The Steward Machine Company
challenged the validity of a tax imposed by the Social Security Act. Steward was upset because the Act established
a Federal payroll tax on employers; however, if employers paid taxes to a
State unemployment compensation fund (created by the States but subject to
Federal standards), they were allowed to credit those payments toward the
Federal tax.
The goal was to coerce
States into to enacting Social Security legislation. In theory,
employers would encourage their State representatives to enact State laws
so they could avoid paying Federal taxes.
Also, Congress was
concerned that if one State created an unemployment compensation tax and
another State didn't, companies would move to those States where they
didn't have to pay unemployment taxes. The Social Security Act evened the playing field so that States that
did not adopt unemployment standards would not have an advantage.
Steward argued that the Act
violated the 5th Amendment right
to due process, and that coercing States to do what the
Federal government couldn't do was a violation of the 10th Amendment.
The US Supreme Court found
that the Social Security Act was
constitutional.
The US Supreme Court found
that the tax was uniform throughout the States and wasn't a violation of
the 10th Amendment because it
didn't really coerce States to enact laws, it just provided
some encouragement. The Court felt that the States still retained
autonomy.
The Court found that
Congress was within their power under the Spending Clause to enact the tax, even if they had ulterior
motives
Even if the taxes
"were collected in the hope or expectation that some other and
collateral good would be furthered as an incident, that, without more,
would not make the act invalid."
"The difficulty with
the petitioner's contention is that it confuses motive with coercion.
Every tax is in some measure regulatory. To some extent it interposes an
economic impediment to the activity taxed as compared with others not
taxed."
The decision in this case was
a shift in how the Supreme Court interpreted Congressional power to
influence State laws. It was basically a reversal of United States v.
Butler (297 U.S. 1 (1936)), which had
been decided only a year before.
It was a very split decision.
The dissents argued that the Act went beyond the powers that were granted
to the Federal government in the Constitution.
The dissents felt that
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.
