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CHAPTER II.

The Legislative Department

Section 1.

POWER OF CONGRESS OVER TAXATION.

Sub-Section A.

EXTENT OF THE FEDERAL POWER.

THE COLLECTOR v. DAY.

11 WALLACE, 113. 1870.

This suit was instituted by J. M. Day against the Collector of Internal Revenue of the United States to recover the sum of sixty-one dollars and fifty cents, which had been assessed as a tax upon his salary as a judge of the Court of Probate and Insolvency for the County of Barnstable, Massachusetts, for the year 1866 and 1867. The salary was fixed by law and was paid out of the state treasury. Day paid the tax under protest and instituted this suit to recover it. It was contended that the Act of Congress levying the tax was unconstitutional as the Federal Government could not impose a tax upon the salary of the judicial officer of a State.* A judgment was given in favor of Day in the lower court, whereupon an appeal was taken to the Supreme Court of the United States.

MR. JUSTICE Nelson delivered the opinion of the court.

The case presents the question whether or not it is competent for Congress, under the Constitution of the United States, to impose a tax upon the salary of a judicial officer of a State.

In Dobbins v. the Commissioners of Erie County, 16 Peters, 435, it was decided that it was not competent for the legislature of a State to levy a tax upon the salary or emoluments of an officer of the

*The Acts passed in 1864, 1865, 1866, 1867 provided: There shall be levied collected and paid annually upon the gains, profits and income of every person residing in the United States,—whether derived from any kind of property, rents, interest, dividends or salaries, or from any profession, trade, employment or vocation, carried on in the United States or elsewhere, or from any other source whatsoever, a tax of five (5) per centum on the amount so derived, over $1,000.

Compare with Income Tax Law of August 15th, 1894, stated in case of Pollock v. Farmers' Loan and Trust Company, infra page 57.

Also compare Income Tax Law of October 3rd, 1913. See digest thereof in Appendix.

United States. The decision was placed mainly upon the ground that the officer was a means or instrumentality employed for carrying into effect some of the legitimate powers of the government, which could not be interfered with by taxation or otherwise by the States, and that the salary or compensation for the service of the officer was inseparably connected with the office; that if the officer, as such, was exempt, the salary assigned for his support or maintenance while holding the office was also, for like reasons, equally exempt.

The cases of McCulloch v. Maryland, 4 Wheat.. 316, and Weston v. Charleston, 2 Peters, 449, were referred to as settling the principle that governed the case, namely, “that the State governments cannot lay a tax upon the constitutional means employed by the government of the Union to execute its constitutional powers."

The soundness of this principle is happily illustrated by the Chief Justice in McCulloch v. Maryland, 4 Wheat. 432. "If the States," he observes, "may tax one instrument employed by the government in the execution of its powers, they may tax any and every other instrument. They may tax the mail; they may tax the mint; they may tax the patent-rights; they may tax judicial process; they may tax all the means employed by the government to an excess which would defeat all the ends of government.” _“This,” he observes, "was not intended by the American people. They did not design to make their government dependent on the States." Again, (Ib. 427.) “That the power of taxing it (the bank) by the States may be exercised so far as to destroy it, is too obvious to be denied.” And, in Weston v. The City of Charleston, 2 Peters, 466, he observes. "If the right to impose the tax exists, it is a right which, in its nature, acknowledges no limits. It may be carried to any extent within the jurisdiction of the State or corporation which imposes it which the will of each State and corporation may prescribe.” *

It is a familiar rule of construction of the Constitution of the Union, that the sovereign powers vested in the State governments by their respective constitutions, remained unaltered and unimpaired, except so far as they were granted to the government of the United States. That the intention of the framers of the Constitution in this respect might not be misunderstood, this rule of interpretation is expressly declared in the tenth article of the amendments, namely: “The powers not delegated to the United States are reserved to the States respectively, or, to the people.” The government of the United States, therefore, can claim no powers which are not granted to it by the Constitution, and the powers actually granted must be such as are expressly given, or given by necessary implication.

The general government, and the States, although both exist within the same territorial limits, are separate and distinct sovereignties, acting separately and independently of each other, within their respective spheres. The former in its appropriate sphere is supreme; but the States within the limits of their powers not granted,

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or, in the language of the tenth amendment, "reserved," are as independent of the general government as that government within its sphere is independent of the States.

Two of the great departments of the government, the executive and legislative, depend upon the exercise of the powers, or upon the people of the States. The Constitution guarantees to the States a republican form of government, and protects each against invasion or domestic violence. Such being the separate and independent condition of the States in our complex system, as recognized by the Constitution, and the existence of which is so indispensable, that, without them, the general government itself would disappear from the family of nations, it would seem to follow, as a reasonable, if not a necessary consequence, that the means and instrumentalities employed for carrying on the operations of the governments, for preserving their existence, and fulfilling the high and responsible duties assigned to them in the Constitution, should be left free and unimpaired, should not be liable to be crippled, much less defeated by the taxing power of another government, which power acknowledges no limits but the will of the legislative body imposing the tax. And, more especially, those means and instrumentalities which are the creation of their sovereign and reserved rights, one of which is the establishment of the judicial department, and the appointment of officers to administer their laws. Without this power, and the exercise of it, we risk nothing in saying that no one of the States under the form of government guaranteed by the Constitution could long preserve its existence. A despotic government might. We have said that one of the reserved powers was that to establish a judicial department; it would have been more accurate, and in accordance with the existing state of things at the time, to have said the power to maintain a judicial department. All of the thirteen States were in the possession of this power, and had exercised it at the adoption of the Constitution; and it is not pretended that any grant of it to the general government is found in that instrument. It is, therefore, one of the sovereign powers vested in the States by their constitutions, which remained unaltered and unimpaired, and in respect to which the State is as independent of the general government as that government is independent of the States.

And if the means and instrumentalities employed by that government to carry into operation the powers granted to it are, necessarily, and, for the sake of self-preservation, exempt from taxation by the States, why are not those of the States depending upon their reserved powers, for like reasons, equally exempt from Federal taxation? Their unimpaired existence in the one case is as essential as in the other. It is admitted that there is no express provision in the Constitution that prohibits the general government from taxing the means and instrumentalities of the States, nor is there any prohibiting the States from taxing the means and instrumentalities of that government. In both cases the exemption rests upon necessary implication, and is upheld by the great law

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of self-preservation; as any government, whose means employed in conducting its operations, if subject to the control of another and distinct government, can exist only at the mercy of that government. Of what avail are these means if another power may tax them at discretion ?

But we are referred to the Veazie Bank v. Fenno, 8 Wall, 533, in support of this power of taxation. That case furnishes a strong illustration of the position taken by the Chief Justice in McCulloch v. Maryland, namely, “That the power to tax involves the power to destroy."

The power involved was one which had been exercised by the States since the foundation of the government, and had been, after the lapse of three-quarters of a century, annihilated from excessive taxation by the general government, just as the judicial office in the present case might be, if subject, at all, to taxation by that government. But, notwithstanding the sanction of this taxation by a majority of the court, it is conceded, in the opinion, that "the reserved rights of the States, such as the right to pass laws; to give effect to laws through executive action; to administer justice through the courts, and to employ all necessary agencies for legitimate purposes of State government, are not proper subjects of the taxing power of Congress. This concession covers the case before us, and adds the authority of this court in support of the doctrine which we have endeavored to maintain.

Judgment affirmed.

Note.-In U. S. v. Baltimore & Ohio Railroad Co., 17 Wallace 322 (1873) the United States sought to collect a tax under the Federal Internal Revenue Act of 1864, as amended, on interest payable by the Baltimore & Ohio Railroad Company to the City of Baltimore. The City of Baltimore, with a view to aid its commercial prosperity, loaned the railroad $5,000,000 to aid it in running its line into the city, and took as security a mortgage on the railroad, on which the interest taxed was paid. The Supreme Court held that this amounted to a tax on the municipal revenues and not a tax upon the railroad and could not be collected.

In South Carolina v. U. S. 199 U. S. 437 (1905) the same court held that the United States may exact the license taxes prescribed by the Internal Revenue Laws for dealers in intoxicating liquors from a State which in the exercise of its sovereign power has taken charge of the business of selling such liquors. The court reasoned that the exemption of the State property and its functions from Federal taxation is implied from the dual character of our Federal system and the necessity of preserving the State in all its efficiency, but when a State goes outside of its purely governmental functions and engages in the business of making and selling things it becomes subject to the Federal taxing power. If this were not so the federal taxing power would be largely crippled by the absorption by the States of certain business, such as public utilities, tobacco business, etc.

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VEAZIE BANK v. FENNO.

8 WALLACE, 533. 1869. Congress passed an act on July 13, 1866, which provided, “That every national banking association, State bank or State banking association shall pay a tax of ten per centum on the amount of notes of any person, State bank, or State banking association, used for circulation and paid out by them after the 1st day of August, 1866." Under this act a tax of ten per cent. was assessed upon the Veazie Bank, for its notes issued for circulation, after the day named in the act. The bank was a corporation chartered under the laws of the State of Maine, with authority to issue bank notes for circulation, and the notes on which the tax imposed by the act was collected, were issued under this authority. The bank paid the tax under protest. The Circuit Court of Maine, in which action was brought to recover the amount of the tax paid, being divided in its opinion, the case was brought to the Supreme Court upon the question of the constitutionality of the act (1) That it was a direct tax and had not been apportioned according to population (2) That the act imposing the tax impairs a franchise granted by the State, and that Congress has no power to pass any law with that intent or effect. The opinion was delivered by CHIEF JUSTICE CHASE.

* Much diversity of opinion has always prevailed upon the question, what are direct taxes. Attempts to answer it by reference to the definitions of political economists have been frequently made, but without satisfactory results. **** We are obliged, therefore, to resort to historical evidence, and to seek the meaning of the words in the use and in the opinion of those whose relations to the government, and means of knowledge, warranted them in speaking with authority. And, considered in this light, the meaning and application of the rule, as to direct taxes, appeals to us quite clear. It is, as we think, distinctly shown in every act of Congress on the subject. In each of these acts, a gross sum was laid upon the United States, and the total amount was apportioned to the several States, according to their respective numbers of inhabitants, as ascertained by the last preceding census. Having been apportioned, provision was made for the imposition of the tax upon the subjects specified in the act fixing its total sum.

* This review shows that personal property, contracts, occupations, and the like, have never been regarded by Congress as proper subjects of direct tax. * * * * It may be rightly affirmed, therefore, that in the practical construction of the Constitution by Congress, direct taxes have been limited to taxes on land and appurtenances, and taxes on polls, or capitation taxes.

* * * * The tax under consideration is a tax on bank circulation, and may very well be classed under the head of duties. Certainly it is not, in the sense of the Constitution, a direct tax. * * * * Is it, then, a tax on a franchise granted by a State, which Congress, upon any principle exempting the reserved powers of the States from impairment by tax

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