Constitutional Authorities Under Which Congress Regulates State Taxation

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Constitutional Authorities Under Which

Congress Regulates State Taxation

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R43842

Constitutional Authorities Under Which Congress Regulates State Taxation

Summary

A variety of clauses in the U.S. Constitution provide direct and implicit authority for Congress to

enact legislation affecting the ability of states to impose taxes, and Congress has acted under

several of them. In some situations, Congress has restricted the states’ taxing power, such as by

prohibiting them from taxing certain activities. In others, it has expanded the states’ ability to tax,

such as by waiving federal immunity to state taxation in specific circumstances.

Chief among these authorities is the Commerce Clause, which provides Congress with the

authority to regulate interstate and foreign commerce. It has long been interpreted by the courts to

contain an implicit restriction on state regulation and taxation that unduly burden interstate

commerce—this is known as the dormant Commerce Clause. Under its commerce power,

Congress can enact laws affecting state taxation of interstate commerce. In general, Congress has

used this authority to limit state taxation, but it can also use it to expand the states’ taxing power

by authorizing state taxation that would otherwise violate the dormant Commerce Clause.

Other provisions in the Constitution that appear to contain an implicit authority for Congress to

enact laws affecting state taxation include the Supremacy Clause and similar provisions in the

Seat of Government Clause and the authority to erect forts, magazines, and arsenals. These

provisions implicitly prohibit states from taxing federal entities. Congress has acted under them to

waive the federal immunity and permit state taxation in certain circumstances, as well as to

restrict states from taxing entities and activities that fall within the federal immunity. Similarly,

Congress’s War Powers could provide authority for legislation affecting state taxation of members

of the Armed Forces.

Importantly, even if Congress has the constitutional authority to exercise legislative power over

the states, other provisions of the Constitution may limit those powers. Two examples of the

limitations that can be discussed in this context are the Tenth Amendment and the Spending

Clause. In general, however, the Tenth Amendment, which prevents commandeering of state

legislatures or executive branch officials to implement federal programs, has not been interpreted

by the courts to represent a significant limit on Congress’s ability to regulate state taxing

authority. Nor have courts found there to be significant limits to Congress’s power under the

Spending Clause to encourage state behavior by conditioning the provision of federal money to

the states. Most instances of grant conditioning by Congress appear to be constitutionally

uncontroversial, so long as the grant conditions are related to the underlying grant and the amount

of grant money conditioned is not so large as to be coercive.

Finally, two relatively obscure provisions of the Constitution—the Import-Export Clause and the

Tonnage Clause—are also relevant. These prohibit states from enacting taxes on imports or

exports and taxes based on tonnage, respectively. Both clauses expressly permit Congress to

authorize what would otherwise be unconstitutional state taxation. However, it does not appear

Congress has ever acted under these authorities.

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Constitutional Authorities Under Which Congress Regulates State Taxation

Contents

Commerce Clause ............................................................................................................................ 1

Supremacy Clause and Similar Provisions ...................................................................................... 3

Tenth Amendment ............................................................................................................................ 5

Spending Clause .............................................................................................................................. 8

Import-Export Clause .................................................................................................................... 10

Tonnage Clause .............................................................................................................................. 12

Contacts

Author Contact Information........................................................................................................... 12

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Constitutional Authorities Under Which Congress Regulates State Taxation

hile the power of taxation is considered a hallmark of sovereign status, the states’

taxing powers are not absolute. This is because Congress has the power under the U.S.

Constitution to restrict state taxation in certain circumstances. On the other hand,

Congress also has the power in some instances to permit state taxation that would otherwise be

unconstitutional. Importantly, even when Congress has the authority to exercise legislative power

over the states, other provisions of the Constitution may limit those powers.

This report discusses these authorities and several of the possible limitations. It also provides

examples of where Congress has appeared to act under each authority. The grouping of the

examples by authority is for illustrative purposes—the authority is assumed in many cases based

on the context of the statute since Congress often did not specify the power under which it acted,

and it is possible an action by Congress might be supported by more than one authority.

Commerce Clause

The Commerce Clause grants Congress the power “To regulate Commerce with foreign Nations,

and among the several States, and with the Indian Tribes.”1 Congress’s authority to regulate

commerce has been described as plenary and limited only by other constitutional provisions.2

Additionally, the Supreme Court has long held that the Commerce Clause, by granting Congress

the sole authority to regulate commerce, implicitly prohibits states from unduly burdening such

commerce, even in the absence of federal regulation.3 This restriction is known as the dormant

Commerce Clause. State tax laws are subject to the dormant Commerce Clause and are therefore

unconstitutional if found by the courts to impermissibly burden interstate or foreign commerce.4

Under its authority to regulate commerce, Congress can regulate state taxation.5 This means

Congress can determine which types of state taxation impermissibly burden interstate or foreign

commerce. Congress can also authorize state taxation that would otherwise be an unconstitutional

burden, so long as it is consistent with other provisions in the Constitution—for example,

Congress could not use this authority to pass a law that violates taxpayers’ due process rights.6

People sometimes struggle with the idea that Congress can authorize state taxation that the

Supreme Court and other courts have held to be unconstitutional. However, this is clearly the case

with the dormant Commerce Clause.7 For example, in a 1992 case holding that the dormant

U.S. CONST. Art. I, §8, cl. 3.

See, e.g., Prudential Insurance Co. v. Benjamin, 328 U.S. 408, 434 (1946).

See, e.g., Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824); Cooley v. Board of Wardens of Port of Philadelphia, 53

U.S. (12 How.) 299 (1851).

See, e.g., Quill v. North Dakota, 504 U.S. 298 (1992) (striking state use tax collection obligations imposed on sellers

without a physical presence in the state); Westinghouse Electric Corp. v. Tully, 466 U.S. 388 (1984) (striking state

corporate tax credit that lowered the effective tax rate on a company’s income as its subsidiary’s exports from the state

increased relative to those from other states.).

See, e.g., Quill, 504 U.S. at 318.

See id.

See Northeast Bancorp v. Board of Governors of Fed. Reserve Sys., 472 U.S. 159, 174 (1985) (“state actions [that

burden interstate commerce] which [Congress] plainly authorizes are invulnerable to constitutional attack under the

Commerce Clause [citations omitted]”).

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Constitutional Authorities Under Which Congress Regulates State Taxation

Commerce Clause requires a seller’s physical presence in a state before the state can require the

seller to collect use taxes, the Supreme Court expressly stated,

Our decision is made easier by the fact that the underlying issue is not only one that

Congress may be better qualified to resolve, but also one that Congress has the ultimate

power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate

commerce, Congress remains free to disagree with our conclusions ... Accordingly, Congress

is now free to decide whether, when, and to what extent the States may burden interstate

mail-order concerns with a duty to collect use taxes.8

Since Congress can authorize state taxation that would otherwise violate the dormant Commerce

Clause, it is helpful to know the circumstances under which a court will determine that a state tax

is impermissible under such clause. In 1977, the Supreme Court articulated a four-prong test for

determining when a state tax runs afoul of the dormant Commerce Clause: (1) the activity taxed

has a substantial nexus with the state; (2) the tax is fairly apportioned to reflect the degree of

activity that occurs within the state; (3) the tax does not discriminate against interstate commerce;

and (4) the tax is fairly related to benefits provided by the state.9 There are two additional criteria

for state taxation of instrumentalities of foreign commerce: the tax cannot create a “substantial

risk” of international multiple taxation, and it cannot prevent the federal government from

“speaking with one voice when regulating” foreign commerce.10

Examples of Congressional Action

Below are examples of where it appears Congress has acted under the Commerce Clause to pass

legislation affecting state taxation. In these examples, Congress has generally limited or clarified

state taxation in some way.

•

4 U.S.C. §114 prohibits states from imposing an income tax on the retirement

income of nonresidents.

•

4 U.S.C. §§116-126 provide rules affecting certain state taxes, charges, and fees

imposed on mobile telecommunications services. 4 U.S.C. §117 provides that

states may impose a tax, charge, or fee on services provided by the customer’s

home service provider so long as the customer’s place of primary use is within

the state, regardless of where the mobile telecommunication services originate,

terminate, or pass through, and that no other taxing jurisdiction may impose

taxes, charges, or fees on those services.

•

15 U.S.C. §78bb(d) prohibits state taxation on changes in beneficial or record

ownership of securities based only on the location of clearing agencies or

registered transfer agents.

•

The Prevent All Cigarette Trafficking Act of 2009 (PACT Act), 15 U.S.C. §§ 375

et seq., imposes requirements on sales of cigarettes and smokeless tobacco

Quill, 504 U.S. at 318. Legislation has been introduced to overturn Quill and permit qualifying states to impose the

tax collection obligations on sellers without a physical presence in the state. In the 113th Congress, these bills are the

Marketplace Fairness Act of 2013 (S. 743, which was passed by the Senate; S. 336; and H.R. 684) and the Marketplace

and Internet Tax Fairness Act (S. 2609).

Complete Auto Transit, Inc. v. Brady 430 U.S. 274, 279 (1977).

Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 451 (1979).

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products when the sale or delivery do not occur face-to-face (i.e., the buyer is not

in the physical presence of the seller). Among other things, the act requires that

sellers comply with state and local taxes on such sales, pay or remit the taxes in

advance, and report sales information to state tax agencies.

•

15 U.S.C. §§381-384 establish minimum jurisdictional requirements that must be

met before a state can impose net income taxes on income derived from interstate

sales of tangible personal property.

•

15 U.S.C. §391 prohibits states from imposing or assessing taxes on electricity

generation or transmission in a way that discriminates against out-of-state

manufacturers, producers, wholesalers, retailers, or consumers.

•

45 U.S.C. §231m prohibits state taxation of railroad retirement annuities.

•

49 U.S.C. §11501 prohibits states from assessing and taxing railroad property

more heavily than other industrial and commercial property.

•

49 U.S.C. §11502 prohibits states from taxing the compensation of rail carrier

employees unless the employee is a resident of the state. Additionally, the carrier

can be required to file employee income tax returns and reports only with the

state where the employee is a resident.

•

49 U.S.C. §14502 prohibits states from assessing and taxing motor carrier

property more heavily than other industrial and commercial property.

•

49 U.S.C. §14503 prohibits states from taxing the compensation of motor carrier

employees unless the employee is a resident of the state. Additionally, the carrier

can be required to file employee income tax returns and reports only with the

state where the employee is a resident.

•

49 U.S.C. §40116 prohibits states from levying or collecting tax on an individual

traveling in air commerce; the transportation of an individual traveling in air

commerce; the sale of air transportation; or the gross receipts from that air

commerce or transportation. Additionally, the section prohibits states from

assessing and taxing air carrier transportation property more heavily than other

commercial and industrial property. It also prohibits states from taxing the

compensation of air carrier employees unless the employee is a resident of the

state or earns at least 50% of the compensation in the state.

•

The Internet Tax Freedom Act11 temporarily prohibits states from imposing new

taxes on Internet access and multiple or discriminatory taxes on electronic

commerce.12

Supremacy Clause and Similar Provisions

The Supremacy Clause provides that the Constitution, federal laws, and treaties are “the supreme

Law of the Land.”13 It implicitly prevents states from taxing federal entities and property.14

P.L. 105-277, Div. C, Title XI, §§1101-1104, found at 47 U.S.C. §151 note.

For more information on the act, see CRS Report R43772, The Internet Tax Freedom Act: In Brief , by (name redac

ted); CRS Report R43800, Taxation of Internet Sales and Access: Legal Issues, by (name redacted).

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Constitutional Authorities Under Which Congress Regulates State Taxation

Several other constitutional provisions—the Seat of Government Clause and the authority to erect

forts, magazines, and arsenals15—are similar in that they give Congress exclusive control over

certain places and thus prohibit state taxation. Congress may use these authorities to clarify the

scope of the federal tax immunity or to waive the immunity in specific instances. Finally,

Congress’s power to declare war and to raise and maintain the Armed Forces16 can also provide

authority for legislation affecting state taxation of the Armed Forces.17

Examples of Congressional Action

The following are examples of Congress apparently acting under the Supremacy Clause or similar

provisions to enact laws affecting state taxation. In general, these laws either waive federal

immunity to permit state taxation of certain federal entities or clarify the immunity’s scope.

•

4 U.S.C. §104 permits states to collect sales taxes on purchases of gasoline and

other motor fuels made on U.S. military and other reservations so long as the fuel

is not for the exclusive use of the United States.

•

4 U.S.C. §§105 and 106 permit states to impose sales and use taxes and income

taxes in federal areas, although not on the United States or its instrumentalities or

with respect to tangible personal property sold by the United States to certain

purchasers. Federal areas are defined in 4 U.S.C. §110(e) as lands or premises

held or acquired by or for the use of the United States.

•

4 U.S.C. §111 permits states to tax the compensation of federal employees so

long as the taxation is not discriminatory. The provision also applies to

employees of the U.S. possessions and the District of Columbia. It further

provides that federal employees at the hydroelectric facilities on the Columbia

River that straddle Oregon and Washington and the Missouri River that straddle

South Dakota and Nebraska may only be taxed in the state where the employee is

a resident.

•

4 U.S.C. §113 prohibits Maryland, Virginia, and the District of Columbia from

treating Members of Congress who have a home there for purposes of attending

congressional sessions as residents for income tax purposes or from treating their

(...continued)

U.S. CONST. Art. VI, cl. 2.

See McCulloch v. Maryland, 4 Wheat. (17 U.S.) 316 (1819).

U.S. CONST. Art. I, §8, cl. 17 (“Congress shall have power ... To exercise exclusive Legislation in all Cases

whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States, and the

Acceptance of Congress, become the Seat of Government of the United States, and to exercise like Authority over all

Places purchased by the Consent of the Legislature of the State in which the same shall be, for the Erection of Forts,

Magazines, Arsenals, dock-Yards, and other needful Buildings.”).

U.S. CONST. Art. I, §8, cl. 11-14 (“The Congress shall have power ... To declare War, grant Letters of Marque and

Reprisal, and make Rules concerning Captures on Land and Water. To raise and support Armies, but no Appropriation

of Money to that Use shall be for a longer Term than two Years. To provide and maintain a Navy. To make Rules for

the Government and Regulation of the land and naval Forces.”).

See, e.g., United States v. Onslow County Bd. of Education, 728 F.2d 628 (4th Cir. 1984) (finding that the Soldiers’

and Sailors’ Civil Relief Act of 1940, now known as the Servicemembers Civil Relief Act, was an example of

Congress acting under its War Powers, and upholding the act against a Tenth Amendment challenge).

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Constitutional Authorities Under Which Congress Regulates State Taxation

congressional compensation as income sourced to that state, unless the Member

represents the area.

•

4 U.S.C. §115 provides that compensation for performing services at Fort

Campbell, Kentucky, may only be taxed by the state where the employee is a

resident.

•

38 U.S.C. §5301 prohibits state taxation of veterans’ benefits.

•

P.L. 99-190, §101(c), as amended by P.L. 100-202, §106, prohibits Maryland,

Virginia, and the District of Columbia from imposing personal property taxes on

motor vehicles owned by Members of Congress and their spouses unless the

Member represents the area.

•

There are numerous examples of federally mandated state tax exemptions for

federal instrumentalities, including the Federal Home Loan Banks (12 U.S.C.

§1433), Federal National Mortgage Association (12 U.S.C. §1723a), Farm Credit

Banks (12 U.S.C. §2023), Federal Financing Bank (12 U.S.C. §2290), National

Consumer Cooperative Bank (12 U.S.C. §3019), and Farm Credit System

Insurance Corporation (12 U.S.C. §2277a-12).

•

Congress has prohibited state income taxation of certain financial instruments,

including federal securities (31 U.S.C. §3124), Federal Home Loan Bank

obligations (12 U.S.C. §1433), banks for cooperatives obligations (12 U.S.C.

§2134), and Tennessee Valley Authority Bonds (16 U.S.C. §831n-4).

•

The Servicemembers Civil Relief Act, 50 U.S.C. Appx. §§501-596, contains

several provisions that provide temporary tax relief for servicemembers while

they are on active duty.18 50 U.S.C. Appx. §561 prohibits states from selling

property to enforce collection for real or personal property taxes without a court

order during the period of military service plus six months. The section contains

special rules allowing for stays of sales proceedings or enforcement during the

period of military service plus 180 days and for redemption rights during that

period. The section also requires the interest rate on unpaid tax debts be 6% and

prohibits any penalties. 50 U.S.C. Appx. §570 defers collection of any income

tax during the period of military service plus six months. No interest or other

penalties may be imposed on the unpaid amounts, and the statute of limitations

for paying the tax is tolled for the period of military service plus nine months. 50

U.S.C. Appx. §571 provides that servicemembers do not lose or acquire

residence for tax purposes when they serve at a duty station outside their home

state and prohibits state taxation of military service compensation and personal

property of nonresident servicemembers.

Tenth Amendment

Even if Congress has the constitutional authority to exercise legislative power over states, other

provisions of the Constitution may, in certain instances, limit those powers.19 One of the

For more information on the act, see CRS Report RL34575, The Servicemembers Civil Relief Act (SCRA): An

Explanation, by (name redacted).

See New York v. United States, 505 U.S. 144, 156 (1992) (“Thus, for example, under the Commerce Clause

(continued...)

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limitations often considered in the context of regulation of state authority is the Tenth

Amendment. The Tenth Amendment provides that “powers not delegated to the United States by

the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the

people.” As a state’s taxing authority is an important state power, it might be argued that a federal

law that preempts such power violates the Tenth Amendment. In general, however, under the

Supreme Court’s current interpretation of the Tenth Amendment, the Amendment does not

represent a significant limit on Congress’s ability to regulate state taxing authority.

It should be noted that, for a number of years, the Supreme Court did interpret the Tenth

Amendment to have such a limiting effect, finding that certain “core” state functions were beyond

the authority of the federal government to regulate. For instance, in the 1976 case National

League of Cities v. Usery,20 the Court struck down federal wage and price controls on state

employees as involving the regulation of core state functions.21 Nine years later, however, the

Court overruled National League of Cities in Garcia v. San Antonio Metropolitan Transit

Authority.22 In sum, the Court in Garcia seems to have said that most disputes over the effects on

state sovereignty of federal commerce power legislation are to be considered political questions,

and that the states should look for relief from federal regulation through the political process.23

Thus, it would not appear that mere federal regulation of the state’s taxing authority would

represent an inherently Tenth Amendment concern.

A different Tenth Amendment question arises as to whether the federal government may direct

states to tax persons or entities who they are not currently taxing. The Court has found that the

Tenth Amendment does limit the federal government from directing states to engage in regulation

of matters within the state’s jurisdiction. For instance, in the 1992 case New York v. United

States,24 the Court addressed Congress’s attempt to regulate in the area of low-level radioactive

waste. The statute at issue required that states either develop legislation on how to dispose of all

low-level radioactive waste generated within the state or the state would be forced to take title to

such waste, which would mean that it became the state’s responsibility. The Court found that

although Congress had the authority under the Commerce Clause to regulate low-level

radioactive waste, it only had the power to regulate the waste directly. Here, Congress had

attempted to require the states to perform the regulation, and decreed that the failure to do so

would require the state to deal with the financial consequences of owning large quantities of

radioactive waste. In effect, Congress sought to “commandeer” the legislative process of the

states to implement a federal program. In New York, the Court determined that this power was not

(...continued)

Congress may regulate publishers engaged in interstate commerce, but Congress is constrained in the exercise of that

power by the First Amendment.”)

426 U.S. 833 (1976).

In National League of Cities v. Usery, the Court conceded that the legislation under attack, which regulated the

wages and hours of certain state and local governmental employees, was undoubtedly within the scope of the

Commerce Clause. However, it cautioned that there are attributes of sovereignty attaching to every state government

function which may not be impaired by Congress, not because Congress may lack an affirmative grant of legislative

authority to reach the matter, but because the Constitution prohibits it from exercising the authority in that manner.

469 U.S. 528 (1985). Justice Blackmun’s opinion for the Court in Garcia concluded that the National League of

Cities test for “integral operations” in areas of traditional governmental functions had proven impractical, and that the

Court in 1976 had “tried to repair what did not need repair.”

See also South Carolina v. Baker, 485 U.S. 505 (1988).

505 U.S. 144 (1992).

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found in the text or structure of the Constitution, and it was thus a violation of the Tenth

Amendment.25

The Court has, however, distinguished between unconstitutional “commandeering” of states and

“substantive regulation” of ongoing state activities in which the states are voluntarily engaged. If

a state chooses to engage in regulation over which Congress has concurrent jurisdiction, then the

federal government may regulate how a state regime in that area is implemented. For instance, the

Court held in Reno v. Condon26 that the Driver’s Privacy Protection Act of 1994,27 which

regulates the sale of personal information gathered from persons seeking driver’s licenses, was

substantive regulation, not commandeering. In that case, the Court found that the state was not

being directed on how to regulate its citizens, but rather on how to treat information that the state

had voluntarily chosen to elicit from its own citizens. Similarly, arguably, as long as states

voluntarily choose to impose a state tax, then the federal government, operating under an

appropriate constitutional authority, may regulate how that taxation is to occur.

Court-Imposed Requirements Affecting State Taxation

It should also be noted that, in an apparent exception to the limits on commandeering, the Court

has found that states and localities may be required to raise taxes to meet certain legal obligations.

For instance, until 1954, the State of Missouri mandated segregated school facilities for black and

white children in violation of the Equal Protection Clause of the Fourteenth Amendment.28 The

federal courts, in order to eliminate vestiges of this system, ordered an implementation of a

remedial plan that included a requirement for local revenue increases. In Missouri v. Jenkins,29 the

Supreme Court approved the power of the federal courts to authorize the imposition of a local tax

and then give effect to that increase by enjoining the operation of a state law which would have

limited such tax.30 The Court rejected the argument that the funding order invaded the state’s

domain of reserved non-delegated powers in violation of the Tenth Amendment.31 In this case, the

A later case presented the question of the extent to which Congress could regulate through a state’s executive branch

officers. This case, Printz v. United States, 521 U.S. 898 (1997), involved the Brady Handgun Act. The act required

state and local law enforcement officers to conduct background checks on prospective handgun purchasers within five

business days of an attempted purchase. This portion of the act was challenged under the Tenth Amendment, on the

theory that Congress was without authority to “commandeer” state executive branch officials. After a historical study

of federal commandeering of state officials, the Court concluded that commandeering of state executive branch

officials was, like commandeering of the legislature, outside of Congress’s power, and consequently a violation of the

Tenth Amendment.

528 U.S. 141 (2000).

18 U.S.C. §§2712-2725.

Brown v. Board of Education, 347 U.S. 483, 486 n.1 (1954).

Missouri v. Jenkins, 495 U.S. 33 (1990).

See id. at 52-58. See also Griffin v. Prince Edward County School Bd., 377 U.S. 218 (1964) (a district court could

“require the [County] Supervisors to exercise the power that is theirs to levy taxes to raise funds adequate to reopen,

operate, and maintain without racial discrimination a public school system.... ”). Griffin followed a line of cases

holding that federal courts could issue a writ of mandamus to compel local governmental bodies to levy taxes adequate

to satisfy their debt obligations. See, e.g., Louisiana ex rel. Hubert v. Mayor and Council of New Orleans, 215 U.S. 170

(1909); Graham v. Folsom, 200 U.S. 248 (1906); Wolff v. New Orleans, 103 U.S. 358 (1881); United States v. New

Orleans, 98 U.S. 381 (1879); Heine v. Levee Comm’rs, 19 Wall. 655, 657 (1874); City of Galena v. Amy, 5 Wall. 705

(1867); Von Hoffman v. City of Quincy, 4 Wall. 535 (1867); Board of Comm’rs of Knox County v. Aspinwall, 24

How. 376 (1861).

But see John Choon Yoo, Recognizing the Limits of Judicial Remedies: Who Measures the Chancellor’s Foot? The

Inherent Remedial Authority of the Federal Courts, 84 CALIF. L. REV. 1121 (1996) (arguing that the Jenkins decision is

(continued...)

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Court found that the Fourteenth Amendment was specifically intended to “permit[] a federal court

to disestablish local government institutions that interfere with its commands.”32

Spending Clause

The Spending Clause grants Congress the authority “to pay the debts and provide for the common

defense and general welfare of the United States.... ”33 One of the more significant ways that the

federal government can encourage state behavior is to provide federal money to states and then

impose conditions on that federal money. Considering the number of federal programs and the

amount of federal funds provided to the states, this represents a significant power for Congress to

exercise. Further, as the voluntary receipt of grants containing these conditions implicitly

involves waiver by the states of their Tenth Amendment rights, these grant conditions may allow

Congress to indirectly achieve compliance by a state in a way that could not be achieved directly.

There are several examples of where Congress has apparently acted under the Spending Clause to

affect state taxation. In these cases, it appears the theory is that the state is voluntarily agreeing to

the federal limitation on its taxing power in return for federal funds.

•

7 U.S.C. §2013 requires states to exempt food purchased with food stamps from

state sales taxes.

•

42 U.S.C. §1786(m) contains a similar provision for food purchased with

coupons under the nutrition program for women, infants, and children.

Although these examples, like most instances of grant conditioning by Congress, are

constitutionally uncontroversial, the Supreme Court has suggested that there are limits on the

Spending Clause authority. In South Dakota v. Dole,34 Congress enacted the National Minimum

Drinking Age Amendment of 1984,35 which directed the Secretary of Transportation to withhold a

percentage of federal highway funds from states in which the age for purchase of alcohol was

below 21 years. South Dakota, which permitted 19-year-olds to purchase beer, brought suit

arguing that the law was an invalid exercise of Congress’s power under the Spending Clause to

provide for the “general welfare.”36 The Supreme Court held that, as the indirect imposition of

such a standard was directed toward the general welfare of the country, it was a valid exercise of

Congress’s spending power.

The Court noted that the grant condition did not implicate an independent constitutional bar (i.e.,

the grant condition did not require the state to engage in an unconstitutional activity). Further, the

court noted that the grant condition was not a violation of the Tenth Amendment, which generally

prevents Congress from “commandeering” state legislatures37 and executive branch officials38 to

(...continued)

inconsistent with United States v. New York, discussed supra, which was decided two years later).

Jenkins, 495 U.S. at 55.

U.S. CONST. Art. 1, §8, cl. 1.

483 U.S. 203 (1987).

23 U.S.C. §158.

U.S. Const., Art I, 8, cl 1 (Congress has the 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”).

New York v. United States, 505 U.S. 144 (1992), discussed supra.

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implement federal programs.39 The Tenth Amendment would not apply here, the Court held,

because the state officials were voluntarily cooperating in order to receive federal grants, and thus

were not being directed to comply with federal mandates.

The Court did suggest, however, that there were limits to Congress’s power under the Spending

Clause. First, a grant condition must be related to the particular national projects or programs to

which the money was being directed.40 In Dole, the congressional condition imposing a specific

drinking age was found to be related to the national concern of safe interstate travel, which was

one of the main purposes for highway funds being expended. Second, the Court suggested that, in

some circumstances, the financial inducements offered by Congress might be so coercive as to

pass the point at which “pressure turns into compulsion,”41 which would suggest a violation of the

Tenth Amendment. In Dole, however, the percentage of highway funds that were to be withheld

from a state with a drinking age below 21 was relatively small, so that Congress’s program did

not coerce the states to enact higher minimum drinking ages than they would otherwise choose.

The 2012 case of National Federation of Independent Business (NFIB) v. Sebelius,42 however,

seemed to suggest that an alternative line of analysis might apply in some grant condition cases.

In 2010, Congress passed the Patient Protection and Affordable Care Act (ACA).43 The ACA,

among other things, required states to expand Medicaid eligibility or lose Medicaid funding.

Following the enactment of the ACA, state attorneys general and others brought several lawsuits

challenging various provisions of the act on constitutional grounds. The Supreme Court, in a

controlling opinion by Chief Justice Roberts,44 found that the enforcement mechanism for the

ACA Medicaid expansion, withdrawal of all Medicaid funds, was a violation of the Tenth

Amendment.45

As noted in Dole, the loss of federal funds associated with a grant condition cannot be so large

that the withholding of such funds is coercive. Justice Roberts’s opinion in NFIB, however,

addressed the slightly different question of whether a grant condition attached to a “new and

(...continued)

Printz v. United States, 521 U.S. 898 (1997), discussed supra.

It would seem that sovereign immunity is a core state power, and that requiring its waiver would raise Tenth

Amendment concerns. See, e.g., National League of Cities v. Usery, 426 U.S. 833 (1976) (striking down federal wage

and price controls on state employees as involving the regulation of traditional state functions). As discussed

previously, however, the Court has, for the time being, abandoned this line of cases. See Garcia v. San Antonio

Metropolitan Transit Authority, 469 U.S. 528 (1985) (concluding that the test to identify traditional governmental

functions had proven impractical, and that such disputes should be resolved through the political process).

483 U.S. at 207.

Id. at 211.

132 S. Ct. 2566 (2012).

P.L. 111-148.

In NFIB, seven Justices held that the requirement that states either comply with the requirements of the Medicaid

expansion under the ACA or lose all Medicaid funds violated the Tenth Amendment. However, these seven Justices

either wrote or joined one of two separate opinions on this issue, and did not join in either the reasoning or judgment of

the other opinion. The opinion of Chief Justice Roberts, which was joined by Justices Breyer and Kagan, appears to be

significantly narrower than the dissenting opinion authored by Justices Scalia, Kennedy, Thomas, and Alito, and is thus

controlling. See Marks v. United States, 430 U.S. 188, 193 (1977) (“[w]hen a fragmented Court decides a case and no

single rationale explaining the result enjoys the assent of five Justices, ‘the holding of the Court may be viewed as that

position taken by those Members who concurred in the judgments on the narrowest grounds’”) (citation omitted).

The Court went on to hold, however, that the remedy was to sever that enforcement mechanism, effectively making

state participation in the Medicaid expansion voluntary. NFIB, 132 S. Ct. at 2607.

Congressional Research Service

Constitutional Authorities Under Which Congress Regulates State Taxation

independent” program (here, the Medicaid expansion) that threatened the funding of an existing

program (here, Medicaid) violated the Tenth Amendment. It is unclear, therefore, whether the

NFIB decision was an application of the Dole analysis, or whether the combination of factors

presented in NFIB suggests an alternate line of reasoning.46

Justice Roberts’s opinion in NFIB held that, in the case of existing program funding being

conditioned on the adoption of a “new and independent” program, the amount of federal funds at

issue cannot represent a significant portion of a state’s budget or its withdrawal will be found to

be unconstitutionally coercive under the Tenth Amendment. Justice Roberts did not identify a

standard to determine what level of withholding funds would be coercive, or specify what kind of

distinguishing factors were necessary to such analysis. He did conclude, however, that withdrawal

of federal program funds which made up 10% of an average state’s budget represented a “gun to

the head” and was a form of “economic dragooning.”47

It is not clear, however, whether the confluence of factors at issue in the NFIB case is likely to be

present in future cases. Few federal programs, for instance, even approach the level of state

funding as does Medicaid; nor do there appear to be significant examples of grant conditions

requiring creation of “new and independent” programs in order to retain funding for a separate

program. Neither of the examples noted above (state sales tax exemptions for food stamps or

supplemental nutrition purchases) appear to involve either the creation of “new and independent”

programs or the threatened withdrawal of a significant portion of a state’s budget. Consequently,

the NFIB case may have minimal effect on the validity of existing or future federal grant

conditions involving state taxation.48

Import-Export Clause

The Import-Export Clause generally prohibits states from taxing imports and exports. It provides

that

No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or

Exports, except what may be absolutely necessary for executing its inspection Laws: and the

net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for

the Use of the Treasury of the United States; and all such Laws shall be subject to the

Revision and Controul of the Congress.49

The Clause expressly grants Congress the power to authorize state taxation that would otherwise

be constitutionally impermissible (and is therefore similar to the implicit authority provided by

the Commerce Clause, as discussed above). It does not appear that Congress has ever authorized

states to tax under the Import-Export Clause.

For an analysis of the relationship between the Dole and NFIB cases, see CRS Report R42367, Medicaid and

Federal Grant Conditions After NFIB v. Sebelius: Constitutional Issues and Analysis, by (name redacted).

NFIB, 132 S. Ct. at 2604-05.

For further discussion, see CRS Report R42367, Medicaid and Federal Grant Conditions After NFIB v. Sebelius:

Constitutional Issues and Analysis, by (name redacted).

U.S. CONST. Art. I, §10, cl. 2. The Import-Export Clause is sometimes confused with the Export Clause, found in

Article I, section 9, clause 5. The Export Clause prohibits the federal government from taxing exports. For more

information, see CRS Report R42780, Export Clause: Limitation on Congress’s Taxing Power, by (name redacted).

Congressional Research Service

Constitutional Authorities Under Which Congress Regulates State Taxation

Since the Import-Export Clause expressly gives Congress the power to authorize state taxation

that would otherwise be impermissible under the clause, it might be helpful to understand what

types of state taxation would run afoul of the clause. Historically, the Supreme Court held that the

clause flatly prohibited any state tax, imposed without congressional consent or for inspection

purposes, on imports and exports, as well as on the importing and exporting processes.50 Under its

modern jurisprudence, the Court, rather than assuming that all such taxes were unconstitutional,

has instead examined whether a tax is an “impost” or “duty” by looking at whether it offends any

of the policies the Framers intended the clause to address: (1) ensuring the federal government

speaks with one voice when regulating foreign commerce; (2) avoiding the diversion of revenue

from the federal government to the states; and (3) preventing the disharmony among the states

that could arise if coastal states taxed goods that traveled through their ports.51 This analysis

based on the Framers’ intent applies to imposts and duties on both imports and exports.52 There

may, nonetheless, be some question as to whether all state taxes are subject to this policy-based

approach, or whether some (e.g., those imposed on goods that are in transit) might automatically

be treated as an “impost” or “duty” regardless of whether they offend the policies behind the

clause.53

If Congress were to authorize state taxation under the Import-Export Clause, one question that

might arise is whether the Clause’s requirement that “the net Produce of all Duties and Imposts,

laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States

... ” would apply to such taxes. It does not appear this language has been substantively examined

by any court or that the Framers’ debates provide useful interpretative assistance. At least one pair

of commentators has argued that the “Use of the Treasury” language applies only to amounts

collected by the states that exceed the amounts needed to fund their inspection laws—and not to

any amounts collected under congressionally authorized imposts or duties—because “otherwise,

the consent procedure, as a practical matter, would become a dead letter.”54 On the other hand, as

even the commentators note, this matter is not entirely free from doubt.55 Arguably, the clause’s

language—“net Produce of all Duties and Imposts, laid by any State on Imports or Exports ... ”

(emphasis added)—could suggest the “use” restriction applies to all state-imposed duties and

imposts, whether congressionally authorized or for state inspections.

See Dep’t of Revenue v. Ass’n of Washington Stevedoring Cos., 435 U.S. 734, 752 (1978). The prohibition applied

to goods still in their original import packages and those that had entered the export stream. See id.

See Michelin Tire Corp. v. Wages, 423 U.S. 276, 285-86 (1976); Washington Stevedoring, 435 U.S. at 752-53. In

Washington Stevedoring, for example, the Court held that a state business and occupation tax violated none of the three

policies when (1) it was a general business tax that applied to almost all businesses and therefore was not a “special

protective tariff” that could interfere with U.S. foreign relations; (2) it would only indirectly affect the demand for

imported goods since it was not imposed on the goods themselves and “merely compensates” the state for services it

provides to the stevedoring industry; and (3) it was imposed on taxpayers with a nexus to the state, was fairly

apportioned, did not discriminate, and was fairly related to services provided by the state. See Washington Stevedoring,

435 U.S. at 754-55.

See Washington Stevedoring, 435 U.S. at 758.

See id. at 757, fn. 23 (“We do not reach the question of the applicability of the Michelin approach when a State

directly taxes imports or exports in transit.”).

Boris I. Bittker & Brannon P. Denning, Constitutional Law and Civil Rights Symposium, Part II: The Import-Export

Clause, 68 MISS. L.J. 521, 563 (1998).

See id. (going on to note that “[i]n any event, doubts about this conclusion [regarding the inapplicability of the “use”

restriction to congressionally authorized imposts and duties] could be dispelled by including a release of any federal

claim to the resulting state revenue in the consent itself.”).

Congressional Research Service

Constitutional Authorities Under Which Congress Regulates State Taxation

Tonnage Clause

Like the Import-Export Clause, the Tonnage Clause also expressly limits state taxation unless

authorized by Congress. It provides that “No State shall, without the Consent of Congress, lay

any Duty of Tonnage.... ”56 It does not appear Congress has ever authorized state taxation under

the Tonnage Clause.

Nonetheless, since the Tonnage Clause expressly gives Congress the power to authorize state

taxation that would otherwise be unconstitutional under the clause, it might be useful to look at

what types of state taxation violate the Tonnage Clause. The Clause’s purpose is “to restrai[n] the

states themselves from the exercise of the taxing power injuriously to the interests of each other,”

and it reflects the Framers’ recognition that “if the states had been left free to tax the privilege of

access by vessels to their harbors,” then the Import-Export Clause’s prohibitions “could have

been nullified by taxing the vessels transporting the merchandise.”57 As such, the prohibition

against tonnage duties includes all taxes and duties, whether or not measured by the vessel’s

tonnage, that impose “a charge for the privilege of entering, trading in, or lying in a port.”58 It

does not, however, apply to charges for services rendered to a vessel (e.g., pilotage, wharfage,

medical inspections, or charges for use of locks), even if graduated according to tonnage.59

Author Contact Information

(name redacted)

Legislative Attorney

[redacted]@crs.loc.gov, 7-....

(name redacted)

Legislative Attorney

[redacted]@crs.loc.gov, 7-....

CONST. Art. I, §10, cl. 3.

See Polar Tankers, Inc. v. City of Valdez, Alaska, 557 U.S. 1, 7 (2009).

Id. at 9.

See, e.g., Clyde Mallory Lines v. Alabama, 296 U.S. 261, 266 (1935).

Congressional Research Service

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