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Supreme Court Cases

301 U. S. 548

(Opinion of the Court)

CARDOZO, J.  The validity of the tax imposed by the Social Security Act on employers of eight or more is here to be determined.

Petitioner, an Alabama corporation, paid a tax in accordance with the statute, filed a claim for refund with the Commissioner of Internal Revenue, and sued to recover the payment asserting a conflict between the statute and the Constitution of the United States.  Upon demurrer the District Court gave judgment for the defendant dismissing the complaint, and the Circuit Court of Appeals for the Fifth Circuit affirmed....  An important question of constitutional law being involved, we granted certiorari.

The Social Security Act is divided into eleven separate titles, of which only Titles IX and III are so related to this case as to stand in need of summary.

The assault on the statute proceeds on an extended front.  Its assailants take the ground that the tax is not an excise; that it is not uniform throughout the United States as excises are required to be; that its exceptions are so many and arbitrary as to violate the Fifth Amendment; that its purpose was not revenue, but an unlawful invasion of the reserved powers of the states; and that the states in submitting to it have yielded to coercion and have abandoned governmental functions which they are not permitted to surrender.

The objections will be considered seriatim with such further explanation as may be necessary to make their meaning clear. 

First: The tax, which is described in the statute as an excise, is laid with uniformity throughout the United States as a duty, an impost or an excise upon the relation of employment.

1. We are told that the relation of employment is one so essential to the pursuit of happiness that it may not be burdened with a tax.  Appeal is made to history.  From the precedents of colonial days we are supplied with illustrations of excises common in the colonies.  They are said to have been bound up with the enjoyment of particular commodities.  Appeal is also made to principle or the analysis of concepts.  An excise, we are told, imports a tax upon a privilege; employment, it is said, is a right, not a privilege, from which it follows that employment is not subject to an excise.  Neither the one appeal nor the other leads to the desired goal....

The historical prop failing, the prop or fancied prop of principle remains.  We learn that employment for lawful gain is a "natural” or "inherent” or "inalienable” right, and not a "privilege” at all.  But natural rights, so called, are as much subject to taxation as rights of less importance.  An excise is not limited to vocations or activities that may be prohibited altogether.  It is not limited to those that are the outcome of a franchise.  It extends to vocations or activities pursued as of common right.  What the individual does in the operation of a business is amenable to taxation just as much as what he owns, at all events if the classification is not tyrannical or arbitrary.  "Business is as legitimate an object of the taxing powers as property.”  City of Newton v. Atchison, 31 Kan. 151, 154 (per Brewer, J.).  Indeed, ownership itself, as we had occasion to point out the other day, is only a bundle of rights and privileges invested with a single name.  Henneford v. Silas Mason Co., Inc., March 29, 1937, 300 U. S. 577....  Employment is a business relation, if not itself a business.  It is a relation without which business could seldom be carried on effectively.  The power to tax the activities and relations that constitute a calling considered as a unit is the power to tax any of them.  The whole includes the parts.

The subject matter of taxation open to the power of the Congress is as comprehensive as that open to the power of the states, though the method of apportionment may at times be different.  "The Congress shall have power to lay and collect taxes, duties, imposts and excises.”  Art. 1, § 8.  If the tax is a direct one, it shall be apportioned according to the census or enumeration.  If it is a duty, impost, or excise, it shall be uniform throughout the United States.  Together, these classes include every form of tax appropriate to sovereignty.  Whether the tax is to be classified as an "excise” is in truth not of critical importance.  If not that, it is an "impost” or a "duty.”  A capitation or other "direct” tax it certainly is not.  "Although there have been from time to time intimations that there might be some tax which was not a direct tax nor included under the words ‘duties, imposts and excises,' such a tax for more than one hundred years of national existence has as yet remained undiscovered, notwithstanding the stress of particular circumstances has invited thorough investigation into sources of powers.”  Pollock v. Farmers' Loan and Trust Co., 157 U. S. 429, 557.  There is no departure from that thought in later cases, but rather a new emphasis of it.  Thus, in Thomas v. United States, 192 U. S. 363, 370, it was said of the words "duties, imposts and excises” that "they were used comprehensively to cover customs and excise duties imposed on importation, consumption, manufacture and sale of certain commodities, privileges, particular business transactions, vocations, occupations and the like.”  At times taxpayers have contended that the Congress is without power to lay an excise on the enjoyment of a privilege created by state law.  The contention has been put aside as baseless.  Congress may tax the transmission of property by inheritance or will, though the states and not Congress have created the privilege of succession.  Congress may tax the enjoyment of a corporate franchise, though a state and not Congress has brought the franchise into being.  The status books of the states are strewn with illustrations of taxes laid on occupations pursued of common right.  We find no basis for a holding that the power in that regard which belongs by accepted practice to the legislature of the states, has been denied by the Constitution to the Congress of the nation.

2. The tax being an excise, its imposition must conform to the canon of uniformity.  There has been no departure from this requirement.  According to the settled doctrine the uniformity exacted is geographical, not intrinsic….

Second:  The excise is not invalid under the provisions of the Fifth Amendment by force of its exemptions.

The statute does not apply, as we have seen, to employers of less than eight.  It does not apply to agricultural labor, or domestic service in a private home or to some other classes of less importance.  Petitioner contends that the effect of these restrictions is an arbitrary discrimination vitiating the tax.

The Fifth Amendment unlike the Fourteenth has no equal protection clause.  But even the states, though subject to such a clause, are not confined to a formula of rigid uniformity in framing measures of taxation.  They may tax some kinds of property at one rate, and others at another, and exempt others altogether.  They may lay an excise on the operations of a particular kind of business and exempt some other kind of business closely akin thereto.  If this latitude of judgment is lawful for the states, it is lawful, a fortiori, in legislation by the Congress, which is subject to restraints less narrow and confining.

The classifications and exemptions directed by the statute now in controversy have support in considerations of policy and practical convenience that cannot be condemned as arbitrary.  The classifications and exemptions would therefore be upheld if they had been adopted by a state and the provisions of the Fourteenth Amendment were invoked to annul them.  This is held in two cases passed upon today in which precisely the same provisions were the subjects of attack, the provisions being contained in the Unemployment Compensation Law of the State of Alabama.  Carmichael v. Southern Coal & Coke Co., No. 724, 301 U. S. 495, and Carmichael v. Gulf States Paper Corp., No. 797, 301 U. S. —.  The opinion rendered in those cases covers the ground fully.  It would be useless to repeat the argument.  The act of Congress is therefore valid, so far at least as its system of exemptions is concerned, and this though we assume that discrimination, if gross enough, is equivalent to confiscation and subject under the Fifth Amendment to challenge and annulment.

Third:  The excise is not void as involving the coercion of the States in contravention of the Tenth Amendment or of restrictions implicit in our federal form of government.

The proceeds of the excise when collected are paid into the Treasury at Washington, and therefore are subject to appropriation like public moneys generally.  No presumption can be indulged that they will be misapplied or wasted.  Even if they were collected in the hope or expectation that some other and collateral good would be furthered as an incident, that without more would not make the act invalid.  This indeed is hardly questioned.  The case for the petitioner is built on the contention that here an ulterior aim is wrought into the very structure of the act, and what is even more important that the aim is not only ulterior, but essentially unlawful.  In particular, the 90 per cent credit is relied upon as supporting that conclusion.  But before the statute succumbs to an assault upon these lines, two propositions must be made out by the assailant.  There must be a showing in the first place that separated from the credit the revenue provisions are incapable of standing by themselves.  There must be a showing in the second place that the tax and the credit in combination are weapons of coercion, destroying or impairing the autonomy of the states.  The truth of each proposition being essential to the success of the assault, we pass for convenience to a consideration of the second, without pausing to inquire whether there has been a demonstration of the first.

To draw the line intelligently between duress and inducement there is need to remind Ourselves of facts as to the problem of unemployment that are now matters of common knowledge....  The fact developed quickly that the states were unable to give the requisite relief.  The problem had become national in area and dimensions.  There was need of help from the nation if the people were not to starve.  It is too late today for the argument to be heard with tolerance that in a crisis so extreme the use of the moneys of the nation to relieve the unemployed and their dependents is a use for any purpose narrower than the promotion of the general welfare.  The nation responded to the call of the distressed.  Between January 1, 1933 and July 1, 1936, the states (according to statistics submitted by the Government) incurred obligations of $689,291,802 for emergency relief; local subdivisions an additional $775,675,366.  In the same period the obligations for emergency relief incurred by the national government were $2,929,307,125, or twice the obligations of states and local agencies combined.  According to the President's budget message for the fiscal year 1938, the national government expended for public works and unemployment relief for the three fiscal years 1934, 1935, and 1936, the stupendous total of $8,681,000,000.  The parens patriae has many reasons—fiscal and economic as well as social and moral—for planning to mitigate disasters that bring these burdens in their train.

In the presence of this urgent need for some remedial expedient, the question is to be answered whether the expedient adopted has overstepped 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.  Supporters of the statute say that its operation is not constraint, but the creation of a larger freedom, the states and the nation joining in a cooperative endeavor to avert a common evil.  Before Congress acted, unemployment compensation insurance was still, for the most part, a project and no more.  Wisconsin was the pioneer.  Her statute was adopted in 1931.  At times bills for such insurance were introduced elsewhere, but they did not reach the stage of law.  In 1935 four states (California, Massachusetts, New Hampshire and New York) passed unemployment laws on the eve of the adoption of the Social Security Act, and two others did likewise after the federal act and later in the year.  The statutes differed to some extent in type, but were directed to a common end.  In 1936, twenty-eight other states fell in line, and eight more the present year.  But if states had been holding back before the passage of the federal law, inaction was not owing, for the most part to the lack of sympathetic interest.  Many held back through alarm lest in laying such a toll upon their industries, they would place themselves in a position of economic disadvantage as compared with neighbors or competitors.  See House Report, No. 615, 74th Congress, 1st session, p. 8; Senate Report, No. 628, 74th Congress, 1st session, p. 11.  Two consequences ensued.  One was that the freedom of a state to contribute its fair share to the solution of a national problem was paralyzed by fear.  The other was that in so far as there was failure by the states to contribute relief according to the measure of their capacity, a disproportionate burden, and a mountainous one, was laid upon the resources of the Government of the nation.

The Social Security Act is an attempt to find a method by which all these public agencies may work together to a common end.  Every dollar of the new taxes will continue in all likelihood to be used and needed by the nation as long as states are unwilling, whether through timidity or for other motives, to do what can be done at home.  At least the inference is permissible that Congress so believed, though retaining undiminished freedom to spend the money as it pleased.  On the other hand fulfillment of the home duty will be lightened and encouraged by crediting the taxpayer upon his account with the Treasury of the nation to the extent that his contributions under the laws of the locality have simplified or diminished the problem of relief and the probable demand upon the resources of the fisc.  Duplicated taxes, or burdens that approach them, are recognized hardships that government, state or national, may properly avoid.  If Congress believed that the general welfare would better be promoted by relief through local units than by the system then in vogue, the cooperating localities ought not in all fairness to pay a second time.

Who then is coerced through the operation of this statute?  Not the taxpayer.  He pays in fulfillment of the mandate of the local legislature.  Not the state.  Even now she does not offer a suggestion that in passing the unemployment law she was affected by duress.  For all that appears she is satisfied with her choice, and would be sorely disappointed if it were now to be annulled.  The difficulty with the petitioner's contention is that it confuses motive with coercion.  "Every tax is in some measure regulatory.  To some extent it interposes an economic impediment to the activity taxed as compared with others not taxed.”  Sonzinsky v. United States, supra, March 29, 1937.  In like manner every rebate from a tax when conditioned upon conduct is in some measure a temptation.  But to hold that motive or temptation is equivalent to coercion is to plunge the law in endless difficulties.  The outcome of such a doctrine is the acceptance of a philosophical determinism by which choice becomes impossible.  Till now the law has been guided by a robust common sense which assumes the freedom of the will as a working hypothesis in the solution of its problems.  The wisdom of the hypothesis has illustration in this case.  Nothing in the case suggests the exertion of a power akin to undue influence, if we assume that such a concept can ever be applied with fitness to the relations between state and nation.  Even on that assumption the location of the point at which pressure turns into compulsion, and ceases to be inducement, would be a question of degree, —at times, perhaps, of fact.  The point had not been reached when Alabama made herchoice.  We cannot say that she was acting, not of her unfettered will, but under the strain of a persuasion equivalent to undue influence, when she chose to have relief administered under laws of her own making, by agents of her own selection, instead of under federal laws, administered by federal officers, with all the ensuing evils, at least to many minds, of federal patronage and power.  There would be a strange irony, indeed, if her choice were now to be annulled on the basis of an assumed duress in the enactment of a statute which her courts have accepted as a true expression of her will.  We think the choice must stand.…

Fourth:  The statute does not call for a surrender by the states of powers essential to their quasi-sovereign existence.

Argument to the contrary has its source in two sections of the act. One section (903) defines the minimum criteria to which a state compensation system is required to conform if it is to be accepted by the Board as the basis for a credit.  The other section (904) rounds out the requirement with complementary rights and duties.  Not all the criteria or their incidents are challenged as unlawful.  We will speak of them first generally, and then more specifically in so far as they are questioned....

Even if opinion may differ as to the fundamental quality of one or more of the conditions, the difference will not avail to vitiate the statute.  In determining essentials Congress must have the benefit of a fair margin of discretion.  One cannot say with reason that this margin has been exceeded, or that the basic standards have been determined in any arbitrary fashion.  In the event that some particular condition shall be found to be too uncertain to be capable of enforcement, it may be severed from the others, and what is left will still be valid.

We are to keep in mind steadily that the conditions to be approved by the Board as the basis for a credit are not provisions of a contract, but terms of a statute, which may be altered or repealed. Section 903 (a) (6).  The state does not bind itself to keep the law in force.  It does not even bind itself that the moneys paid into the federal fund will be kept there indefinitely or for any stated time.  On the contrary, the Secretary of the Treasury will honor a requisition for the whole or any part of the deposit in the fund whenever one is made by the appropriate officials.  The only consequence of the repeal or excessive amendment of the statute, or the expenditure of the money, when requisitioned, for other than compensation uses or administrative expenses, is that approval of the law will end, and with it the allowance of a credit, upon notice to the state agency and an opportunity for hearing.  Section 903 (b) (c).

These basic considerations are in truth a solvent of the problem.  Subjected to their test, the several objections on the score of abdication are found to be unreal....

Finally and chiefly, abdication is supposed to follow from Section 904 of the statute and the parts of Section 903 that are complementary thereto.  Section 903 (a) (3).  By these the Secretary of the Treasury is authorized and directed to receive and hold in the Unemployment Trust Fund all moneys deposited therein by a state agency for a state unemployment fund and to invest in obligations of the United States such portion of the Fund as is not in his judgment required to meet current withdrawals.  We are told that Alabama in consenting to that deposit has renounced the plenitude of power inherent in her statehood.

The same pervasive misconception is in evidence again.  All that the state has done is to say in effect through the enactment of a statute that her agents shall be authorized to deposit the unemployment tax receipts in the Treasury at Washington.  Alabama Unemployment Act of September 14, 1935, Section 10 (i).  The statute may be repealed.  Section 903 (a) (6).  The consent may be revoked.  The deposits may be withdrawn.  The moment the state commission gives notice to the depositary that it would like the moneys back, the Treasurer will return them.  To find state destruction there is to find it almost anywhere.  With nearly as much reason one might say that a state abdicates its functions when it places the state moneys on deposit in a national bank.

There are very good reasons of fiscal and governmental policy why a State should be willing to make the Secretary of the Treasury the custodian of the fund.  His possession of the moneys and his control of investments will be an assurance of stability and safety in times of stress and strain.  A report of the Ways and Means Committee of the House of Representatives, quoted in the margin, develops the situation clearly.  Nor is there risk of loss or waste.  The credit of the Treasury is at all times back of the deposit, with the result that the right of withdrawal will be unaffected by the fate of any intermediate investments, just as if a checking account in the usual form had been opened in a bank.

The inference of abdication thus dissolves in thinnest air when the deposit is conceived of as dependent upon a statutory consent, and not upon a contract effective to create a duty.  By this we do not intimate that the conclusion would be different if a contract were discovered.  Even sovereigns may contract without derogating from their sovereignty.  The states are at liberty, upon obtaining the consent of Congress, to make agreements with one another.  Constitution, Art. I, Section 10, Par. 3.  We find no room for doubt that they may do the like with Congress if the essence of their statehood is maintained without impairment.  Alabama is seeking and obtaining a credit of many millions in favor of her citizens out of the Treasury of the nation.  Nowhere in our scheme of government—in the limitations express or implied of our federal constitution—do we find that she is prohibited from assenting to conditions that will assure a fair and just requital for benefits received.  But we will not labor the point further.  An unreal prohibition directed to an unreal agreement will not vitiate an act of Congress, and cause it to collapse in ruin....

The judgment is affirmed.