Steward Machine Company V. Davis - Background

Background

In the first months of 1937, the Court handed down decisions that affirmed both national and state prerogative to legislate regarding social welfare. The decisions were the first wave of what has become known as the constitutional revolution of 1937.

There are three additional issues that set the stage in early 1937:

  1. Use of the Spending Power of the national government to regulate commercial economic activity
  2. Expansive view of general welfare
  3. National economic conditions in the United States

1. Use of the Spending Power of the national government to regulate commercial economic activity

By 1937, it had been well-established that regulatory taxes controlling commercial economic actions were within the power of Congress. In Hampton & Co. v. United States, the U.S. Supreme Court held that a regulatory tax is valid even if the revenue purpose of the tax may be secondary. The Supreme Court had also held that a tax statute does not necessarily fail because it touches on activities that Congress might not otherwise regulate. In Magnano Co. v. Hamilton, the Court stated:

From the beginning of our government, the courts have sustained taxes although imposed with the collateral intent of effecting ulterior ends which, considered apart, were beyond the constitutional power of the lawmakers to realize by legislation directly addressed to their accomplishment.

Further emphasizing the broad power of taxation, the Court in Sonzinsky v. United States concluded that a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. In that case the Court held (regarding a tax on dealers in firearms):

We are not free to speculate as to the motives which moved Congress to impose it, or as to the extent to which it may operate to restrict the activities taxed. As it is not attended by an offensive regulation, and since it operates as a tax, it is within the national taxing power.

2. Expansive view of general welfare

The Supreme Court had recently decided U.S. v. Butler. The main issue presented in that case was whether certain provisions of the Agricultural Adjustment Act of 1933 conflicted with the Constitution. In the Act, a tax was imposed on processors of farm products, the proceeds to be paid to farmers who would reduce their area and crops. The intent of the act was to increase the prices of certain farm products by decreasing the quantities produced.

The Court held that the so-called tax was not a true one because the payments to farmers were coupled with unlawful and oppressive coercive contracts, and the proceeds were earmarked for the benefit of farmers complying with the prescribed conditions. Making the payment of a government subsidy to a farmer conditional on the reduction of his planned crops went beyond the powers of the national government. Specifically, the Court said:

The act invades the reserved rights of the states. It is a statutory plan to regulate and control agricultural production, a matter beyond the powers delegated to the federal government. The tax, the appropriation of the funds raised, and the direction for their disbursement, are but parts of the plan. They are but means to an unconstitutional end.

Although it struck down the Act, the Court dealt positively with expenditure of funds to advance the general welfare as specified in Article 1 § 8 of the Constitution. The Court stated that the issue “presents the great and the controlling question in the case.” After comparing opposing expansive and restrictive interpretations of the Spending Clause, the Court decided that

the 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. Each contention has had the support of those whose views are entitled to weight. This court had noticed the question, but has never found it necessary to decide which is the true construction. Justice Story, in his Commentaries, espouses the Hamiltonian position. We shall not review the writings of public men and commentators or discuss the legislative practice. Study of all these leads us to conclude that the reading advocated by Justice Story is the correct one. While, therefore, the power to tax is not unlimited, its confines are set in the clause which confers it, and not in those of Sec. 8 which bestow and define the legislative powers of the Congress. 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.

The idea that Congress has authority separate and distinct from powers granted by enumeration was (and still is) controversial. The fact that the Court struck down the Act despite an expansive interpretation of the Spending Clause reflects the turmoil in the Court's thinking at this critical time.

3. National economic conditions in the United States

The nation was in the midst of the Great Depression. In its Steward decision, the Court noted that:

During the years 1929 to 1936, when the country was passing through a cyclical depression, the number of the unemployed mounted to unprecedented heights. Often the average was more than 10 million; at times a peak was attained of 16 million or more.

The unemployment compensation provisions of the Social Security Act of 1935 establish a tax imposed on employers. If, however, a state has established an approved unemployment compensation plan, the taxpayer is allowed to credit up to 90% of the federal tax paid to the state unemployment fund. In effect, the Act established a taxing structure designed to induce states to adopt consistent laws for funding and payment of unemployment compensation.

The main controversy in Steward was whether the tax coerced the states and whether the tax was within the powers of Congress. Justice Cardozo wrote for a sharply divided Court—one that was in the process of changing its character relative to affirmation of national action for the general welfare:

The question is to be answered whether the expedient adopted has overlept the bounds of power. The assailants of the statute say that its dominant end and aim is to drive the state legislatures under the whip of economic pressure into the enactment of unemployment compensation laws at the bidding of the central government.

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