Steward Machine Co. v. Davis
301 U.S. 548 (1937)

  • 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.