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Victor E. Cappa 






^ ^ 19/8 



9 » 3^ > * 

Legal Research Section 
January, 1936 






ThiB report on Federal Regtilation Through the Joint 
Emplo^rraent of the Power of Taxation and the Spending Power was 
prepared "by Mr, Victor E. Cappa as a study of the Legal Research 
Section, Mr, George W, Kretzinger, Jr., in charge, 

Tliis study was "begun, shortly after the Schechter deci- 
sion when plans for nev/ industrial legislation within the limits 
of that decision were under consideration. The original pur- 
pose was to state the legal case for such legislation as authori- 
tatively from the sts-ndpoint of its possible proponents as constitu- 
tional limitations and precendents permit. In so far as the re- 
port retains the flavor of a "brief v/ritten in support of a client's 
case, it is only "because, in the opinion of the v/rl'ter, such legis- 
lation as is indicated herein will stand the test of the Supreme 
Court. O"bviously legislative policy - \7hether any such statutes 
should or should not be enacted - is not v/ithin the province of 
this work; although specific forms or methods have been necessarily 
adduced as examples* 

L. C, Marshall 
Director, Division of Review 

^^"^^ 13 My 36 g 

Digitized by the Internet Archive 

in 2011 with funding from 

Boston Public Library 



BilDliography iii 

Texts iii 

Law Review Articles iii 

Law Review Notes iv 

Cases Cited v 

Statutes Cited vi 

Siimmary of Findings 1 

Argument 3 

A. Judicial limitations on Regulatory Taxing 

Statutes "based on the Reserved Powers of the 

States , 3 

Statutes sustained "by Supreme Court 3 

Statutes invalidated "hy Supreme Court 3 

General Principles of these cases 3-6 

Use of Taxing Devices in New Deal Statutes. . .6-7 
PrO]-osed Taxing measures in N.R.A. Legis- 
lative Piles 7 

5. Judicial limitations on Reasonal^leness of 

Classification 7 

Source of the power to levy excises 7 

The use of a practical point of view in 

determining reasonableness 8 

A difference of social and economic consequences 

as a "basis 8 

C. The Spending Pov^er and the Cases of liassachusetts 
& Erothingham v. iviellon 

The Source of spending pov/er S 

The Hamiltonian-Ladisoniaji controversy 

on the general neliare clause 9 

The unassaila'bilitj'- of the spending power 
as the practical result of I.Iassachusetts 

V. l,:ellon 9 

The fifty-fifty or cooperative grants-in- 
aid statutes 9 

The Massachusetts & Erothingham v. Mellon 

cases considered in detail 9-11 

Broad delegations of po\7er and regnJ.atory 

features in spending "bills 11 

Federal control of state action through co- 
operative grants-in-a,id sta.tutes 11 

D. A Four Plan Approach 11 

The pure taxing power approach 11 

The two "bill approach 11 

A non-correlative taxing and spending "bill 

approach 12 

The use of miscellaneous ancillar:/ devices. . . 12 

9378 -i-- 

E. The Two Bill Plan 

The disassociation of the taxing "bill 

from the appropriation bill 12 

The probability that the Supreme Court 

may read the two bills together 12 

The case of Gregg Dyeing Co. v. Query . . . .13-15 

The use of the two bill plan in the 

recent railroad retirement act 15 

F, Specific Recommendations Under the Four Plan 
Approach and Two Bill Plan 16 

Four different excise taxes on four labor 

privileges 16 

The rates of tax to be imposed 16 

The method of administrative determina- 
tion of subsistence wages and maximum 
periods of labor - advantages and disad- 
vantages 16 

The question of legislative standards 16 

The inapplicability of the objections of 
the Supreme Court in the Child Labor Tax 

Case 17 

The bases of classification for the four 

excise taxes on labor privileges 17 

Criticism of proposed N.R.A. bills in 

legislative files 17 

The plan of a cooperative N.R.A. between 

the federal government and the states 18 

Grants to states on condition of enactment 

of N.R.A. legislation 18-19 

The payment of direct bounties to com- 
plying employees 19-21 

The denial of deductions from gross in- 
come for substandard wages 21 

9378 -ii- 



Austin F. IJacdonald - Foderal Aid - 1928 

Austin F, I.i'acdonald - Federal SulDsidies to the States - 1925 

Federalist (Lodge ed.) 1902 

Stop-- - Coniientaries on the Constitution of the United States - 1891 

Hamilton - VJorks (Lodge ed,) 

Edward S, Corv/in - The Tvvilij^rht of the Supreme Court - 1934 

Lau Reviov/ Articles 

E. I7« Perhins - Discriminatory License Classifications - North Carolina Lan 
;-:evie\7 (Dec, 19 Si) 

K» Brev/ster - Is the Process Tax Constitutional - American Bar Association 
Journal (July, 1933) 

Edward St Cor;/in - The Spending Power of Congress Apropos the . 
Maternity Act - 36 Harvard Law Review 543 (1923) 

Abraham J. Levin - Does the Pov;er to Tax Involve the Eight to Destroy a Lav.^ 
ful Business - U, S# Law Review (Sept. 1933, Oct, 1935) 

Edward S, Corv/in - Congress' Power to Prohibit Commerce - 16 Cornell La.vr 
^rterly 477 (1933) 

Thomas Reed Poviell - Child Labor, Congress and the Constitution 1 iTorth Caro- 
lina Law Reviev; 61 (1922) 

Robert E. Cushman - The National Police Pov/er Under the Taxing Clause of the 
Constitution - 4 liinnesota Low Review 247 (1920) 

M. G-raves ^ Federal Sales Tax with Allocation of Share of Proceeds to the 
States - Tax liagazine (Oct, 193o) 

Walter Barton - Direct and Indirect Taxes - 3 ifet. Income Tax Magazine 336 

Walter Barton - Constitutional Limitations on Direct and Indirect Taxes - 
4 Nat. Income Tax i-iagazine 96 (1926) 

A. S, Gold - Jurisdiction of the Saorerae Court Over Political Q;uestioiis - 
Cornell Law Q^arterly (Dec, 1923) 

Paul E, Douglo.s - The Development of a System of Federal Grants in Aid - 
Political Science Quarterly (June 1920) 

9378 -iii- 

Rol)ert Et Cuslinan - Social p.nd Economic Control lliroii^^h Federal Taxation - 
Minnesota Lav; ilevicv/ (joiie, 19ri4-) 

S. D, Seecher - Energency .Relief Sales Tax - Dicldnson Lav; Roviev/, (jan-aar;-, 

Arthur 17. i.Iechenj Jr. - Tno Strange Case of Florida v, I.^ellon, 13 Cornell Lav; 
Qiarterly 351 (19:23) 

T. A» Lee — An Unconstitutional Diversion- of Tax Funds - Journal Bar Associa- 
tion Kansas (Feor-iar-/, 1934-) 

Sanmel Becker sjid EolDert A» Hess - The Chain Store License To.x and the Foiij.-— 
teenth Anendnent - 7 ITorth Carolina Law Heviev; 115 (1929) 

Walter E, Barton - The Federal Tfcixing Power - 99 Cent. L. J. 57 (1926) 

Walter E, Barton - Hie Scope of the Federal Taxing Pov/er - 2 ITationoJ. Income 
Tax Magazine 297 (1924) 

Barbara Ara.istrong - Tlie Federal SocirJ Sec-ority Act - Aneric;jii Bar Association 
Jovu'nal Becomher, ,1935. 

Lav; Reviev/ Hotes 

Constitutionality of State Chain Store Tax Based on Total lluj-nber of Stores - 
Yale Lav/ Journal (Febrvjarj?-, 1935) 

The Sales Tax - Harvard Law Review (l.iarch, 19 34-) 

Constitutional Limitations on Sales Taxes- - CoP.R. L'lichigan Law Reviev; 
(Fohruar-, 1935) 

9378 ' -iv- 


Voazie Hajik v. Porina. 75 Uo S. 5o3 ^1869) 

Billiii n V. United States, 232 U* S. 261 (1914) 

Uc^DJRO V. Ila.nilton, 292 U. S* 40 (1934) 

HcGra^ v. United States, 195 U. S. 27 (1904) 

In re Xolloch, 165 U. So 526 (1896) 

United States v, Doronus, 249 U, So 86 (1918) 

Lig{sett Co« V, Lee, 288 U, S, 517 (1952) 

State Board of Tax Commissioners v» Jackson, 283 U, S. 527 (l9ol) 

Sailc3- V. Drexel Forniture Co., 259 U. S. 20 (1922) 

Hill V. Wallace, 259 U, S. 44 (1922) 

License Tax Cases, 5 Wall, 462 (1866) 

United States v. Da.ugherty, 269 U.S. 360 (1925) v. Dagenhart, 247 U. S. 251 (1918) 

Lincaier v. United States, 26S U. S* 5 (1925) 

Alston V, United States, 274 Uo S. 289 (1927) 

Fox V. Standard Oil Co. of lu J., 294 U. S« 87 (1935) 

Qp-one TJing v. Kirkendell, 223 U, S. 59 (1912) 

Ai.ierican Sugar Eefining Co. v. Louisiana, 179 U, S« 89 (1900) 

Soutliucstern Oil Co, v. Texas, 217 U, S. 114 (1910) 

Sproles V. Binford, 286 U. S. 374 (1931) 

Ste^onenson v. Binford, 287 U. S. 251 (1932) 

Flint V. Stone Tracy Co., 220 U, S, 107 (1910) 

Thonas v. United States, 192 U, S. 363 (1903) 

Evans v. Gore, 253 U. S, 245 (l92l) 

lietropolis Theatre Co. v, Chicago, 228 Uo S. 61 (1913) 

Klein v. Board of Supervisors, 282 U. S. 19 (1930) 

Tyler v. United States, 281 U. S. 497 (1929) 

Barclay v. Edwards, 267 U, S. 442 (1924) 

liassachusetts v. Mellon, 262 U. 3. 447 (1922) 

Frothi;^gham v. Mellon, 262 U. S. 447 (1922) 

Gregg Dyeing Co. v. Q:u.ery, 286 U. S. 472 (I93l) 

Federal Farm Loan Banks Case, 255 U. S. 180 (1920) 

Railroad Retirement Board v. Alton, 55 S. Ct. 758 (1935) 

Allen V. Smith, 173 U. S. 389 (1898) 

United States v. Realty Co., 163 U. S. 427 (1895) 

B-ornett v. Thom-oson Oil & Gas Co., 283 U. S. 301 (1930) 

he-J Colonial Ice Co. v, Helvering, 292 U. S. 436 (1934) 

Helvering v. Indiana Life Insura.nce Co., 292 U. S. 371 (1934) 

Adizins v. Children* s HosTDital, 261 U. S. 525 (1923) 

Bunting v. Oregon, 243 U. S. 426 (1917) 

Holden v. Hardy, 1S9 U. S. 566 (1897) 

Huller V. Oregon, 208 U. S. 412 (1907) 

Riley v. Massachusetts, 232 U. S. 671 (1914) 

Miller v. Oregon, 236 U. S. 373 (1914) 

Sturges V. Beauchamp, 231 U. S, 320 

9378 -V- 


Tlie Maternity Act, 42 Stat, 224 
The i.iorrill Act, 12 Stat. 503 
The Siiith Lever Act, o8 Stat. 372 
Tlie Sriith Hiighes Act, 39 Stat, 929 
Federal Highi7a,y Act, 42 Stat, 212 
Vocational Hehabilitation Act, 41 Stat. 735 
national Firearm Act of 1934, 48 Stat, 1235 
Federal Highway Act of 1934, 48 Stat. 993 





The Supreme Court has sustained majiy ta^-ing statutes: whose primarjr pur- 
pose v/as regulatory rather than revenue raising© Other statutes of this type 
have "been invalidated, particularly the child labor tax. The general princi- 
ple of the decided cases is that the courts will not inquire into the collater- 
al motives of Congress in enacting such measures where ■tiiey do not disclose on 
their face s. y greater regulatory scheme than is incidental to the collection 
of the revenue to "be raised thereby. 

Slight differences have sufficed as bases of classification for tax pur- 
poses. Thus differences of social and economic consequences have been held to 
be sufficient. 

It is believed that the economic and social consequences in periods of de- 
pression of certain labcr practices such as the employment of child labor, the 
payment of sub- standard wages and the employment of laborers more than a reason- 
able maximum of hours may justify bases of classification for tax purposes. 

The objections of the Supreme Court in the Child Labor Tax Case and in 
other case 5 may be met by a simply drawn statute which contains no recital of 
purposes, oases of classification or detailed regulatory scheme beyond that in- 
cidental to the collection of the tax and which eliminates any penalty element 
and is directly proportioned to the extent of the privilege taxed and the fre- 
quency of its use. 

The type of taxes which may be utilized either singly or in conjunction 
with the others for regulatory purposes to achieve N,R,A, purposes are: 

First: A tax of 25 per cent on that part of payrolls which represents 
payments to children under fourteen years of age; second, a tax of 20 per cent 
on that part of payrolls which represents child labor between fourteen and six- 
teen years of age; third, a tax of 25 per cent on the differential between the 
sub-minimum wage paid to each employee and a minimum living wage determined 
administratively; and fourth, a tax of 50 per cent on that portion of payrolls 
which represaits compensation for services rendered in excess of certain maxi- 
mum hours of labor similarly determined. 

In addition a federal bounty system may be inaugurated to make payments 
to complying units of industry or grants-in-aid to the states to finance the 
cost of administration of state N, R,A, agencies, or to be their educational 
funds, on condition that they enact such social legislation as has been sus- 
tained by the Supreme Court in cases like Bunting v, Oregon (ten hour day for 
all employees of mills, factories, and manufacturing establishments), Holden 
v. Hardy , etc. The monies for these bounties can be raised by extending the 
present list of excises on the sale or use of certain commodities to include 
others, perhaps even to the extent of a general sales tax. These monies would 
be paid into the general treasury and then disbursed by a separate appropria- 
tions bill. 

The importance of having two separate bills is that under the doctrine of 
the companion cases of Massachusetts v. Mellon and Frothingham v, Mellon 
(infra) a taxpayer rjannot attack a spending bill, as his interest in the trea- 
sury funds is too remote. The device of two bills keeps that interest remote, 



liThilc there is some possibility that the Supreme Conrt may read these oills 
together, it is 'believocl that the disinclination of that Court to :'.)ass on the 
spending poner together v/ith the rule of construction consistently aciiierec'- to 
"by it in cases involving the validity of tax statutes maJies it in":)ro'ba''olc that 
it vdll do so. 

The device nay "be further used to secure compliance uith iuIl»A« standards 
as follows: A taxing bill v/ould lev;^ a five to ten per cent tax on the gross 
profits of all industry which tax v/ould be remitted by a separate appro'oriation 
bill to those units of industry which comply with federal standards acxiinistra- 
tivoly determined. Ancillary devices such as the denial of the right to de- 
duct sub*-minimum wages may also be employed in aid of the main plans. 



'Tliero are niunerous instances v/here the Su"orerae Court has sustained taxi- 
ing stc.tutes whose primary purpose was to effect certain social, economic 
or Lioral objectives and whose secondary aim was to raise revenue. Other 
statutes act"aated by similar regulatory motives have been striken do\7n by the 
higheist court as in excess of the Federal power. 

The general principle of these cases is that the co\U7ts will not inquire 
into the collateral motives of Congress in the enactment of measures which 
on their face disclose no greater reg^alatory scheme than is incidental to 
the collection of the revenue intended to be raised thereby. 

Taxing measures with undisclosed, or only partially disclosed, regula- 
tory intent v;hich have been sustained by the Supreme Court of the United States 
are: A tax of ten per cent on state bank notes to drive these notes out of 
existence ( Veazie Bank v, Fenno , 75 U,S« 535), a tax on foreign built yachts 
to discourage the use thereof ( Billings v, U,S «» 232 U.S, 26l) , special taxes 
on oleomargarine and butter substitutes to encourage the dairy industry?- 
( MaCTano Co^ v. Hamilton, 292 U,S, 40; McCray v, U.S . 27; In re Kolloch , 155 
U,S« 526), special excises on lotteries, liquor and narcotic dealers to sup- 
press Olid regulate these businesses ( U.S» v» Doremus , 249,U,S« 86; License 
Tax Cases y 5 'Jail* 462) , and more recently a graduated tax on the nu"iber of 
stores or business units to discourage chain stores and inordinate multipli- 
cation af units ( Liggett Co. v, Lee , 288 U«S» 517; n tate Board of Ta^x Coumis - 
sioners v. Jackson . 283 U,S. 527). 

Statutes v/ith disclosed regulatory schemes bearing little, if an,", regu- 
lation to the collection of the tax which have not succeeded in rujining the 
gauntlet of the highest court are the famous child labor tax case ( Baile;- 
V, Drexel Furniture Go «« 259 U.S. 20), where a special tax was imposed only 
on the employers of child labor; and the futures trading act case (Hill v. 
Wallace , 259 U.S. 44), \7here a tax was imposed on all contracts for future 
delivery- of grain. The regulatory schemes in both of these cases viere YSTy 
elaborate and went far beyond that purely incidental restraint and reg-olation 
which a tax must necessarily involve. 

These two eases clearly chart the coiurse which regulatory tax legislation 
must take to avoid being wrecked on the reefs of the Tenth Amendment which 
confirms the residuum of powers in the State governments. 

In the Child Labor Tax Case , sugra, the validity of Title XII of the 
Revenue Act of 1919 was involved. This title imposed an excise tax of ten 
per cent on the entire net profits received from the sale or disposition of 
the product of mines, quarries, mills, canneries, workshopc, factories 
or manufacturing establishments in which children under certain ages ^Tore 
employed. The tax was levied only on the emploj'-ers of child labor. In hold- 
ing that the act on its face was designed to penalize and thereb^- to cis- 
courage c.oncuct (the employment of child labor) within the regulatory power 
of the States, the court speaking through Chief Justice Taft said at Page 38: 


• .-4- 

"The difference 'between a tax and a -oenalty is sometimes difficult 
to define and yet the consequences of the distinction in the requir- 
ed method of their collection often are important, 'Ihere the sover- 
eign enacting the lavf has power to im;oose "both a tax and penalty the 
difference between revenue production and more regulation may oe im- 
material , "but not so Then one sovereign can impose a tax only, and 
the por/er of re,';ulation rests in another* Taxes are occa.sionally im- 
posed in the discretion of the legislature on proper subjects \7ith 
the primary motive of obtaining revenue from them and with the inci« 
dental motive of discouraging them be mal-cing their continuance oner- 
ous. They do not lose their character as taxes because of the in- 
cidental motive. But there comes a time in the extension of the 
penalizing features of the so-called ta.x when it loses its character 
as such and "becomes a mere penalty with the characteristics of re.^- 
lat ion suid punishment. Such is the case in the law before us. Al- 
though Congress does not invalidate the contract of emplo^n-nent or 
ezq^ressly declare that the employment within the mentioned ages is 
illegal, it does exiiibit its intent practically to achieve the latter 
result by adopting the criteria of wrong doing and imposing its 
principle consequence on those who transgress its standard," 

In Hill V. WaJlace, 259 U.S. 44, a complete regulatory schem.e on boards 
of trade thro-^igh the supervision of the Secretary of Agriculture was incor-oor- 
ated into a taxing meas-ure. The Future Trading Act of 1921 imposed a tax of 
20 cents a bushel on all contracts for the sale of grain for future deliver3'-, 
but excepted from its amplication sales on boards of trade designated as con- 
tract markets by the Secretary of Agriculture, on fulfillment by such boo.rds 
of certain conditions and requirements set forth in the act. Those require- 
ments were addjressed to the elimination of undesirable practices in the scle 
of grain. They provided for admission to membership on the Board and aJ.l 
its privileges of any authorized representative of any lawfully formed cooper- 
ative associations of oroducers, the prevention of manipulation of prices or 
the cornering of any grain by dealers or operators upon such board, the adop- 
tion and enforcement of rules requiring members to make and keep me:.-;ora.nda of 
all transactions in grain, A^hether for cash or for futui'e delivery, the preven- 
tion of the dissemination of false, misleading or ina.ccurate reports concerning 
crop or market information or conditions that "^af fee ted or tended to affect the 
price of cov.imodities, and the location of such boards at terminal markets \;here 
there v/as a recognized official weighing and inspection service and v^here cash 
grain vras sold in sufficient amount and under such conditions as to 'reflect the 
value of t;-jrain in its different grades, 

ITo board of trade X7as required to become a contract market but the induce- 
ment of complete exemption from the tax was held out to all boards of trade in 
order to compel their acceptance of the designation as a contract market.. 
This designation could be had only thro"'agh making the rules of the board and 
the conduct of its business conform to the prescribed requirements. 

The court held that it was impossible to escape the conviction' |'rom- a full 
reading of the law (the title of the act recited not only the tax purpose but 
that of regulation of boards of trade) that the manifest purpose of the tax 
(considered '.-ost burdensome by the court since it varied according- to the 
price and character of the grain from 15 per cent of its value to 50 per cent, 
compared to the tax on the same contracts for future delivery under the Heve-- 
nue Act of only 2 cents upon $100 of value) , was to compel boards of trade 
to con^oly -..Ith the regulations, many of which could hare no relevancy to the 


collection of the tax at all, The act in e ssence r,nd on its face was a coi.rolete 
regulation of the Jooards of trade v/ith a penalty of .20 cents a bi.ishel on all 
dfutuj-Qs^ ta-ooerce "boards of trade and their members into compliance. This pur- 
00 se r/as declared in the title to the bill, was clear from the effect of the 
provisions of the bill, \7as confirmed by the elaborate machinery for hearings 
by the Secretary and an administrative commission on violations of the re.^ti- 
lationsj and the withdravrpl by the commission of the designation of the board 
as a contract market, and the imposition of the penalty of a denial o,f trading 
privileges upon violators of the regulations, 

The Solicitor General of the United States in the Child Labor Ta:: Case, 
supra, laid great stress in his brief on the argument that taxes rarely are 
levied solely with reference to fiscal necessities but that the social, econom- 
ic, and moral effects of the tax, and all the v arying influences upon the pub- 
lic welfare that such a levy incidentally entails, are more influential con- 
siderations than the mere raising of revenue. He cited the cases referred to 
in paragraoh 3 hereof. The court, hov/ever, in both this and the Future Trading 
Act case distinguished these cases on the ground that in none of them did the 
law objected to show on its face detailed regulation of a concern wholly within 
the police power of a State, with a heavy exaction to promote the efficiency 
of such regulation. This distinction must be taken as fundamental. 

The Harcotic Drug Act involved in United States v, Doremus , 249 U.S. C5, 
did, however, on its face show a regulation of matters of local concern, Tliis 
was proba.bly the broadest regulatory scheme annexed to a tax measure A7hich 
has been sustained Ijy the Supreme Court. The Act imposed a special ta:: on the 
manufacture, importation and sale or gift-of opium or cocoa leaves or 'choir 
compounds or derivatives. Every person subject to the tax was required to 
register v.lth the Collector of Internal Revenue his name and place of business, 
and was forbidden to sell except upon the written order of the person to "..'hom 
the sale was made on a form prescribed by the Commissioner of Internal Heveruc, 
The vendor- vjas required to keep the order for two years, and the purchaser to 
keep a duplicate for the same time and both were to be subject to official 
inspection. Similar req_uirements were made as to sales upon prescriptions 
of a physicioJL and as to the disr)ensing of such drugs directly to a patient 
by a physician. The provisions for subjecting the sale and distribution of 
the drugs to official supervision and inspection v/ere held to have a reasonable 
relation to the enforcement of the tax. 

Any ho-oes predicated on the Dorcmus Cas e thcit broad reg'oJ.atory meo,surcs 
might be sustained were temporarily shaken by the fact that the Supreme Court 
subsecuently in U.S. v. Dau/^herty . 269 U.S. 360, expressed the opinion that 
such cases as Hammer v, Jagenhart , 247 U.S, 251 (1918), Child Labor Tax Case 
su-pra (1922), Hill v. T/allace, supra (1922), and Lindner v. U.S. , 268 U.S. 5 
(1925) (all except the I)ag:enhart Cas e decided after the Dor emus Case ) might 
necessitate a review of the constitutionality of the Anti-Narcotic Act if that 
question were thereafter properly presented, Hovyever, in Alston v, U»S » » 274 
U,S, 289, 47 Sup, Ct, Rep, 634 (1927), the coiirt sustained the act again, hold- 
ing tha.t Congress under its power to lay taxes might impose a tax on drugs and 
declare it -un-lav^ful to purchase or sell them except in or from original stamped 



Little gmdance is found in the nost recent of the "collateral" ta::cs, 
as tlicse do not follow the pattern of the Narcotic Criig Act hut arc in form 
plainly acts with nothing in their terms to suggest that they are in- 
tended to "be anything else. Thus in I .Iagnamo Co> v» Hamilton (193o) 292 U»S» 
40, an e;:cise tax of 15 cents per pound on all outter substitutes sold ±n the 
State of TJashington was upheld though the motive "behind it was admittedly to 
iDencfit the dairying ind\;stry "by "burdening oleomargerine. The court said at 
page 44: 

"Collateral purposes or :.iotives of a legislature in levj^ing a ta:: 

of a kind x/ithin the roach of its lawful power are matters beyond the 

scope of judicial inquiry. McCray v«> "U"#S « supra ^ 58-59." 

And at page 47: 

"From the beginning of our government, the courts have sustained 
tsixes although imposed with the collateral intent of effecting ul- 
terior ends which, considered aps,rt, were bejrond the constitutional 
j)0wers of the law-makers to realize by legislation directly address- 
ed to their accomplishment." 

Tlie I.Iagna mo Case was subsequently cited by the Supreme Court to sustain 
the state cho^n store taxes, the most recent type of "cGlla.teral intent taxes" 
to come before it. These are gra.dup.ted taxes based on the number of stores 
or units of business operated by the taxpayer. The tax may be made so heavy 
as to discoujrage mult i-oli cat ion of the units to an extent believed inordinate 
and thus by the incidence of the burden cause other forms of industry to de- 
velop. Fox V. Strmdard Oil Co. of II. J. , 55 S. Ct, 333 (chain store ta::) ; 
Qaon,'^: V.'ing v, Kirkendall , 223 U,S. 59, 32 S. Ct, 192, 56 L. ed. 350 (license 
tax on hand laundries); Lig.'^ett C o« v. Lee , 268 U. S. v617, 53 S. Ct. 4-81, 
77 L« ed. 929 (chain store tax); State Board of Tax Commissioners v, Jackson , 
283 U.S. 527, 51 S. Ct, 540, 75 L» ed, 1248 (chain store tax); Ame].-ican Sr/^ar 
Hefinin- C o . v. Louisiana , 179 U.S. 39, 21 S, Ct. 43, 45 L. ed. 102 (license 
tax on sugar and molasses refiners); Southwestern Oil Coc v, Texas > 217 IJ.S, 
114, 30 S. Ct. 496 (occupation taz: on wholesale dealers in certain articles.) 

It is ap^oarent from the foregoing that "collateral intent" taxing statutes 
have TVJi the high court gc.-ontlet only where the collateral regulatory motives 
were concealed from judicial view by an astute failure to incorporate them in- 
to the bill, or to refer to them in the title of the bill, or in the whereas 
clauses, or in the declaration of policj^. Tihere a disclosure v;as; unavoidable 
through the necessity of declaring the regulations sought to be enforced, then 
the act \7as judged by its natural and reasonable effect c 

The Hew Deal draftsmen have employed taxing devices to effect reguJlatory 
purposes in some of the leading recovery measures. The Agricultural Adjust- 
ment Act, the Kerr Tobacco Control Act, the Banldiead Cotton Control Act and 
the Quffey Coal Bill are examples of this. Tlie orobable vice of these measures 
(apart from the serious delegation question) is that they disclose on their 
face a detailed plan of regulation of matters of purely local concern cjnd not 
within the federal province though the rental and benefit payments under the 
Agricultural Adjustment Act have been defended as purely voluntary bounties. 
This position may be well taken although it is to be noted that these bomities 
are for the first time being used for regulatory purposes. With respect, how- 
ever, t.o the Bankhead and Guffey Bills, it x~ould seem that the necessary ef- 
fect of the system of exemptions and rebates therein used is to coerce 


recr.lcitrnJits into com-olying v/itli str^jidards of conduct which may not ^oc v/ithin 
the federal poi/er to re^^ulate, 

HiG Harrison Anti-llarcotic Act sustained in the Dorenus Case has served 
as the no del for the most recent (or.cluding the G-uffey Coal Eill) of reffoJ-atory 
taxing st^.tutes. This is the National Firearms Act of 1934 (48 St:t, IcoS) 
whi :h atto,ches a scheme of rec^uiation for the sale of firearms to a license end 
traLisfer ta:: upon such sales. Tlie act requires importers, manufacturers, 
pawnhrohers and dealer in firearms to register with the collector of internal 
revenue and to pay a, special ta:: of $300 for pavmhrokers and $500 for the 
others* It levies a ta:' of $200 on the transfer of firearms in the continertal 
limited states. A transfer of a firearm must be pursimnt to a T/ritton order 
from the person seeking to obtain such article. Within sixtj'' days after the 
effective date of the act every person possessing a firearm was re'*'uired to 
register with the collector the number or other identifying ma.rk of the firearm 
and the place v;hore it is kept. Manufacturers and importers are recuired to 
identif;- firearms T/ith a number or other identifying mark approved b3' the Com- 
missioner of Internal Revenue and the obliteration of such marks by anyone is 
made unlav/ful. Books, records and returns relating to transfers of 
are required. A fine of two thousand dollars or imiDrisonment for not nore than 
five years, or both, is provided for the violation of - ny requirements of the 

!Hie breadth of these regulatory -orovisions is readily seen at a glance. 
It may be doLioted if all are merely incidental to the collection of the tax 
and i:ivolve o:ily the restraint necessary thereto. However, the sir.ilrrity of 
this scheme to that of the Narcotic Act with the closer analogy of firearms 
to drugs woii-ld seem to favor the probability that the act will be sustained. 

It is believed that most, if not all, of the proposed N.R.A. measures 
found in the legislative files suffer from the same infirmity of disclosure 
of regula.tory puriDOse. A detailed analysis of the more important of these 
measures 'Till hereinafter be set forth. 


The -oovjer to levy excise taxes is found in Article I, Section 8, Clause 
1, in the following language: 

"The Congress shall have power to pay and collect taxes, duties, 
imposts end excises, to ;oay the debts and provide for the corjnon 
defense and general welf.-ire of the United States; but? all duties, 
in;oosts and e:-:cises shall be uniform throughout the United States." 

The ter:ns, duties, imposts and excises, are generally treated as e::bracing 
the indirect forms of ta::ation conteraple^ted by the Constitution. They are very 
broad in scope and subject to but one constitutional limitation, that they must 
bo uniform throughout the United States. Flint v. Stone Tracy Co., 220 U.S. 
106; 55 L. ed, 589. In TLiomas v. United States , 192 U.S. 363, 48 L. ed, 431, 
in considering the meaning of the words "duties," "imposts" and "e:;cises" the 
court said; 


"T7e think that they were used comprehensively to cover ciistons and 
excise duties imposed on importation, consumotion, manufacture, and 
sale of certain commodities, privileges, particular business trans- 
actions, vocations, occupations and the like," 

The courts have imposed judicial limitations of reasonableness on classifi- 
cations of persons and objects of excise taxation, but, even so, have tahen 
a practical -i^oint of viev; in applying the test of reasonableness. Evans v Gore . 
253 U.S. 245'; Barclay Va Edwards 267 U.S. 442; Ty ler v. United State s > 221 U.S. 
497; Klein v. Board gj* Su-nervisors . 382 U.S. 19, 'Thus, even a small difference 
in the method of conducting a business, or in the characteristics of the objects 
of taxation has supported the classification. Billings v. United States , 232 
U.S» 261, sustained an excise tax on the use of every foreign built yacht, llo 
bases of classification were sot forth in the Act. The court recognized the 
difference between things domestic and things foreign, and their use as a prop- 
er bC'.sis of classification. In Metroi-jolis t heatre Co.. v. Chicago , 223 U.S. 
61, a graduated license tax on theatres, based on the different prices ch^Tged 
for tickets, v/as upheld. The court found a basis for classification in the . 
fact that there v;as a substantial business reason for charging different prices 
for tickets* 

In State Board of Tax Commissioners of Indiana v. Jackson, supra , s'^oi'ii- 
cient differences betv'/een independent retailers on the one hand and chain • 
stores on the other to justify their separate classification for tax pfTposcs 
were recognized. Large chains do a different type of retailing than do small 
chains or independent retailers. 

In a later chain ctore tax case - Eox v. Standard Oil Co. of N.J., su^ra , 
the court recognized a difference of social and economic consequences as a 
basis for classification. The court said through Iir. Justice Cardozo at page 

"A chain, as we have seen, is a distinct business species with its 
orrn caroacities and functions. Broadly speaking its opportunities 
and powers become greater with the number of component links, and 
the greater they become, the more far-reaching are the consequences, 
both social and economic. For that reason the state may tax the 
large. chains more heavily than the small ones and upon a graduated 
basis as indeed we have already held. State Board of Tax Conission- 
ers V. Jackson, 223, U.S. 527 (1931) Liggett v. Sec. 288 U.S. 517 

These decisions are consistent viith those decided under purely regulatory 
statutes other than taxing measures where broad social differences' have been 
held to justify classifications. Thus in Sproles v. Binford , 286 U.S. 374, 
the court in upholding a statute which applied a load limit to trucks that 
was not applied to buses said through Mr. Chief Justice Hughes at page 596: 

"Tiic peculiar importance to the state of conveniences for the trans- 
portation of iDcrsons in order to provide its communities v/itli re- 
sources both of employ^nent and of recreation, the special dependence 
of varied social and educational interests upon freedom of inter- 
course through safe and accessible facilities for such transportation, 
are_ sufficient to sunport a classifications of passenger traffic a.s 
distinct from freight." 




Tlie spending ^.oower is also based on Article I, Section 5, Clause 1, v;hich 
confers on Congress the power "to pay the debts and provide for the comLion de- 
fense and general welfare of the United States." Professor Corwin in "The 
Ti,7ilight of the Supreme Court" traces the history of this power. Traditional- 
ly, there are two interpretations thereof. The interpretation of Hamilton was 
the literal and liberal one thp,t the power was not limited to the general wel- 
fare embraced within the enumerated powers of Congress, but that its scope T/as 
broader. Madison argued for a strict construction of the power. 

The Hamiltonian theorj^ has prevailed in practice, as Congress since the 
beginning has spent money for purposes not within the e:rpress or implied grant 
of powers. Suffice it to say that for practical -^ourposes the power is unlimit- 
ed. This results from the fact that in the cases of Massachusetts v. Mellon , 
262 U.S. 447, and Frothingham v. Mellon , 252 U.S. 447, the Supreme Court 
denied court sta.tus to a tax payer and to the State of Massachusetts to bring 
an injunction suit to restrain the enforcement of an act of Congress authoriz- 
ing apioropriations of public money on the ground that the Act was unconstitu- 

The practical result of this decision is, as stated by Corwin in "The 
Tvilight of the Supreme Court" at page 178: 

"The moral seems to be that so long as 
Congress has the prudence to lay and collect 
taxes without s;oecifying the purposes to 
which the proceeds from any particular tax 
are to be devoted, it may continue to 
appropriate the natural funds without 
judicial lot or hindrance." 

The elimination of the tax TDayer as challenger, was, however, based on 
the fact that the Maternity Act of 1921, which was under attack in these cases, 
was an exercise solely of the spending power - no taxing feature being in- 
volved. The tax payer's interest in the moneys in the general Treasury, which 
are raised partly from taxation ^nd loartly from other sources, was too minute 
and remote. In drafting new N.R.A. legislation, that interest must be ke-ot 

The Maternity Act of 1921, involved in the two Mellon cases, was one of 
the so-called fifty-fifty statutes or cooperative statutes. The better known 
statutes of the same type are the Morrill Act (Land grants, 12 Stat, 503), 
the Smith-Lever Act of 1912, (the Agricultural Extension Work Act (38 Stat. 
372), the Smith Hughes Act of 1917, (the Vocational Education Act (39 Stat. 
929), the Federal Aid Road Act of 1918, (the Federal Highway Act (42 Stat. 
212), and the Vocational Rehabilitation Act of 1920 (41 Stat. 735). These 
statutes embodied the principle of matchin- state funds with federal funds. 
The ap-oropriations to carry out the purposes of these acts were made out of 
any moneys in the Treasury not otherwise appropriated. 

The Maternity Act of 1921 (42 Stat. 224) was a typical cooperative 
statute. It ;orovided for an initial appropriation and thereafter annual ap~ 
Toropriations for a period of four years, to be aT^portioned among such of the 



several states as should acce-ot and com>ly with its provisions, for the pm-- 
Dose of cooperating --'ith them to reduce maternal and infant mortality and 
protect the" health of mothers and infants. It created a bureau to aeaninister 
tne act in cooperation nith state agencies vhich uere required to make such 
re-oorts concernin>5 their OT^erations and expenditures, as might he required hy 
the federal "bureau. Pavraents might he withheld, vrhenever that bureau shoul.d 
determine that funds had not been properly exoended in respect of any state. 

One of the -orincipal grounds of attack was that the act vas sn us-orpation 
of power not grc?nted to Congress by the Constitution - an attempted exercine 
of the power of local self-government reserved to the states by the Tenth 
Araendj.ient. While the court stated at the outset that it disposed of the cases 
for iTDnt of jurisdiction without considering the merits of the constitutional 
questions, nevertheless, it did proceed to a consideration thereof. Thus at 
page 480 Mr. Justice Sutherland said: 

"Probably, it would be sufficient to 
"ooint out that the powers of the state 
are not invaded, since the statute im- 
poses no obligation but simply extends 
an option which the State is free to 
accent or reject,.., 

"Vi/hat, then, is the nature of the right 
of .the State here asserted and how is it 
affected by this statute? Reduced to its 
simplest terms, it is alleged that the 
statute constitutes an attempt to legis- 
late outside the loowers granted to Congress 
by the Constitution and vfithin the field 
of local powers exclusively reserved to 
the States. Nothing is added to the force 
or effect of this assertion by the further 
incidental allegations that the ulterior 
purposes of Congress thereby was to induce 
the States to yield a portion of their 
sovereign rights; that the burden of the 
appropriations falls unequally upon the 
several States; and that there is imposed 
upon the States an illegal and unconstitu- 
tional OTotion either to yield to the 
Federal Government a part of their reserved 
rights or loss their share of the monies 
a^Dpropriated. But ^-^hat burd.en is imposed 
upon the States, unequally or otherwise? 
Certainly there is none, unless it be the 
burden of taxation, and that falls upon 
their inhabitants, who are within the tax- 
ing power of Congress as well as that of 
the States where they reside. Nor does 
the statute reouire the States to do or to 
yield anything. If Congress enacted, it 
with the ulterior purpose of terapting them 
to yield, that purpose nay be effectively 
frustrated by the simole ex-oedient of not 


"In the last analysis, the complaint of 
the plaintiff State is l)ro-a,^ht to the naked 
contention that Congress has usurped the 
reserved powers of the several sto.tes hy the 
mere enactment of the statute, though nothing 
has been done and nothing is to "be done ^-ith- 
out their consent; and it is plain that the 
question, as it is thus presented, is politi- 
cal and not judicial in character, and there- 
fore is not a matter v;hich admits of the 
exercise of the judicial power." 

Section :■; of the Act xms attacked as an invalid delegation of legisla.- 
tive power in that it "orovided that "any state desiring; to receive the bene- 
fits of the act shall by its agency described in Section 4, submit to the 
Children's Bureau (the Federal agency) detailed plans for carrying out the 
provisions of this act, which plans shall be subject to the approval of the 
board," These plans might contain any provisions reasonably thought to be 
suitable to accomplish the purposes of the act. The only purpose stated by 
the act, hov/ever, was the promotion of the welfare and hygiene of maternity 
and infancy. 

Legally, the objection would seem to have been well taken. As the court 
decided the tax payer could not attack the statute, it permitted it to be ad- 
ministered under this lurking invalidity of broad delegation. This suggests 
the practical advantage of these statutes. All the flexibility sought to be 
achieved by the code making power delegated to the President in the old 1T,R.A. 
Act may be here achieved. 

Any re;gulatory provisions incorporated in these statutes ■would, like 
broad delegations of power, be unassailable. 

They afford an excellent technique for federal control of state action 
by requiring the approval by a. federal board of state plans. 


Although many difficulties attend the effort to draft an N.R.A, re-gula- 
tory taxin;? measure without a specific enunciation of objectives, neverthe- 
less, there are several methods of approach to the problem. 

The first of these is predicated on the taxing power alone and, although 
it is revenue raising in purpose, it incidentally has the effect of discourag- 
ing certain labor Dractices considered undesirable. It is a true collateral 
intent tax. 

The second is predicated on the use of the taxing power to raise addition- 
al revenue to carry out certain regulatory purposes to be effected by a second 
bill, a spending or appropria.tion bill. There xTould be no direct connection, 
however, betv/een these two bills. The moneys raised from the imposition of 
new and valid excises v/ould not be earmarked, but would go into the general 
treasury and theoretically could be used for any of the purposes of government. 
The spending measure would in no true sense be a correlative of the taxing 
bill. The only thing which would connect the Uio bills would be the im-^lica- 
tion that the purpose of the taxing bill was to increase the funds in the 
Treasury so that moneys would be available for the increased ex;oenditures of 
Government required by the regulatory spending bill, 


The third is also predicated on a joint use of the taxing iDOwer and the 
s-oending pov/er, tut here one is a true correlative of the other, as the moneys 
raised by the ta.xes levied are either remitted as a hounty ujider a spending;; 
bill, or .the equivalent thereof is remitted to the tax payer as a bountjr for 
compliance, "Jhe distinction between this and the second method must be kept 
in mind, as the degree of vulnerability between the two varies considerably^. 

The fourth is the use of miscellaneous ancillary devices to the foregoing 
three. These are not classified separately, but are grouped together. In 
this group are such devices as the denial of the right to deduct from gross 
receipts sub-standard wages, the use of the commerce power, etc. 


It is believed that the advantage of unassailability by the tax paj^'er 
may be had where the taxing oui-pose is dissociated from the regulatory dj the 
use of two separate bills, one a taxing measure and the second, an appropria- 
tion bill. The tax payer's attack v.'ould be limited to the validity of the 
tax as a valid excise. What appears to be the weakness of the Social Security 
Bill and the Agriciiltural Adjustment Act thus would be avoided. There the 
juxtaposition of a tax with the broad social purposes of the bill (Social 
Security Sill) cJid the interweaving of tax and regulatory purposes (Agricul- 
tural Adjustment Act) give the tax;oayer a, sufficiently direct interest to 
challenge the bill. The proceeds of the tax are directly tied up to the 
financing of the regulatory program. The Agricultural Adjustment Act, as 
amended, seeks to correct the recognized weakness. Section 12, in addition 
to an appropriation of one hundred million dollars out of money in the 
Treasury, not otherwise appropriated, provides for an appropriation of a. sum 
equal to the proceeds derived from all taxes imposed under Title I of the Act 
(processing taxes) to be available i nter alia for the regulatory purposes of 
the Act, The provision was inserted in lieu of the original which appropriat- 
ed the proceeds derived from all taxes imposed under the Act to be available 
for the same 'ourposes. 

It may be doubted whether this expedient will cure the vice as the direct 
connection betvreen the tax and the regulatory purpose is still a^iparent on 
the face of the bill. The Supreme Court has only to read the tax bill to dis- 
cover this. 

The objection may be made to this plan of t^r-o bills that the Supreme 
Court might read the two statutes together and declare them invalid in a tax- 
payer's suit. With reference to the second approach, it is believed that this 
possibility is very slight, as there is no direct connection between the two 
bills. With respect to the third approach, the possibility is a little more 
immediate, as the two bills are truly correlative and form part of an integral 
scheme. However, it is not believed that the court is likely to do so. To 
support this belief is the fact that the court has consistently refused in the 
past not only to inquire into Congressional motives behind tax measure, valid 
on their face, but also to pass on the Hamilton-Madison controversy as to the 
limits of the general welfare clause. Professor Corwin (pages 174-175) points 
out that in the Pacific Railway Cases (127 U.S. l), the Ge 1 1 y s burg Rai 1 way 
Co-se (160 U,S. 668), the Federal Farm Loan Banlc Case (255 U.S. 180) and in the 
Maternity Act Cases (supra), the court consistently avoided this major issue. 
He states that the latter cases were i^the latest - and apparently meant to be 
the last utterance of the court" on the point and concludes that the spending 
power has successfully eluded all "constitutional snares." 


To be weighed against these considerations is the fact that in Gregg 
Dyeing Co. v. Quary , 286 U.S. 472, the Supreme Court read several statutes to- 
gether in order to determine the constitutionality of a state taxing scheme. 
There a gasoline license tax of six cents per gallon was levied on gasoline 
imported from other states and kept in storage for a period of twenty-four 
hours or r.iore, after the sawe had lost its character as a shipment in inter- 
state commerce. The statute was assailed as violative of the Fourteenth 
Amendment of the ITederal Constitution as it discriminated against gasoline 
produced by other states, and placed a license tax only upon citizens of the 
state rho imported and stored such gasoline. The Supreme Court of South C^.to- 
lina held the statute valid because it was com-^limentary to several other 
statutes ?/hich, when considered with it, imposed the sane rate of tax of 6 
cents a gallon on all consumers of gasoline in the state, no matter what the 
origin of, or state in which tlie gasoline is produced. In affirming judgments 
dismissing the complaints, the Supreme Court of the United States held tha.t 
when a State Supreme Court had held that two or more statutes must be talcen 
together, it vrould acce-)t that conclusion as if written into the statutes 
themselves. This seems to be the ratio ( decidendi of the decision though the 
court did use general language to the effect that it ^"ould regard substance 
rather than form in maintaining rights asserted under the federal Constitution, 
This is borne out by the following language, beginning at page 476; 

"In maintaining rights asserted under the 
Federal Constitution, the decision of this 
court is not dependent upon the form of a 
taxing scheme, or upon the characterization 
of it by the state court. We regard the 
substance rather than the form, and the 
controlling test is found in the operation 
and effect of the statute as applied and 
enforced by the state. St. Louis South-western 
western Ry. Co. v. Arkansas, 235 U.S. 350, 362; 
Hanover Fire Ins. Co. v. Harding, 272 U. S. 
494, 509, 510. The operation and effect of 
this tax act have been determined definitely 
by the state court in the instant cases. 
Construing the Act, that court has said: 

"'The Act in question may be said to be 
complementary to the other statutes of South 
Carolina, under v;hich are assessed a gallonage 
tax on gasoline and other petroleum products. 
Indeed, it expressly excludes from its pro- 
visions all gasoline upon ^-'hich a like tax: 
has been paid under other statutes. It so 
declares in its title and specifically de- 
signates in its body the statutes, pajmient 
of the tax under which exempts from its 

"'In South Carolina, comnencing about a de- 
cade ago, the Generaly Asse-ibly expressed its 
public policy as to revenue to be derived 
from the use of gasoline, vol, 32, Stats, 
at Large, p, 335. The tax then imposed 



was two cents a gallon. In 19:^5, the ta:: 
was increased to five cents, and in IS 29, 
to six cents on the gallon. These statutes, 
however, onl7 reached "dealers" in this comrao- 

"'Statutes of this nature have "been uniiorinly 
construed as imposing a tax on the ultimate 
consujiier or user, as will 'be hereafter shown. 
Ileal izing that large users of gasoline either 
were evading or would evade the r)a,innent of 
the tax imposed under these Acts, "by bring- 
ing in gasoline in quantities from without 
the state, rnd storing it for their own pur- 
poses, the Legislature in 1930 enacted the 
statute under consideration, apiDlying the 
six cents tax to every person, firm corpora- 
tion, munici])ality ot any suMivision subject 

to its terms Thus, with the Act of 1930 

contemplating the other statutes referred to, 
all consumers of gasoline in South Carolina 
pay a tax of 6 cents per gallon, no natter 
what the origin of,, or Sta.te in which, the 
gasoline is viroduced '" 

"The state court ansvrered the contention 
as to discrimination against interstate 
commerce "by referring to other statutes of 
the State imposing a tax u"oon the sale and 
use of gasoline within the state. The 
state court said that the Act in question 
'taxes all gasoline stored for use and con- 
sumption upon which a like tax has not "been 
paid under other statutes. By the kindred 
Acts all users are taxed. ' But appella.nts 
question the right to invoke other statutes 
to support ti.e validity of the Act assailed. 
To stand the test of constitutionality, they 
say, the Act must "be constitutional 'within 
its four corners', that is, considered "by 
itself. This argument is without merit. 
The question of constitutional validity/- is 
not to "be determined "by artificial standards. 
Wliat is reo^uired is that state action, 
whether through one agency or another, or 
through one enactment or more than one shall 
he consistent with the restrictions of the 
Federal Constitution. There is no demand 
in that Constitution that the State shall 
put its requirements in anjr oxie statute. 
It may distri'oute them as it sees fit, if 
the result, taken in its totality, is within 
the State's constitutional pox7er. When the 
Supreme Court of the State has held that two 



or more statutes must "be taken tog:ether, ve 
acceiot that c oncl-usion as if v.Titten into 
the statutes themselves . Eobert v. Louisiana , 
272 U.S. 312, 317. See Lindsley v. Natural 
Car"bonic Gas Co . 220 U.S. 61, 73, (italics 

"Readin-^ together the statutes with respect 
to gasoline taxes, the state court took the 
view that as to the gasoline tax with res- 
pect to sales within the state, the burden 
actualls;- rests upon the consumer, although 
not placed upon the consumer directly. No 
reason is found to challenge this view, 
Texas Company v. Brown , supra , at p. 479^ 
Panhandle Oil Co. v. Kno x, 277 U.S. 218, 
222; Indian Motorcycle Co. v. United States , 
283 U.S. 570, 579 " 

Tlie doctrine of the case is necessarily restricted to its facts uhich 
involved state statutes. So far as federal taxing statutes go, it would seem 
that a different rule would apply. If the Supreme Court has refused to take 
the step of inquiring into Congressional motives behind tax statutes, as evi- 
denced by Congressional committee reports and debates, it does not seem pro- 
bable that it will take the still further removed step of reading two statu- 
tes together, certainly not two non-truly correlative bills of the second 
grou^o of our classification. 

It is, of course, impossible to vrei-^h a consideration such as that re- 
vealed by the Schechter Decision , that when constitutional principles which 
have onl-/ the diminished vitality of political formulas (the separation of 
powers theory) are violated, by sweeping applications which transcend all 
reasonable bounds, the Supreme Court will breathe new life into them. 

It is interesting to note that Congress recently enacted two bills to 
carry out the plan of a retirement system for employees of interstate carriers 
which had been declared unconstitutional by the Supreme Court in Railroad Re- 
tirement Board v. Alton , 55 S. Ct. 758. The taxing bill is H. R. 8552, Public 
No. 400, 74th Congress, which levies an excise tax on carriers of 3-;l^ of the 
compensation, not in excess of $300 per month, paid to it by its employees, 
and an income tax of 3-|5^ of the income of each emDloyee of carriers not in 
excess of $300 per month. The taxes collected are to be paid into the Treas- 
ury'- of the United States as internal revenue receipts (Section 8 (a)), A 
separate bill (H. R. 8651, Public No. 399, 74th Congress) establishes a re- 
tirement system for employees of carriers subject to the Interstate Commerce 
Act, This bill contains complete regulatory features. Finally, Section 13 
authorizes the ap'oropriation of such money from time to time out of the Treas- 
urer of the United States as may be necessary to carry the Act into effect. 

But for the fact that the taxing bill imposes a levy on a particular 
group of employees i.e., employees of carriers, who in turn are benefit- 
ed by the retirement system set up in the second bill, we would classify 
these bills under our second classification of bills not truly correlative. 
This one distinction, however, probably places them in our third group of 
correlative bills. The revenue for the regulatory purposes to be effected 
in the second group of our classification is to be raised from increases in 
the rates on present subjects of excise taxation, and from the imposi- 
tion of new excises on persons and objects generally and not on those in- 


tended tc be the "beneficiaries of the appropriation bill. 


This brin.^s us to our specific plans. Under the first group of collateral 
motive taxes we s'loggest four different excise taxes on four priviler;es: (l) 
An excise tax on the right to employ minors under fourteen years of age; (2) 
an excise tax on the right to employ minora betv/een fourteen and sixteen years 
of age: (3) an excise tax on the right to eraDloy employees at less than a 
living uage , to be determined administratively for e?ch industry and each 
section of the coiuitry; and (4) an excise tax on the right to employ employees 
for more than a reasonable number of hours each week, as determined adminis- 
tratively for eac'ii industry and section of the country. 

The rates of tax should be sufficiently high for both revenue raising 
and regulatory purposes. The following are recommended: A rate of twenty- 
five per cent on that part of that payroll v/hich represents the child labor 
taxed under (l); a rate of tv;enty per cent on that part of the T^ajnroll which 
represents child labor taxed under (2); a rate of twenty-five per cent on the 
differential between the sub-minimum wage paid to each employee and the ad- 
ministratively determined minimum under (3) and a rate of fifty ner cent on 
that portion of the payroll \7hich represents compensation for services render- 
ed in excess of the maximum hours of labor similarly determined under (4). 

While the method of administrative determination of subsistence wages 
and raaxinuin periods of labor is open to attack on the ground that it indi- 
cates regulatory intent, nevertheless, it seems to be the only practical one. 
The proposed Johnston and Pharr Bills attempt to fix legislatively minimum 
wages applicable to all industries. Thus they would legislate a 40 cents an 
hour minimum wage of general applicability. The economic unsoundness of this 
Torovision is obvious when it is considered that the minimum hourly ^mges fixed 
"by the defunct codes ranged all the v/ay from 15 cents an hour in the peanut 
and pecan processing industry to 70 cents an hour in the wrecking industry. 
While it is more practical to fix legisla.tively maximum hours of labor (the 
Black Thirty-Hour Bill), nevertheless, there is considerable question as to 
the economic soundness of an inflexible legislative standard, no matter how 
broad the exceptions may be. 

The method of administrative determination necessarily raises the Ques- 
tion of legislative standards. This problem is a s-iecisdized one not vdthin 
the rrovince of this report. It is being v:orked on by other la^.^/yers. Any 
standards which are determined sufficient for the purpose of the commerce 
power will serve the purpose of the taxing power. 

Prom an economic point of view, excise Number 3 may present practical 
difficulties, - s the tendency of employers may be to lower maximum wages to 
the minimum. The economic power of labor through collective bargaining, 
strikes, etc,, should serve as the corrective. 

The minimum tax under (3) may render unnecessary the child labor excises 
under (1) and (2) since the economic effect of minimum wage legislation is to 
elimino-te child labor. 

The tax on child la'oor under (l) and (2), based on the actual payroll for 
child laoor, is directly prorDortioned to tne extent of the privilege and fre- 
quency of its use and would thus not "be vulnerable to the objection urged by 
the Supreme Court in the Child Lab or T ax Case (at p. 36) against the tax 
there invalidated. The tax is not imposed equally, as it was there, on an ein- 
pl03-2r who hires a child for a day and on one who hires a hundred children 
for a year. 

Since the tax is imposed on all emTDloyers of child labor whether the 
employnent was wilful or inadvertent, the -Denaltj element and the emphasis on 
intent (an attribute of criminal law) which v/as present in the invalidated 
child labor tax (employers unwittingly employing children were exempt) is en- 
tirely lacking. The tax does not suggest a punitive rather than a fiscal pur- 
pose as did the old ta:; 

I. .A. • 

Sira;oly 6.ra\m without any detailed regulations to disclose a pararao-ujit and 
obviously dominr^nt regulatory purpose, the tax would be free of the last of 
the characteristics which spelled out a penal measure of the invalidated statu- 

The classification set up in (l) and (2) is that of erar)loyers who em;oloy 
a certain kind of labor easily distinguishable from adult labor on sociologi- 
cal grounds. The classification which obtains in (3) and (4) is that of em- 
ployers who nay less than a living wage and work their employees such an im- 
rea.sonable number of hours as to contribute to -unemployment and to necessi- 
tate increased federa,l expenditures for relief purposes. While these classi- 
fications are new classifications, unknown to traditional tax law, neverthe- 
less, in the light of the economic and social consequences in periods of 
economic depression of such practices, they are reasonable ones. In view of 
the practical point of view taJien in determining reasonableness, they would, 
in all probability, stana the test. 

The bill vra-old be simply drawn. It would do nothing more than levy 
excises. The precedent of Section 211 (2) of the National Industrial 'Recovery 
Act rrould be followed. Under the title "Reemplo^n^ient and Relief Taxes" a 
nimber of excises are imposed which are preceded by no findings of fact, 
recitals, or enumeration of bases of classification. The effect of these is 
to arouse a suspicion of regulation '"liich might prove fatal. 

This suspicion hovers around the recitals in the Johnston and Pharr 
drafts of ;oroposed bills. Probably even more serious than this is the inter- 
weaving of tax provisions with lengthy recitals of the obligation of the 
federal government to provide for the relief of the distressed and unemployed, 
and to reduce government expenditures for the relief of the needy, followed by 
a direction that the proceeds of the tax be spent for the relief of the needy 
and distressed. The draftsmen have thus imprudently specified the purposes 
to which the proceeds from the tax were to be devoted and have given the tax 
payer the status to raise the constitutional question as to the limits on the 
power of Congress to provide for the general welfare. This would be involved 
since there is no express grant of power to Congress to provide for the relief 
of the unemr)loyed. This question can and ought to be avoided, 

TThile 1- is our belief that all recitals ought to be omitted, neverthe- 
less, if it is felt that soiie guide should be given the courts, then it is 
recom::ended that a short and irmocuous recital, such as that found in the 
Conner draft, be used. This simply recites that eraplojinent of i^ersons at 
less than a living wage and the spread of unemplo-'niient by the exaction from 


employees oi unreasonably Ions hours of labor has necesritated amjropriations 
for tlie relief of the unemployed and thoce not employed at a living wage. 

The effect of the taxes imposed on these employers (assuming thr.t the 
bases of classification \/ill stand up) iias no bearing on their validity. Even 
if it could be ar^^ed (miich it cannot in view of the present abundance of 
unerai^loyed adult labor) that these taxes would destroy the businesses of cer- 
tain employers, they would still be sustained. "Even if the ta.x should destroy 
a business, it \-raul.d not be invalid or require compensation on that groimd 
alone. Those who enter uroon a business take that risk." Alaska 7ish Co. v . 
Smith , 255 U.S. 44, 48, quoted in Magnano Co. v. Hamilton (supra) at p. 46, 
"When the power to tax exists the extent of the burden is a matter for the 
discretion of the lawmaker." Fox v. Standard Oil Co. of N.J. (supra) at page 

The second method is one of levying new excise taxes to swell the Treasur; 
funds available for a system of federal bounties to the state and to comply- 
ing emioloyers. The present list of excises is set out on pages 5 and 8 of 
our outline. The list of articles on which a sales ta,x is presently im;oosed 
could be considerably extended without the necessity of a. general sales tax. 
Even s, one or two percent tax on all sales of tangible personal property 
patterned after the New York State tax could be imposed. (See. 3S1 New York 
Tax Law.) The purpose of the New York tax is to raise funds for relief ex- 
penditures, but it is not labeled in any fashion to indicate this, Funds 
raised by these excises would not be earmarked, 

A cooperative N.R.A. between the Federal government and the States couJLd 
be financed ''oy the matching of State funds with Federal funds to pay the cost 
of administration of State N.R.A. agencies. These could be required to sub- 
rait to the Federal agency for approval detailed plans or codes which, when so 
approved, could be submitted to the State legislatures for enactment. Since 
many of the objectives of the N.R.A. (if kept within the judicially defined 
limits of due process) are dthin the legislative competency of the states 
(apart from special state constitutional objections), this plan may have 
practical value. 

Again grants y_iight be made for educational or other purposes conditioned 
on the enactment by the states of child labor, minimum wage and maximum hour 
legislation. The Morril Act, 12 Stat, 503, donated public lands to the states 
upon the condition that all monies derived from the sale of such lands should 
be invested and the interest thereof a^opropriated to the support of at least 
one co].lege v^here the leading object should be "without excluding other scien- 
tific and classical studies and including military ta-ctics to teach such 
branches of learning as are related to agriculture and the mechanic arts." In 
the Federal Highway Act of 1934 (48 Stat, 992) in order to prevent further 
diversion of motor vehicle tax or gas tax funds by state governments to other 
pui'poses than highway construction. Congress lorovided (section 12) that after 
June 30, 1934 federal aid for highway cons tiTict ion should be extended only to 
these states that used the amounts then provided bj^- law for such purposes from 
varioLis forms of state taxation of motor vehicle trans"oortation. 

TJithout going afield to vreigh state constitutional difficulties to the 
enactment of state statutes embodying the fundamental objectives of iT,R.A. it 
does seem clear that such legislation as rainimujn fair wage standards for women 
and children would be a proper exercise of the state police power v/hich could 


be encouraged 02r these grants. A well drawn st?ti-..te such as Article IC of the 
New York Labor Law r.^hich aroears to meet the -"Trincipal, if not all, the ob-. 
jections of the Supreme Court vxged. in Adkins v. Children's Hosr)ital , 261 U.S. 
535, could serve as the pattern of initial legislation to he fostered by grants 

In addition grants co';Lld be given to encoVvTage the enactment of legisla- 
tion regulating hours of labor and other conditions of labor patterned after 
the mea.sures already sustained by the Siipreme Court in Bunting v. Oregon , 243 
U.S. 426 (Oregon ten hour day for all employees of mills, factories rnd manu- 
facturing establishnents in Oregon), Holden v. Hardy , 169 U.S. 366 (Utah eight 
hour day for \7orking men in underground mines and smelters) , Iluller v. Oregon , 
208 U.S. 412 (Oregon ten hour law for women in mechanical establislT-ients, 
factories or laundries), Riley v. Massachusetts , 232 U.S. 671 (Massachusetts 
ten hour law for women in manufacturing and mechanical establishments), and 
Miller v. Oregon . 236 U. S. 373 (California eight hour statute for v;omen in 
manufacturing, mechanical, mercantile, laundry, hotel, restaurant, telegraph 
or telephone e-cpress or transportation establishments) Sturgis v. Beauchgjnp , 
231 U. S. 320 (Child labor in certain hazardous occupations). 

Direct bounties could be paid to these employers who complied vlth the 
ap-jroved labor and fair trade standards. These could be paid under contracts 
with employers in the A. A, A. regulatory rianner, or on proof of compliance. 
There are tv;o Supreme Court cases on the subject of direct bounties: Allen v . 
Smith . 173 U.S. 389, and United States v. Realty Co ., 163 U.S. 427. In Allen 
V. Smith , supra , the court discussed the nature of bounties. It said at p, 

"Bounties granted by a government are never pure 
donations, but are allowed either in considera- 
tion of services rendered or to be rendered, 
objects of public interest to be obtained, pro- 
duction or manufacture to be stimu3.ated, or 
i.ioral obliga.tions to be recognized.^' 

The validity of the Sugar Bounty Act of Congress of March 2, 1895, ap-. 
propriating money to pa.}'- bounties to persons who had been prevented by the re- 
peal of the Act of 1890 from obtaining bounties for the production of sugar 
before the Act was repealed, or for sugar manufactured during the year ending 
June 30, 1895, was involved in United States v. Realty Co ., su-pra . The court 
uoheld the constitutionality of the act, regardless of the constitutionality 
of the eatrlied Act, It considered at length what debts Congress has power to 
pay under Article I, Section 8 of the Constitution. This consideration is 
most pertinent. The court said at page 219: 

"Under the provisions of the Constitution (Art I, 
Sec, 8), Congress has power to lay and collect 
taxes, etc., 'to -oay the debts' of the United 
States. Having power to raise money for that 
purpose, it of course follows that it has power 
when the money is raised to a-opropriate it to 
the same object, "iThat are the debts of the 
United States within the meaning of this con- 
stitutional provision? It is conceded, and indeed 
it cannot be questioned, that the debts are not 
limited to those vrhich are evidenced by some written 



obligation or to those which are otherwise of a strict- 
ly legal character. The terra 'deots' includes those 
debts or claims v/hich rest Wjon a merely equitable or 
honorary obligation, and which would not be recover- 
able in a court of law if existing against an in- 
dividual. The nation, spealving broadly, owes a 
'debt' to an individual \?hen his claim grows out 
of general principles of right and justice; when, 
in other words, it is based upon considerations of 
a moral or merely honorary nature, such as are bind- 
ing on the conscience or the honor of an individual, 
although the debt could obtain no recognition in a 
court of law. The power of Congress extends at least 
as far as the recognition and payment of claims against 
the government ^/hich are thus founded. To no other 
branch of the government than Congress could any 
application be successfully made on the part of the 
owners of such claims or debts for the pa^nnent there- 
of. Their recognition depends solely upon Congress, 
8Jid whether it will recognize claims th"iis founded must 
be left to the discretion of that body. Payments 
to individuals, not of right or of a merely legal 
claim, but payments in the nature of a gratuity, 
yet having some feature of moral obligation to 
supr)ort them, have been made by the government by 
virtue of acts of Congress, appropriating the public 
m.oney, ever since its foundation. Some of the acts 
were based uoon considerations of -oure charity. A 
long list of c.cts directing payments of the above 
general character is ap^oended to the brief of one 
of the counsel for the defendants in error. The acts 
are referred to, not for the pui^pose of asserting 
their validity in all cases, but as evidence of ^-^hat 
has been the practice of Congress since the adoption 
of the Constitution, See also, among other cases in 
this court, amor son v. Hall , 38, U.S. 13 Pet. 409 (10: 
223); United States v. Price , 116 U,S, 42 (29:541); 
Williams v. Heard , 140 U,S. 529 (35:550), The last 
cited case arose imder an act oi Congress in relation 
to the Alabama claims." 

Even if Massachusetts v. Mellon (supra) were to be overruled, it \:ould 
seem clec\r from the Realty Com'oany Case that bounties paid to employers con- 
tracting ^. ith the federal government to comply with certain labor and trade 
sta.ndards could be successfully defended as the pa^nnent of debts which rest 
upon both a legal and an equitable obligation of the government. 

It cannot be argued that these bounties constitute a method of coercing 
emroloyers into compliance with the Pederal standards, or of penalizing non- 
complying employers. They impose no obligation or burden on emploj'-ers. If 
the ulterior riiirpose of Congress is to tempt them to yield, that purpose may 
be as effectively frustrated here as under the Maternity Act by the same ex- 
pedient Ox not 3delding. If they do not want the liountj, they are net com- 
pelled to acceDt it. 



Practically, a system of ciirect bounties to enroloyers which is practical 
is cifxicu].-'' to v'ork out. The re^^lation of industry requires almoct constant 
supervision oecause of factors v/hich vary from day to day. In this respect 
such regulation differs from that of agriculture where only a periodic super- 
vision is required. Most of the direct bounty plans v/hich re have examined 
appear to us to suffer from the infirmity of impracticability. This seems 
-narticularly true of the suggested bounties to employees equivalent to the 
difference between applicable standards and sub-standard \7age and hour scc.les 
and to complying employers equal to the difference between applicable standards 
and average sub-standard wage and hour scales paid "oy no n-com;n lying emplo^-ers 
in sane industry (Conner outline - Spending Power - 2 (a). 

A loractical use of bounties may be made imder our third classification. 
The tax bill and the appropriation bill vrould here be true, correlatives. An 
excise tax could be levied on the gross profits of industry. This tax could 
be at a fixed rate of five to ten per cent, or the rate could be determined 
by the ratio the total unemplo;^,rment relief exnenditures for any given year 
Dears to the total gross Drofits of all industry for the same period. The 
appropriation bill would provide for a bounty to each complying employer in 
an amount equivalent to the tax ^Daid, or a certain percentage thereof. This 
would in effect amount to a remission of the tax or a substantial percentage 
thereof. The burden of proof would be on the employer to show full compliance 
with the federal standards. 

The fourth group is the miscellaneous one. The income tax might be 
amended to deny deductions for wages paid below a fixed minimum, preferably 
determined administratively. Net income is a purely statutory concept and is 
what Congress says it is. The classification of employers who pay less than 
a living wage should support the different treatment in respect to deductions. 
No riL:ht preserved in the Constitution is impaired by the placing of a limit 
upon deduct? jns or by denying them altogether, Burnett v. Thompson Oil r. G-as 
Co., 23 o U, b, 301, New Colonial Ice Co. v. Helvering, 252 U.S. 435, Kelvcr - 
ing V. In d. Life Ins. Co ., 292 U.S. 371, 381. 

without specific consideration of other proposed "olans, it is believed 

that those herein set forth are the most practical which have been offered. 

In our opinion they have the best chance of withstanding an attack on consti- 
tutional grounds.