Article I, Section 8, Clause 1:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States; . . .

Congress has broad discretion in selecting the “measure and objects” of taxation, and may use its taxing power to regulate private conduct.1 For instance, the Supreme Court has sustained regulations on the contents of taxed packaged goods2 and the packaging of taxed oleomargarine,3 which were ostensibly designed to prevent fraud in the collection of the tax. It has also upheld measures taxing drugs4 and firearms,5 which prescribed rigorous restrictions under which such articles could be sold or transferred, and imposed heavy penalties upon persons dealing with them in any other way.

The Court has not invalidated a tax with a clear regulatory effect solely because Congress was motivated by a regulatory purpose.6 Even where a tax is coupled with regulations that have no relation to the efficient collection of the tax, and no other purpose appears on the face of the statute, the Court has refused to inquire into the motives of the lawmakers and has sustained the tax despite its prohibitive proportions.7 The Court has stated:

In some cases, however, the structure of a taxation scheme is such as to suggest that Congress actually intends to regulate under a separate constitutional authority.9 As long as such separate authority is available to Congress, the imposition of a tax as a penalty for such regulation is valid.10 In National Federation of Independent Business v. Sebelius (NFIB),11 the Court reaffirmed that it construes the Constitution to prohibit Congress from using the taxing power to enact taxes that are functionally regulatory penalties as a means of regulating in areas that Congress cannot regulate directly through a separate constitutional authority.12 The Court has invalidated a few federal taxes on this basis.13

Discerning whether Congress, in passing a regulation that purports to be under the taxing authority, intends to exercise a separate constitutional authority, requires evaluation of a number of factors.14 Under Bailey v. Drexel Furniture Co.,15 decided in 1922, the Court, which had previously rejected a federal law regulating child labor as being outside of the Commerce Clause,16 also rejected a 10% tax on the net profits of companies who knowingly employed child labor. The Court invalidated the child labor tax as a penalty exceeding Congress’s constitutional authority and aiming to achieve a regulatory purpose “plainly within” the exclusive powers reserved to the states under the Tenth Amendment.17 Four characteristics of the tax led the Court to conclude the tax was a penalty. First, the Court noted that the law in question set forth a specific and detailed regulatory scheme—including the ages, industry, and number of hours allowed—establishing when employment of underage youth would incur taxation.18 Second, the tax was not commensurate with the degree of the infraction—i.e., a small departure from the prescribed course of conduct could feasibly lead to the 10% tax on net profits.19 Third, the tax had a scienter requirement, so that the employer had to know that the child was below a specified age in order to incur taxation.20 Fourth, the statute made the businesses subject to inspection by officers of the Secretary of Labor, positions not traditionally charged with the enforcement and collection of taxes.21 The Court distinguished the child labor tax from acceptable regulatory taxes by emphasizing that in those cases Congress had authority outside the taxing power to regulate those activities.22

In the first half of the twentieth century, the Court continued to strike down federal taxes on the ground that they infringed on regulatory powers reserved to the states under the Tenth Amendment because Congress did not have separate constitutional authority to regulate the subject matter at issue. In 1935, in United States v. Constantine,23 the Court struck down a federal excise tax on liquor dealers operating in violation of state law. The Court construed the Constitution to prohibit Congress from imposing the excise tax when the purpose of the tax was to punish rather than raise revenue.24 The majority concluded that Congress exceeded its authority by penalizing liquor dealers for violating state law, because such regulation was reserved, under the Tenth Amendment, to the states.25 Congress lacked authority to impose a penalty on liquor dealers following the repeal of the Eighteenth Amendment, which had established the national prohibition on alcohol.26 The next year, in United States v. Butler,27 the Court struck down a tax on agricultural producers that Congress had enacted to raise funds to subsidize specific crops and control agricultural commodity prices. The Court held that Congress did not hold the power to regulate the “purely local activity” 28 of controlling agricultural production, because the power to regulate local activity was reserved to the states under the Tenth Amendment.29 The Court has since limited the applicability of these decisions.30

In subsequent cases, the Court upheld regulatory taxes without specifying whether Congress had authority to regulate the activity subject to tax under its other enumerated powers. For example, in Sonzinsky v. United States,31 the Court rejected a challenge to a federal license tax on dealers, importers, and manufacturers of certain firearms. Similarly, in United States v. Sanchez,32 the Court upheld a tax on unregistered transfers of marijuana that was challenged based on its penal nature.

In 2012, in NFIB v. Sebelius, the Court confirmed that the taxing power provides Congress with the authority to use taxes to carry out regulatory measures that might be impermissible if Congress enacted them under its other enumerated powers.33 In NFIB, the Court upheld the constitutionality of a provision in the Patient Protection and Affordable Care Act (ACA) requiring individuals to either purchase minimum health insurance (commonly referred to as the “individual mandate” ) or pay a “penalty” in lieu of purchasing minimum health insurance.34 Despite being labeled a penalty in the statute, the Court held the payment due in lieu of purchasing minimum health insurance (the exaction) was a constitutionally permissible use of Congress’s authority under the taxing power.35 More precisely, the Court ruled the exaction was a tax not a penalty for constitutional purposes, and thus the exaction was not impermissibly regulatory under the taxing power.36

Chief Justice John Roberts, in a majority holding,37 distinguished the exaction in NFIB from its past precedent in which it held Congress lacked authority under the taxing power to use penalties disguised as taxes to regulate activities that it could not regulate directly through its other enumerated powers.38 Specifically, the Court found that three of the four characteristics that it had used in Drexel Furniture Co. to conclude the child labor tax was a penalty for constitutional purposes were not present with respect to the individual mandate provision at issue in NFIB.39 Unlike Drexel Furniture Co., the Court found: (1) the exaction was not “prohibitory” because the exaction was “far less” than the cost of insurance; (2) there was no scienter requirement—the exaction was not levied based on a taxpayer’s knowledge of wrongdoing; and (3) the Internal Revenue Service (IRS) collected the exaction and the IRS was prohibited from using “those means most suggestive of a punitive sanction, such as criminal prosecution.” 40

The majority did not expressly address the first factor used by the Court in Drexel Furniture Co. to conclude the child labor tax was a penalty for constitutional purposes—whether the ACA set forth a specific and detailed course of conduct and imposed an exaction on those who transgress its standard. However, the majority did apply a functional approach that looked at the exaction’s “substance and application” to conclude the exaction was a tax not a penalty for constitutional purposes.41 The Court found that the exaction “look[ed] like a tax in many respects.” 42 The Court observed that the exaction is located in the Internal Revenue Code (IRC); the requirement to pay the exaction is located in the IRC; the IRS enforces the exaction; the IRS assesses and collects the exaction “in the same manner as taxes” ; the exaction does not apply to individuals who do not owe federal income taxes because their income is less than the filing threshold; taxpayers pay the exaction to the Treasury’s general fund when they file their tax returns; the exaction is based on “such familiar factors” as taxable income, filing status, and the number of dependents; and the exaction “yields the essential factor of any tax: it produces at least some revenue for the government.” 43 Additionally, in distinguishing penalties from taxes for constitutional purposes, the Court explained that, “if the concept of penalty means anything, it means punishment for an unlawful act or omission.” 44 The Court emphasized that, besides the exaction itself, there were no additional “negative legal consequences” for failure to purchase health insurance.45 The majority’s discussion suggests that, for constitutional purposes, the prominence of regulatory motivations for tax provisions may become less important than the nature of the exactions imposed and the manner in which they are administered.

In those areas where activities are subject to both taxation and regulation, Congress’s taxing authority is not limited from reaching illegal activities. For instance, Congress may tax an activity, such as the business of accepting wagers,46 regardless of whether it is permitted or prohibited by the laws of the United States47 or by those of a state.48 However, Congress’s authority to regulate using the taxing power “reaches only existing subjects.” 49 For example, “Congress cannot authorize a trade or business within a state in order to tax it,” because it would be “repugnant to the exclusive power of the State over the same subject.” 50 Thus, so-called federal “licenses,” so far as they relate to topics outside Congress’s constitutional authority, merely express “the purpose of the [federal] government not to interfere . . . with the trade nominally licensed, if the required taxes are paid.” 51 In those instances, whether a federally “licensed” trade shall be permitted at all is a question to be decided by a state.

Footnotes

1

Flint v. Stone Tracy Co., 220 U.S. 107, 167 (1911).

2

Felsenheld v. United States, 186 U.S. 126 (1902).

3

In re Kollock, 165 U.S. 526 (1897).

4

United States v. Doremus, 249 U.S. 86 (1919); cf. Nigro v. United States, 276 U.S. 332 (1928).

5

Sonzinsky v. United States, 300 U.S. 506 (1937).

6

Without casting doubt on the ability of Congress to regulate or punish through its taxing power, the Court has overruled United States v. Kahriger, 345 U.S. 22 (1953), and Lewis v. United States, 348 U.S. 419 (1955), to the extent that the opinions precluded individuals from asserting their Fifth Amendment privilege from self-incrimination as a defense to prosecution for violations of tax statutory schemes requiring registration and information reporting. Marchetti v. United States, 390 U.S. 39 (1968); see Leary v. United States, 395 U.S. 6 (1969); Grosso v. United States, 390 U.S. 62 (1968); Haynes v. United States, 390 U.S. 85 (1968).

7

McCray v. United States, 195 U.S. 27 (1904); see United States v. Doremus, 249 U.S. 86 (1919); Patton v. Brady, 184 U.S. 608 (1902).

8

United States v. Sanchez, 340 U.S. at 44 (1950).

9

Sunshine Anthracite Coal Co. v. Adkins, 310 U.S. 381, 393 (1940).

10

Id.; see also Edye v. Robertson (Head Money Cases), 112 U.S. 580 (1884).

11

567 U.S. 519 (2012).

12

Id. at 572–73.

13

See, e.g., United States v. Butler (Child Labor Tax Case), 297 U.S. 1, 68–69 (1936); United States v. Constantine, 296 U.S. 287, 293–94 (1935); Bailey v. Drexel Furniture Co. (Child Labor Tax Case), 259 U.S. 20, 37 (1922).

14

Hill v. Wallace, 259 U.S. 44 (1922); see also Helwig v. United States, 188 U.S. 605 (1903).

15

259 U.S. 20.

16

Hammer v. Dagenhart, 247 U.S. 251 (1918), overruled by United States v. Darby, 312 U.S. 100 (1941).

17

Drexel Furniture Co., 259 U.S. at 37.

18

Id. at 36.

19

Id.

20

Id. at 36–37.

21

Id. at 37.

22

Id. at 40–44.

23

296 U.S. 287 (1935).

24

Id. at 294.

25

Id. at 296.

26

Id. at 293–94.

27

297 U.S. 1, 63 (1936).

28

Id. at 63–64.

29

Id. at 68–69.

30

See NFIB v. Sebelius, 567 U.S. 519, 572–73 (2012).

31

300 U.S. 506, 513–14 (1937).

32

340 U.S. 42, 44 (1950).

33

NFIB, 567 U.S. 519.

34

Id. at 574 (majority opinion).

35

Id.

36

Id. at 572–74.

37

Justices Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan joined this portion of Justice Roberts’ opinion.

38

Id. at 564–68.

39

Id. at 565–66.

40

Id. at 566.

41

Id. at 565 (quoting United States v. Constantine, 296 U.S. 287, 294 (1935)).

42

Id. at 563.

43

NFIB, 567 U.S. at 563–64.

44

Id. at 567 (quoting United States v. Reorganized CF&I Fabricators of Utah, Inc., 518 U.S. 213, 224 (1996)).

45

Id. at 568.

46

United States v. Kahriger, 345 U.S. 22 (1953).

47

United States v. Stafoff, 260 U.S. 477, 480 (1923); United States v. Yuginovich, 256 U.S. 450, 462 (1921).

48

United States v. Constantine, 296 U.S. 287, 293 (1935).

49

License Tax Cases, 72 U.S. (5 Wall.) 462, 471 (1867).

50

Id.

51

Id.