The doctrine of intergovernmental tax immunity arises from concerns about the viability of the federal system if a state or the federal government can tax the operations of the other. Chief Justice John Marshall in McCulloch v. Maryland (1819) contended that “the power to tax involves the power to destroy” (p. 431). The doctrine of tax immunity he articulated in that case has been seen as critical to the preservation of the constitutional system. Expansion of the doctrine and the notion of correlative state and federal immunities grew until the 1930s, when governmental financial needs placed pressure on the doctrine and the Supreme Court responded with decisions narrowing its scope.
In McCulloch, the Supreme Court reviewed the constitutionality of a Maryland statute that required banks operating without a charter from that state's legislature either to issue notes on state‐furnished stamped paper or to pay an annual fee to the state. Marshall's decision, which found the Bank of the United States immune from these imposts, raised issues that were critical to the development of intergovernmental tax immunity—the sources of such immunities, the asymmetry of state and federal immunities, and the characteristics of an offending tax. In McCulloch, the source of the federal government's immunity from state taxation was not found in any express provision of the Constitution but rather in the structure of the document, which posited the supremacy of the federal constitution and laws.
In Collector v. Day (1871), a case holding that the federal government could not tax the salary of a state judge, the constitutional structure and the Tenth Amendment were invoked as the basis of a reciprocal state immunity from federal taxation. Because of the different sources of immunity and the structure of the federal government, however, the immunity of the federal government differs from state immunity from federal taxation. The Supremacy Clause of Article VI and the representation of the states' interests in Congress have led the Court to conclude that the two types of intergovernmental immunities are asymmetrical.
The number and variety of taxes that ran afoul of the doctrine of intergovernmental tax immunities grew until the 1930s, when Court decisions began to retreat from the previous broad application of the doctrine. In the years following McCulloch, the doctrine of intergovernmental immunities came to shield employees, lessees, vendors to the government, patent and copyright holders, and governmental bondholders from various federal and state taxes. These immunities were based on the idea that taxation of third parties would increase the economic burden on the government contracting with them and that such economic burdens violated constitutional principles.
In the 1930s, the Court rejected the economic burden test, adopting instead a legal incidence test to identify unconstitutional taxes. During the 1930s and 1940s most third‐party tax exemptions were overturned, although the exemption for recipients of governmental bond interest remained intact during this period. The administration of Franklin D. Roosevelt reversed previous federal government positions by accepting state taxation of federal contractors in 1937 and sought to collect federal income tax from state lessees and employees in 1938. Justice Felix Frankfurter, in his concurrence in Graves v. New York ex rel. O'Keefe (1939), rejected the previous expansion of the doctrine as being “without regard to the actual workings of our federalism” at a time “when the financial needs of all governments began to steadily mount” (p. 490). Much later, in South Carolina v. Baker (1988), the Supreme Court upheld federal taxation of interest on unregistered state bonds in an opinion that rejected constitutional immunity for state bondholders. Justice William J. Brennan in Baker summarized what was left of the doctrine of intergovernmental immunities: “the States can never tax the United States directly but can tax any private parties with whom it does business … as long as the tax does not discriminate against the United States or those with whom it deals” (p. 523). The opinion indicated that “some nondiscriminatory federal taxes can be collected directly from the States, even though a parallel state tax could not be collected directly from the Federal Government” (p. 523), reiterating the asymmetry of the doctrine.
The doctrine of intergovernmental tax immunities has changed as fears about taxation's potential for destroying federalism have waned and as demands for increasing government services and revenues have increased at both the state and federal level.
See also State Taxation.
Bibliography
- Thomas Reed Powell, The Waning of Intergovernmental Tax Immunities,
Harvard Law Review 58 (1945): 633–674. - Thomas Reed Powell, The Remnant of Intergovernmental Tax Immunities,
Harvard Law Review 58 (1945): 757–805
— Carolyn C. Jones
