax measures that attempt to expand Congress’s authority under the Constitution. Hammer v. Dagenhart (1918) held that Congress’s powers under the Commerce Clause could not support a federal prohibition on the interstate shipment of goods produced by child labor.³³ Congress responded to Hammer by enacting a significant profits tax on manufacturers who used child labor. However, Bailey v. Drexel Furniture Co. (1922) declared that the profits tax was unconstitutional.³⁴ Though the profits tax was styled as a revenue raising measure, the “tax” was in substance a penalty designed to regulate activity. And, the Court concluded, Congress lacked Commerce Clause authority to enact that penalty. To uphold the profits tax would “break down all constitutional limitation of the powers of Congress and completely wipe out the sovereignty of the states.”³⁵

After Drexel Furniture, the Court took a more relaxed approach to taxes with a regulatory purpose. United States v. Kahriger (1953) upheld a federal tax on gamblers.³⁶ The Court emphasized that it often upheld congressional attempts to “curtail and hinder” activities, or tax those activities.³⁷ NFIB v. Sebelius (2012) acknowledged the trend, stating that “more often and more recently,” the Court has “declined to closely examine the regulatory motive or effect of revenue-raising measures.”³⁸

In the nineteenth century, the Court found that state sovereignty imposed some limitations on the Taxing Clause, but in the twentieth century, those limits receded. For example, in 1870, the Court found that a federal income tax that applied to a state judge was unconstitutional because it infringed upon a state’s sovereignty.³⁹ But in 1938, the Court upheld federal taxation authority over state employees.⁴⁰ The Court made a similar switch for the federal taxation of state or municipal bonds. Pollock v. Farmers’ Loan & Trust Co. (1895) held that such taxation violated state sovereignty,⁴¹ but South Carolina v. Baker (1988) reversed that position. Under the case law, principles related to state government sovereignty no longer impose major barriers to federal taxation.⁴²

Open Questions

In NFIB v. Sebelius, the Court cautioned that “there comes a time in the extension of the penalizing features” of a tax “when it loses its character as such and becomes a mere penalty with the characteristics of regulation and punishment.”⁴³ However, exactly when Congress crosses the line from “tax” to “penalty” remains unclear. NFIB found that a measure that was statutorily labeled a penalty and was designed to shape behavior did not cross the line. Whether the “penalty” limitation imposes any practical restraint on Congress’s taxing power remains to be seen.

1. Flint v. Stone Tracy Co., 220 U.S. 107, 151 (1911). ↩︎
2. Art. I, § 9, cl. 4. ↩︎
3. Art. I, § 8, cl. 1. ↩︎
4. Art. I, § 9, cl. 5. ↩︎
5. Articles of Confederation, arts. II & VIII. ↩︎
6. Calvin H. Johnson, Homage to CLIO: The Historical Continuity from the Articles of Confederation into the Constitution, 20 Const. Comment. 463, 486 (2004). ↩︎
7. 1 Farrand’s 243. ↩︎
8. Id. at 245. ↩︎
9. Id. ↩︎
10. Id. at 35. ↩︎
11. Id. ↩︎
12. Id. at 19–22. ↩︎
13. Louis J. Sirico, Jr., How Law Employs Historical Narratives: The Great Compromise as an Example, 2017 Pepp. L. Rev. 65, 66 (2018). ↩︎
14. Id. ↩︎
15. Aaron T. Knapp, The New Jersey Plan and the Structure of the American Union, 15 Geo. J.L. & Pub. Pol’y 615, 639–40 (2017). ↩︎
16. Storing 5.17.1. ↩︎
17. Id. ↩︎
18. Storing 3.11.47. ↩︎
19. Id. ↩︎
20. Calvin H. Johnson, Apportionment of Direct Taxes: The Foul-Up in the Core of the Constitution, 7 Wm. & Mary Bill of Rts. J. 1, 20 n.74 (1998). ↩︎
21. James McHenry, Speech Before the Maryland House of Delegates (Nov. 19, 1787), in 3 The Founders’ Constitution 355 (Philip B. Kurland & Ralph Lerner eds., 1987). ↩︎
22. 2 Elliot’s 42. ↩︎
23. 9 DHRC 1021. ↩︎
24. Tariff Act of 1789, 1 Stat. 24, § 1. ↩︎
25. Jonathan S. Sidhu, For the General Welfare: Finding a Limit on the Taxing Power After NFIB v. Sebelius, 103 Cal. L. Rev. 103, 115 (2015). ↩︎
26. William J. Rich, Lessons of Charleston Harbor: The Rise, Fall and Revival of Pro-Slavery Federalism, 36 McGeorge L. Rev. 569, 591 (2005). ↩︎
27. Richard S. Arnold, How James Madison Interpreted the Constitution, 72 N.Y.U. L. Rev. 267, 290 (1997). ↩︎
28. Senator Henry Clay, The American System (Feb. 2, 3, and 6, 1832), in Robert C. Byrd, 3 The Senate 1789–1989, Classic Speeches 1830–1993, 84 (1994), https://perma.cc/VLL5-A2RJ. ↩︎
29. Letter from James Madison to Joseph C. Cabell (Sept. 18, 1828), in 9 The Writings of James Madison 316–340 (1910). ↩︎
30. David P. Currie, The Constitution in Congress: The Public Lands, 1829–1861, 70 U. Chi. L. Rev. 783, 786 (2003). ↩︎
31. 276 U.S. 394, 411 (1928). ↩︎
32. Id. at 412 (quoting Bailey v. Drexel Furniture Co., 259 U.S. 20, 38 (1922)). ↩︎
33. 247 U. S. 251 (1918). ↩︎
34. 259 U.S. 20 (1922). ↩︎
35. Id. at 38. ↩︎
36. 345 U. S. 22 (1953). ↩︎
37. Id. at 27. ↩︎
38. 567 U.S. 519, 573 (2012). ↩︎
39. Collector v. Day, 78 U.S. 113 (1870). ↩︎
40. Helvering v. Gerhardt, 304 U.S. 405 (1938). ↩︎
41. 158 U.S. 601, 630 (1895). ↩︎
42. 485 U.S. 505 (1988). ↩︎
43. 567 U.S. at 573. ↩︎