Steward Machine Co. v. Davis

Background

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

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

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

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

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

Expansive view of general welfare

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

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

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

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

National economic conditions in the United States

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

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

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

Decision

The key holding regarding the excise tax of the Act was:

An important part of the rationale was the conclusion that even if the excise taxes:

The arguments placed the actions of Congress within its Constitutional power. The Court then established that the tax and the credit in combination are not weapons of coercion that would destroy or impair the autonomy of the states. The first step was:

After reviewing the distressed condition of the nation’s economy, the Court noted that:

Although not quoted specifically in Steward, the relevant aspect of Butler addressed the constitutional powers of Congress and established that Congress has a “separate and distinct” power to tax and spend that is “not limited by the direct grants of legislative power found in the Constitution.”

Directly addressing the contention that the tax is coercive, Justice Cardozo wrote:

An important issue in a tax not being coercive, satisfied in Steward, is that the conduct to be encouraged or induced accomplish a national end (general welfare) and be related to the tax itself.

And then, finally, Cardozo made explicit the liberty of the states to make agreements with Congress.

Based on all the foregoing arguments, the final judgment was to affirm the lower court’s decision upholding the constitutionality of the Act. The ruling upholding the Act was one of two Social Security Cases that upheld elements of New Deal legislation in 1937.

Dissents

The essence of the dissents was that the Social Security Act of 1935 went beyond the powers that were granted to the federal government in the Constitution. Imposing a tax that could be avoided only by contributing to a state unemployment compensation fund was effectively coercing each state to make law creating such a fund.

Justice McReynolds

“That portion of the Social Security legislation here under consideration, I think, exceeds the power granted to Congress. It unduly interferes with the orderly government of the state by her own people and otherwise offends the Federal Constitution.... [Article 1, Section 8] is not a substantive general power to provide for the welfare of the United States, but is a limitation on the grant of power to raise money by taxes, duties, and imposts. If it were otherwise, all the rest of the Constitution, consisting of carefully enumerated and cautiously guarded grants of specific powers, would have been useless, if not delusive.” He wrote: “I can not find any authority in the Constitution for making the Federal Government the great almoner of public charity throughout the United States” (p. 603).

Justice Sutherland, with Van Devanter

"The threat implicit in the present encroachment upon the administrative functions of the states is that greater encroachments, and encroachments upon other functions, will follow."

Justice Butler

"…the statutory scheme is repugnant to the Tenth Amendment.... The Constitution grants to the United States no power to pay unemployed persons or to require the states to enact laws or to raise or disburse money for that purpose. The provisions in question, if not amounting to coercion in a legal sense, are manifestly designed and intended directly to affect state action in the respects specified. And, if valid as so employed, this 'tax and credit' device may be made effective to enable federal authorities to induce, if not indeed to compel, state enactments for any purpose within the realm of state power and generally to control state administration of state laws."

The dissenters are sometimes known collectively as the Four Horsemen, the conservative members of the Court who opposed the New Deal agenda of President Franklin Delano Roosevelt.

Subsequent jurisprudence

Steward was part of a set of decisions in which the U.S. Supreme Court consistently upheld New Deal economic and regulatory legislation. Its key role was the expansion of Congressional authority to the regulation of state activity, and marked the end of Supreme Court attempts to limit Congressional power based on advancement of the general welfare. In fact, Butler, just the year before Steward, was the last case in which the Supreme Court struck down an Act of Congress as beyond the authority granted by the Spending Clause.

Steward marked the beginning of the recognition that Congress could use the Spending Clause, under the umbrella of general welfare, to regulate state laws through incentives and encouragement—but not coercion. The national government may induce the states, or tempt them, or seduce them—but not coerce them into passing legislation considered desirable to meet national needs. Before Steward, Congress could regulate only commercial economic activity; after Steward, Congress could regulate the actions of state governments.

It is now common for Congress to tie grants-in-aid with requirements and restrictions upon the states, although the practice is still often controversial. In a modern case depending upon the jurisprudence of Steward, the Court held in South Dakota v. Dole that Congress could influence states to raise the minimum drinking age to 21, by threatening to withhold funds for federal highways. In her dissent, Justice O'Connor stated:

She later approved of and quoted from the text of Butler: