The Taxing Power - Constitutional Law I

The Taxing Power

1. The Constitution of the United States provides that

   1. "The Congress shall have Power To lay and collect taxes, Duties, Imposts and Excises, to pay the Debts and provide for the Common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States . . . ." Art. I, § 8, cl. 1.

2. Issue: Where Congress draws on the taxing power, is the exaction a "tax" or a "penalty"?

   1. In determining whether an exaction is a "tax" or a "penalty," a "functional approach" is employed. See NFIB v. Sibelius (pg. 16)

      1. The "label . . . does not determine whether the payment may be viewed as an exercise of Congress’s taxing power . . . ." See NFIB v. Sibelius (pg. 16)

   2. Definition of Penalty

      1. "In distinguishing penalties from taxes, this Court has explained that 'if the concept of penalty means anything, it means punishment for an unlawful act or omission.'" NFIB v. Sibelius (quoting United States v. Reorganized CF&I Fabricators of Utah, Inc.) (pg. 16)

   3. In Bailey v. Drexel Furniture (the Child Labor Tax case) (1922), the Court determined that three factors led to the conclusion that the exaction at issue was a "penalty" rather than a "tax":

      1. (1) The exaction imposed an exceedingly heavy burden;

         • In that case, the exaction was 10 percent of a company’s net income on those who employed children, no matter how small their infraction.

      2. (2) The exaction was imposed only on those who knowingly employed underage laborers; and

         • The Court in Sibelius noted that "[s]uch scienter requirements are typical of punitive statutes, because Congress often wishes to punish only those who intentionally break the law."

      3. (3) The exaction was enforced in part by the Department of Labor, an agency responsible for punishing violations of labor laws, not collecting revenue.

      4. THUS in this case, the Court determined that the Child Labor Tax Law, which imposed a 10 percent tax on the net income of any manufacturer employing children below specified ages, was a "penalty" rather than a "tax"; thus, it was unconstitutional.

         • The Court noted that "a court must be blind not to see that the so-called tax is imposed to stop the employment of children. . . . Its prohibitory and regulatory effect and purpose are palpable." Bailey v. Drexel Furniture (pg. 449)

         • "Taxes are occasionally imposed in the discretion of the legislature on proper subjects with the primary motive of obtaining revenue from them with the incidental motive of discouraging them by making their continuance onerous. They do not lose their character as taxes because of the incidental motive. But there comes a time in the extension of the penalizing features of the so-called tax when it loses its character as such and becomes a mere penalty with the characteristics of regulation and punishment. Such is the case in the law before us. . . ." Bailey v. Drexel Furniture (pg. 449)

         • "[H]ere the so-called tax is a penalty to coerce people of a State to act as Congress wishes them to act in respect of a matter completely the business of the state government under the Federal Constitution." Bailey v. Drexel Furniture (pg. 450)

   4. In Hill v. Wallace (1922), decided the same day as Bailey v. Drexel Furniture, the Court held invalid as a regulation of the local business of grain trading a tax of 20 cents per bushel on grain future contracts except those made through "boards of trade" designated by the secretary of agriculture upon their compliance with detailed regulations specified in the statute. (pg. 450)

   5. In United States v. Constantine (1935), the Court struck down a federal excise tax of $1,000 imposed on liquor dealers carrying on business in violation of state or local law; the Court held that this was a penalty and not a revenue-raising measure. (pg 450)

   6. In McCray v. United States (1904), the Court sustained a law, designed to discourage the sale of margarine that looked like butter, that taxed yellow margarine at 10 cents per pound and white margarine at only 0.25 cents per pound. (pg. 450)

      1. The Court in Bailey v. Drexel Furniture distinguished this law on the ground that on its face, it was a tax rather than regulatory measures.

   7. In United States v. Doremus (1919), the Court sustained burdensome federal record-keeping requirements on sellers of narcotics, ostensibly designed to enforce a tax on the drugs. (pg.450)

      1. The Court in Bailey v. Drexel Furniture distinguished this law on the ground that on its face, it was a tax rather than regulatory measures.

   8. In Sonzinsky v. United States (1937), the Court upheld a law requiring persons dealing in certain firearms (e.g., machine guns with silencers, sawed-off shotguns, and rifles) to register with the collector of internal revenue and pay a $200 annual tax. (pg. 564)

      1. The Court noted that the law "contains no regulation other than the mere registration provisions, which are obviously supportable in aid of a revenue purpose. On its face it is only a taxing measure." Sonzinsky v. United States (pg. 564)

         • "Every tax is in some measure regulatory. . . . But a tax is not any less a tax because it has a regulatory effect; and it has long been established that an Act of Congress which on its face purports to be an exercise of the taxing power is not any less so because the tax is burdensome or tends to restrict or suppress the things taxed." Sonzinsky v. United States (pg. 564)

         • "Inquiry into the hidden motives which may move Congress to exercise a power constitutionally conferred upon it is beyond the competency of courts." Sonzinsky v. United States (pg. 565)

           • Courts "will not undertake by collateral inquiry as to the measure of the regulatory effect of a tax, to ascribe to Congress and attempt, under the guise of taxation, to exercise another power denied by the Federal Constitution." Sonzinsky v. United States (565)

   9. In United States v. Kahriger (1953), the Court upheld a federal provision requiring persons engaged in the business of accepting wagers to pay a $50 occupational tax and register with the collection of internal revenues. (pg. 568)

      1. "[A] federal excise tax does not cease to be valid merely because it discourages or deters the activities taxed. Nor is the tax invalid because the revenue obtained is negligible." United States v. Kahriger (pg. 568)

         • "[T]he instant tax has a regulatory effect. But regardless of its regulatory effect, the wagering tax produces revenue. . . ." United States v. Kahriger

      2. "It is axiomatic that the power of Congress to tax is extensive and sometimes falls with crushing effect on businesses deemed unessential or inimical to the public welfare, or where, as in dealing with narcotics, the collection of the tax also is difficult. As is well known, the constitutional restraints on taxing are few." United States v. Kahriger (pg. 568)

      3. "Unless there are provisions extraneous to any tax need, courts are without authority to limit the exercise of the taxing power. All the provisions of this excise are adapted to the collection of a valid tax."

   10. NFIB v. Sibelius (2012)

       1. In NFIB v. Sibelius, the Court first noted that the exaction at issue looks like a tax in many respects:

          • (1) "The '[s]hared responsibility payment,' as the statute entitles it, is paid into the Treasury by 'taxpayer[s]' when they file their tax returns." NFIB v. Sibelius (pg. 15)

          • (2) "It does not apply to individuals who do not pay federal income taxes because their household income is less than the filing threshold in the Internal Revenue Code." NFIB v. Sibelius (pg. 15)

          • (3) "For taxpayers who do owe the payment, its amount is determined by such familiar factors as taxable income, number of dependents, and joint filing status." NFIB v. Sibelius (pg. 15)

          • (4) "The requirement to pay is found in the Internal Revenue Code and enforced by the IRS, which—as we previously explained—must assess and collect it 'in the same manner as taxes.'" NFIB v. Sibelius (pg. 15)

          • (5) "This process yields the essential feature of any tax: it produces at least some revenue for the Government. Indeed, the payment is expected to raise about $4 billion per year by 2017." NFIB v. Sibelius (pg. 15)

       2. The Court in Sibelius then noted that the fact that the Congress labeled the exaction as a "penalty" is not dispositive.

          • In determining whether an exaction is a "tax" or a "penalty," a "functional approach" is employed. See NFIB v. Sibelius (pg. 16)

            • The "label . . . does not determine whether the payment may be viewed as an exercise of Congress’s taxing power . . . ." See NFIB v. Sibelius (pg. 16)

       3. The Court then noted that the factors considered in Bailey v. Drexel Furniture all weigh in favor of the exaction being a "tax" rather than a "penalty."

          • (1) Does the exaction impose an exceedingly heavy burden?

            • "[F]or most Americans the amount due will be far less than the price of insurance, and, by statute, it can never be more." NFIB v. Sibelius (pp. 15-16)

          • (2) Is there a scienter requirement?

            • "[T]he individual mandate contains no scienter requirement." NFIB v. Sibelius (pg. 16)

          • (3) Who enforces the exaction?

            • "[T]he payment is collected solely by the IRS through the normal means of taxation—except that the Service is not allowed to use those means most suggestive of a punitive sanction, such as criminal prosecution." NFIB v. Sibelius (pg. 16)

       4. From here, the Court then notes that the fact that this exaction is intended to affect individual conduct is also not dispositive. NFIB v. Sibelius (pg. 16)

          • "None of this is to say that the payment is not intended to affect...