U.S. Supreme Court GRAVES v. PEOPLE OF STATE OF NEW YORK, 306 U.S. 466 (1939)

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stitutional immunity of federal agencies which courts have implied, is a question which need not now be determined.

Congress has declared in 4 of the Act that the Home Owners' Loan Corporation is an instrumentality of the United States and that its bonds are exempt, as to principal and interest, from federal and state taxation, except surtaxes, estate, inheritance and gift taxes. The corporation itself, 'including its franchise, its capital, reserves and surplus, and its loans and income,' is likewise exempted from taxation; its real property is subject to tax to the same extent as other real property. But Congress has given no intimation of any purpose either to grant or withhold immunity from state taxation of the salary of the corporation's employees, and the Congressional intention is not to be gathered from the statute by implication. Cf. Baltimore National Bank v. State Tax Comm., supra.

It is true that the silence of Congress, when it has authority to speak, may sometimes give rise to an implication as to the Congressional purpose. The nature and extent of that implication depend upon the nature of the Congressional power and the effect of its exercise. [Footnote 1] But

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ing v. Gerhardt, supra; cf. Metcalf & Eddy v. Mitchell, , 46 S. Ct. 172; Fox Film Corp. v. Doyal, 286 U.S. 123, 52 S.Ct. 546; James v. Dravo Contracting Co., supra, page 149, 58 S.Ct. page 216; Helvering v. Mountain Producers Corp., 303 U.S. 376, 58 S.Ct. 623, and the only possible basis for implying a constitutional immunity from state income tax of the salary of an employee of the national governmentor of a governmental agency is that the economic burden of the tax is in some way passed on so as to impose a burden on the national government tantamount to an interference by one government with the other in the performance of its functions.

In the four cases in which this Court has held that the salary of an officer or employee of one government or its instrumentality was immune from taxation by the other, it was assumed, without discussion, that the immunity of a government or its instrumentality extends to the salaries of its officers and employees. [Footnote 2] This assumption, made with respect to the salary of a governmental officer

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prevent undue interference with the one government by imposing on it the tax burdens of the other.

In applying these controlling principles in the Gerhardt case the Court held that the salaries of employees of the New York Port Authority, a state instrumentality created by New York and New Jersey, were not immune from federal income tax, even though the Authority be regarded as not subject to federal taxation. It was said that the taxpayers enjoyed the benefit and protection of the laws of the United States and were under a duty, common to all citizens, to contribute financial support to the government; that the tax laid on their salaries and paid by them could be said to affect or burden their employer, the Port Authority, or the states creating it, only so far as the burden of the tax was economically passed on to the employer; that a non-discriminatory tax laid on the income of all members of the community could not be assumed to obstruct the function which New York and New Jersey had undertaken no perform, or to cast an economic burden upon them, more than does the general taxation of property and income which, to some extent, incapable of measurement by economists, may tend to raise the price level of labor and materials. [Footnote 4] The Court concluded

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to affairs. These refinements derived authority from an unfortunate remark in the opinion in McCulloch v. Maryland. Partly as a flourish of rhetoric and partly because the intellectual fashion of the times indulged a free use of absolutes, Chief Justice Marshall gave currency to the phrase that 'the power to tax involves the power to destroy.' Id., at page 431 of 4 Wheat. This dictum was treated as though it were a constitutional mandate. But not without protest. One of the most trenchant minds on the Marshall court, Justice William Johnson, early analyzed the dangerous inroads upon the political freedom of the States and the Union within their respective orbits resulting from a doctrinaire application of the generalities uttered in the course of the opinion in McCulloch v. Maryland. [Footnote 3] The seductive cliche that the power to tax involves the power to destroy was fused with another assumption, likewise not to be found in the Constitution itself, namely the doctrine that the immunities are correlative-because the existence of the national government implies immunities from state taxation, the existence of state governments implies equivalent immunities from federal taxation. When this doctrine was first applied Mr. Justice Bradley registered a powerful dissent,4 the force of which gathered rather than lost strength with time. Collector v. Day, 11 Wall. 113, 128, 20.Ed. 122.

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All these doctrines of intergovernmental immunity have until recently been moving in the realm of what Lincoln called 'pernicious abstractions'. The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes's pen: 'The power to tax is not the power to destroy while this Court sits'. Panhandle Oil Co. v. Mississippi, 277 U.S. 218, 223, 48 S.Ct. 451, 453, 56 A.L.R. 583 (dissent ). Failure to exempt public functionaries from the universal duties of citizenship to pay for the costs of government was hypothetically transmuted into hostile action of one government against the other. A succession of decisions thereby withdrew from the taxing power of the States and Nation a very considerable range of wealth without regard to the actual workings of our federalism,5 and this, too, when the financial needs of all governments began steadily to mount. These decisions have encountered increasing dissent. [Footnote 6] In view of the powerful pull of our decisions upon the courts charged with maintaining the constitutional equilibrium of the two other great English federalisms, the Canadian and the Australian courts were at first inclined to follow the earlier doctrines of this Court regarding intergovernmental immunity. [Footnote 7]

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Both the Supreme Court of Canada and the High Court of Australia on fuller consideration-and for present purposes the British North America Act, 30 & 31 Vict., c. 3, and the Commonwealth of Australia Constitution Act, 63 & 64 Vict., c. 12, raise the same legal issues as does our Constitution8- have completely rejected the doctrine of intergovernmental immunity. [Footnote 9] In this Court dissents have gradually become majority opinions, and even before the present decision the rationale of the doctrine had been undermined. [Footnote 10]

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have said about it. [Footnote 11] Neither Dobbins v. Commissioners of Erie County, 16 Pet. 435, and its offspring, nor Collector v. Day, supra, and its, can stand appeal to the Constitution and its historic purposes. Since both are the starting points of an interdependent doctrine, both should be, as I assume them to be, overruled this day. Whether Congress may, by express legislation, relieve its functionaries from their civic obligations to pay for the benefits of the State governments under which they live is matter for another day.

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similarly free have been the States to tax salaries of officers and employees of the United States. The compensation for past as well as for future service to be taxed and the rates prescribed in the exertion of the newly disclosed power depend on legislative discretion not subject to judicial revision. Futile indeed are the vague intimations that this Court may protect against excessive or destructive taxation. Where the power to tax exists, legislatures may exert it to destroy, to discourage, to protect or exclusively for the purpose of raising revenue. See e.g. Veazie Bank v. Fenno, 8 Wall. 533, 548; McCray v. United States, 195 U.S. 27, 53 et seq., 24 S.Ct. 769, 775, 1 Ann.Cas. 561; Magnano Co. v. Hamilton, 292 U.S. 40, 44 et seq., 54 S.Ct. 599, 601; Cincinnati Soap Co. v. United States, 301 U.S. 308, 57 S.Ct. 764

Appraisal of lurking or apparent implications of the Court's opinion can serve no useful end for, should occasion arise, they may be ignored or given direction differing from that at first seemingly intended. But safely it may be said that presently marked for destruction is the doctrine of reciprocal immunity that by recent decisions here has been so much impaired. Footnotes

Footnote 1 The failure of Congress to regulate interstate commerce has generally been taken to signify a Congressional purpose to leave undisturbed the authority of the states to make regulations affecting the commerce in matters of peculiarly local concern, but to withhold from them authority to make regulations affecting those phases of it which, because of the need of a national uniformity, demand that their regulation, if any, be prescribed by a single authority. Cooley v. Board of Wardens, 12 How. 299, 319; Minnesota Rate Cases, 230›u.S. 352, 399, 400, 33 S. Ct. 729, 739, 48 L.R.A.,N.S., 1151, Ann.Cas.1916A, 18; Kelly v. Washington, 302 U.S. 1, 14, 58 S.Ct. 87, 94; South Carolina State Highway Dept. v. Barnwell Brothers, 303 U.S. 177, 184, 185 S., 58 S.Ct. 510, 513; Milk Control Board v. Eisenberg Farm Products, , 59 S.Ct. 528, 83 L.Ed. --, decided February 27, 1939. As to the implications from Congressional silence in the field of state taxation of interstate commerce and its instrumentalities, see Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 58 S.Ct. 546, 115 A.L.R. 944; Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434, 59 S.Ct. 325, decided January 3, 1939.

Footnote 2 In Dobbins v. Commissioners of Erie County, 16 Pet. 435, a Pennsylvania tax, nominally laid upon the office of the captain of a federal revenue cutter, but roughly measured by the salary paid to the officer, ws held invalid. The Court seems to have rested its decision in part on the ground that a tax on the emoluments of his office was the equivalent of a tax upon an activity of the national government, and in part on the ground that it was an infringement of the implied superior power of Congress to fix the compensation of government employees without diminution by state taxation.'In Collector v. Day, 11 Wall. 113, this Court held that the salary of a state probate judge was constitutionally immune from federal income tax on the grounds that the salary of an officer of a state is exempt from federal taxation if the function he performs as an officer is exempt, citing Dobbins v. Commissioner of Erie County, supra, and that there was an implied constitutional restriction upon the power of the national government to tax a state in the exercise of those functions which were essential to the maintenance of state governments as they were organized at the time when the Constitution was adopted. The possibility that a non-discriminatory tax upon the income of a state officer did not involve any substantial interference with the functioning of the state government was not discussed either in this or the Dobbins case.

In New York ex rel. Rogers v. Graves, 299 U.S. 401, 57 S.Ct. 269, the question was whether the salary of the general counsel of the Panama Rail Road Company was exempt from state income tax because the railroad company was an instrumentality of the federal government. The sole question raised by the taxing state was whether the railroad company was a government instrumentality. The Court, having found that the railroad company was such an instrumentality, disposed of the matter of tax exemption of the salary of its employees by declaring: 'The railroad company being immune from state taxation, it necessarily results that fixed salaries and compensation paid to its officers and employees in their capacity as such are likewise immune.' New York ex rel. Rogers v. Graves, supra, page 408, 57 S.Ct. page 272.

In Brush v. Commissioner, 300 U.S. 352, 57 S.Ct. 495, 108 A.L.R. 1428, the applicable treasury regulation upon which the government relied exempted from federal income tax the compensation of 'state officers and employees' for 'services rendered in connection with the exercise of an essential governmental function of the State.' The Court held that the maintenance of the public water system of New York City was an essential governmental function, and in determining whether the salary of the engineer in charge of that project was subject to federal income tax the Court declared, citing New York ex rel. Rogers v. Graves, supra, page 408, 57 S.Ct. page 272: 'The answer depends upon whether the water system of the city was created and is conducted in the exercise of the city's governmental functions. If so, its operations are immune from federal taxation and, as a necessary corollary, 'fixed salaries and compensation paid to its officers and employees in their capacity as such are likewise immune." Brush v. Commissioner, supra, page 360, 57 S.Ct. page 495.

Footnote 3 The fact that the expenses of the one government might be lessened if all those who deal with it were exempt from taxation by the other was thought not to be an adequate basis for tax immunity in Metcalf & Eddy v. Mitchell, 269 U.S. 514, 46 S.Ct. 172, 70.Ed. 384; Group No. 1 Oil Corp. v. Bass, 283 U.S. 279, 51 S.Ct. 432; Burnet v. Jergins Trust, 288 U.S. 508, 53 S.Ct. 439; James v. Dravo Contracting Co., 302 U.S. 134, 58 S.Ct. 208, 114 A.L.R. 318; Helvering v. Mountain Producers Corp., 303 U.S. 376, 58 S.Ct. 623.

Footnote 4 That the economic burden of a tax on salaries is passed on to the employer or that employees will accept a lower government salary because of its tax immunity, are formulas which have not won acceptance by economists and cannot be judicially assumed. As to the 'passing on' of the economic burden of the tax, see Seligman, Income Tax, VII Encyclopedia of Social Sciences, 626-638; Plehn, Public Finance (5th Ed.), p. 320; Buehler, Public Finance, p. 240; Lutz, Public Finance (2d Ed.), p. 336, and see Indian Motocycle Co. v. United States, 283 U.S. 570, 581, footnote 1, 51 S. Ct. 601, 603. As to preference for government employment because the salary is tax exempt, see Dickinson, Compensating Industrial Effort (1937), pp. 7-8; Douglas, The Reality of Non-Commercial Incentives in Industrial Life, c. V of The Trend of Economics (1924); Vol. I, Fetter, Economic Principles (1915), p. 203.

[Footnote 1] The state of the docket of the High Court of Australia and that of the Supreme Court of Canada still permits them to continue the classic practice of seriatim opinions.

[Footnote 2] Article 1, Sec. 10, U.S.Constitution, U.S.C.A.

[Footnote 3] Weston v. City Council of Charleston, 2 Pet. 449, 472, 473.

[Footnote 4] 'I dissent from the opinion of the court in this case, because it seems to me that the general government has the same power of taxing the income of officers of the state governments as it has of taxing that of its own officers. ... In my judgment, the limitation of the power of taxation in the general government, which the present decision establishes, will be found very difficult to control. Where are we to stop in enumerating the functions of the state governments which will be interfered with by Federal taxation? ... How can we now tell what the effect of this decision will be? I cannot but regard it as founded on a fallacy, and that it will lead to mischievous consequences.' 11 Wall. 113, 128, 129.

Footnote 5 E.g., Gillespie v. Oklahoma, 257 U.S. 501, 42 S.Ct. 171; Panhandle Oil Co. v. Mississippi, 277 U.S. 218, 48 S.Ct. 451, 56 A.L.R. 583; Macallen Co. v. Massachusetts, 279 U.S. 620, 49 S.Ct. 432, 65 A.L.R. 866; Indian Motocycle Co. v. United States, 283 U.S. 570, 51 S.Ct. 601; Burnet v. Coronado Oil & Gas Co ., 285 U.S. 393, 52 S.Ct. 443; New York ex rel. Rogers v. Graves, 299 U.S. 401, 57 S.Ct. 269; Brush v. Commissioner of Internal Revenue, 300›u.S. 352, 57 S.Ct. 495, 108 A.L.R. 1428.

Footnote 6 E.g., Mr. Justice Brandeis, dissenting, in Jaybird Mining Co. v. Weir, 271 U.S. 609, 615, 46 S.Ct. 592, 594; Justice Holmes, dissenting, in Panhandle Oil Co. v. Mississippi, 277 U.S. 218, 222, 48 S. Ct. 451, 452, 56 A.L.R. 583; Mr. Justice Stone, dissenting, in Indian Motocycle Co. v. United States, 283 U.S. 570, 580, 51 S.Ct. 601, 604; Mr. Justice Roberts, dissenting, in Brush v. Commissioner of Internal Revenue, 300 U.S. 352, 374, 57 S.Ct. 495, 502, 108 A.L.R. 1428. See, also, Mr. Justice Black, concurring, in Helvering v. Gerhardt, 304 U.S. 405, 424, 58 S.Ct. 969, 977.

Footnote 7 Bank of Toronto v. Lambe, 12 App.Cas. 575; D'Emden v. Pedder, 1 C.L. R. 91.

Footnote 8 Especially is this true of the Australian Constitution. One of its framers, who afterwards became one of the most distinguished of Australian judges, Mr. Justice Higgins, characterized it as having followed our Constitution with 'pedantic imitation.' Australasian Temperance and General Mutual Life Assurance Co., Ltd., v. Howe, 31 C.L.R. 290, 330.

Footnote 9 Abbott v. City of St. John, 40 Can.Sup.Ct. 597; Caron v. The King, ( 1924) A.C. 999; Amalgamated Society of Engineers v. Adelaide Steamship Co., Ltd., 28 C.L.R. 129; West v. Commissioner of Taxation, 56 C.L.R. 657.

Footnote 10 E.g., James v. Dravo Contracting Co., , 58 S.Ct. 208, 114 A.L.R. 318; Helvering v. Mountain Producers Corp., 303 U.S. 376, 58 S.Ct. 623; Helvering v. Gerhardt, 304 U.S. 405, 58 S.Ct. 969.

Footnote 11 Compare Taney, C.J., in Passenger Cases, 7 How. 283, 470: 'I ... am quite willing that it be regarded as the law of this court, that its opinion upon the construction of the Constitution is always open to discussion when it is supposed to have been founded in error, and that its judicial authority should hereafter depend altogether on the force of the reasoning by which it is supported.'