Interactive Constitution Essay: Taxing Clause

Under the Articles of Confederation, Congress lacked the power to protect the states from military warfare waged by foreigners and from commercial warfare waged by one another. The states proved unable to solve these difficulties on their own. They acted individually when they needed to act collectively, and the Framers of the United States Constitution concluded that the states cannot reliably accomplish an objective when doing so requires them to cooperate.

Arguably the most severe problem facing the young nation under the Articles was that the national government had no power to tax individuals directly; indeed, it had no effective way of raising money at all. Instead, it was limited to “requisitioning” (that is, asking) the states to contribute their fair share of tax revenue to the national treasury in order to repay the Revolutionary War debts and fund the national government. Instead of complying with these requests, states free rode off the contributions of sister states. The consequence was that the national government was severely underfunded, which (among other things) gravely threatened national security.

The solution to the collective action failures of the Articles lay with the establishment of a more powerful and comprehensive unit of government—a national government with the authority to tax, raise and support a military, regulate interstate and international commerce, and act directly on individuals. The Taxing Clause of Article I, Section 8, is listed first for a reason: the Framers decided, and the ratifiers of the Constitution agreed, that Congress must itself possess the power “to lay and collect Taxes . . . to pay the Debts and provide for the common Defence and general Welfare of the United States.” Congress was given the power to assess, levy, and collect taxes without any need of assistance from the states, and Congress’s taxing power was not limited to repayment of the Revolutionary War debts—it was prospective as well.

After the Constitution was ratified, Alexander Hamilton (representing the Federalist Party) and James Madison (representing the Democratic Republican Party) debated the scope of the Taxing Clause. According to Hamilton, Congress possessed a robust power to tax (and spend) regardless of whether the tax (or expenditure) could plausibly be viewed as carrying out another enumerated power of Congress, such as regulating interstate commerce or raising and supporting a military. Madison argued that Congress had no independent power to tax and spend in pursuit of its conception of the general welfare; rather, Madison contended, the constitutional meaning of the phrase “general Welfare” is defined and limited by the specific grants of authority in the rest of Section 8. The Supreme Court did not weigh in on this longstanding debate over the scope of the federal taxing and spending powers until 1936, in United States v. Butler (1936), when it sided with Hamilton. Ever since, the law has been that Congress can use the Taxing Clause without tying such use to another of its constitutional powers.

What are the constitutional limits on Congress’s authority to use the Taxing Clause? It is clearly established that such power is limited by constitutional provisions protecting individual rights. For example, it would undoubtedly violate the Free Speech Clause if Congress taxed people just because they criticized the federal government.

More controversial is whether there are internal limits on the Taxing Clause, and whether they may be enforced by courts. Relatively early in American history, the Supreme Court suggested, in McCulloch v. Maryland (1819), that redress for misuse of the taxing power lies with the political process, where unhappy citizens can vote politicians out of office. Later, the Court suggested that courts, too, may enforce the limits on the Taxing Clause, and that Congress exceeds its power when it imposes monetary payments that have the primary purpose of regulating people’s behavior, not of raising revenue, even when Congress labels the payment a “tax,” not a “penalty.” Child Labor Tax Case (Bailey v. Drexel Furniture Co.) (1922). In more recent times, the Court sustained the constitutionality of required payments just because they raised at least some revenue. Sonzinsky v. United States (1937); United States v. Kahriger (1953). Because decisions from one era deviated from earlier decisions without overruling them, the Court’s Taxing Clause jurisprudence was for a long time difficult to sort out.

In 2012, in NFIB v. Sebelius (the Health Care Case), the Court clarified much of the confusion. It rejected a focus on the primary purpose of the required payment at issue, observing that in America, “taxes that seek to influence conduct are nothing new. Some of our earliest federal taxes sought to deter the purchase of imported manufactured goods in order to foster the growth of domestic industry.” Instead of asking about the primary purpose of the required payment, the Court adopted a “functional approach,” and made whether the payment was a tax or a penalty turn on the “practical characteristics” and likely effects of the payment.

Specifically, the Court held that the so-called “individual mandate” in the federal health care law (the requirement to either obtain health insurance or make a payment to the federal government) was within the scope of the Taxing Clause—even though Congress labeled the payment a “penalty,” not a “tax”—primarily because it was likely to have a relatively modest impact on people’s behavior. The Court reasoned that the required payment would likely discourage people from going without insurance without preventing them from doing so, which is why it was expected to raise several billion dollars in revenue each year. The Court’s holding in NFIB on the scope of the Taxing Clause is today the law of the land.