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5.2 The Commerce, Taxing, and Spending Clauses

Learning Objectives

  1. Explore how the Constitution grants the power to regulate commerce to the federal government.
  2. Understand how the meaning of the Commerce Clause has expanded greatly.
  3. Learn about state police powers and the limitations on those powers.
  4. Learn about the power given to Congress to tax and spend money.

Figure 5.2

The Commerce Clause allows Congress to regulate all aspects of interstate commerce.

Members of the Constitutional Convention were divided about how powerful the new central government should be. To avoid the rise of tyrannical government, the Constitution carefully grants certain powers to Congress, reserving all other powers to the states. These powers are listed in Article I, Section 8. Look at this section in Note 5.25 "Hyperlink: The Powers of Congress" and notice how detailed these powers are.

The list begins with monetary matters, an issue of great concern at the time because the prior government was bankrupt and states regulated their own money supply. The Congress therefore has the power to borrow money, lay and collect taxes, regulate commerce (the Commerce ClauseThe power granted to Congress to regulate foreign and domestic commerce.), establish a uniform law on bankruptcy and naturalizationThe process and procedure to become a citizen., make money (currency) and establish its value, punish the counterfeiting of U.S. money, and establish a uniform system of weights and measures. The list then moves on to aspirational ideals for the young new country to strive toward. Congress has the power to establish post offices and post roads and to protect intellectual property in copyrights and patents. Next, the list turns to Congress’s adjudicative powers: to create lower courts under the Supreme Court created in Article III and to define crimes committed on the “high seas” and against the “law of nations.” Congress is also given fiscal responsibility over the armed forces and navy (note there is, of course, no mention of an air force) and the power to provide oversight to the militia. Then, to help Congress with carrying out these powers, Article I, Section 8 provides that the states may cede to Congress a district, not to exceed ten square miles, that will become the seat of government, and to exercise exclusive legislative authority over this district.

The scope of power granted under Article I, Section 8 is the subject of much debate among legal scholars. The clause granting Congress the power to regulate commerce is particularly troublesome. There is very little debate about the power of Congress to regulate foreign trade. This power is explicit, total, and exclusive. If Congress wanted to ban all imports and exports into and out of the United States, for example, it could legitimately do so. Indeed, Congress routinely uses economic trade sanctions against “rogue” nations such as Cuba and North Korea as a means of economic warfare to try to bring about regime change. Even in the case of friendly allies such as Canada, Mexico, and the European Union, Congress routinely engages in trade regulations that restrict or distort foreign trade. Since this power is exclusive to Congress, state attempts to regulate foreign commerce are invalid. Oregon, for example, cannot ban Oregon companies from exporting to Mexico or establish a free trade zone with duty-free imports with China.

There is more disagreement about Congress’s power to regulate domestic commerce. Notice how Article I, Section 8 is structured. Many scholars believe that this list is complete and exhaustive, since it lists all the powers the Founding Fathers wanted to give Congress at the time. The idea, they argue, was to create powerful and limited government, leaving the states room to govern in all other areas. As evidence, these scholars point to the structure of the list and the high level of detail provided (such as specific crimes to be made punishable and the square mile limitation for the seat of government). Other scholars believe that the list should be interpreted more broadly and that the language granting Congress the power to “make all laws necessary and proper” to carry out the enumerated powers demonstrates the Founding Fathers’ desire for a more flexible interpretation, to allow Congress the power to react to needs and challenges not foreseeable at the time the clause was drafted.

In the early part of the country’s history, the first view held firm sway, and together courts and Congress carefully observed the constitutional limits to the growth of federal government power. If you consider our modern federal government, however, it’s obvious that the second view is now more prevalent. Today, the federal government does a lot more than what is enumerated on the list in Article I, Section 8. From regulating educational standards, to defining clean air and water, to outlawing workplace discrimination, to licensing portions of the electromagnetic spectrum for cell phone and digital television providers to use, it’s clear that if a member of the Constitutional Convention were to travel forward in time, he would be shocked at both the pace of progress and the size and power of the federal government. How did our country’s view of congressional power evolve over time?

The answer can be traced to the Great Depression. In response to unprecedented economic distress, President Roosevelt sought to redefine the very nature of the employer/employee relationship. He, along with Congress, enacted legislation that established a minimum hourly wage, set maximum weekly working hours, established workplace safety rules, outlawed child labor, and provided for a safety net to protect older and disabled workers. These laws initially ran into stiff opposition at the Supreme Court. The justices at the time clung to a more formalistic reading of Article I, Section 8 and saw the employer/employee relationship as one governed by freedom of contract. In this view, if a worker wanted to work and an employer was willing to provide that work, then the government should not interfere with that contract. Thus, early portions of the New Deal were struck down as unconstitutional under the Commerce Clause.

After President Roosevelt proposed his court-packing plan, leading one of the swing votes on the Supreme Court to change his vote to begin upholding the New Deal, the barriers surrounding the interpretation of the Commerce Clause came crashing down. Courts have now adopted a very flexible reading of the Commerce Clause. As long as Congress makes reasonable findings that a certain activity has some sort of effect on interstate commerce, Congress can regulate that activity.

This broad interpretation of the Commerce Clause has been challenged repeatedly. In 1964, for example, Congress passed a broad and sweeping Civil Rights Act, prohibiting discrimination against citizens on the basis of race, color, national origin, and sex. Congress relied on its power under the Commerce Clause to pass this legislation. That same year, the Heart of Atlanta Motel in Georgia (Figure 5.3 "Heart of Atlanta Motel") filed a federal lawsuit seeking to overturn the Civil Rights Act as unconstitutional, arguing that Congress lacked the authority under the Commerce Clause to pass the law. The Supreme Court held the law to be constitutional, finding that since 75 percent of the motel’s clients came from out of state and since the motel was located near Interstates 75 and 85, the business had an “effect” on interstate commerce.Heart of Atlanta Motel v. United States, 379 U.S. 241 (1964). Subsequent civil rights legislation, including the important Americans with Disabilities Act, is also grounded in congressional authority to regulate interstate commerce.

Figure 5.3 Heart of Atlanta Motel

In the late 1990s, several curious decisions by the conservative wing of the Supreme Court led some observers to wonder if the days of virtually unfettered authority by Congress to regulate under the Commerce Clause were coming to an end. Judicial conservatives, especially the late Chief Justice Rehnquist, have always been somewhat uncomfortable with the broad reading of the Commerce Clause, worried that it has led to a runaway federal government many times bigger than what the Founding Fathers intended. In a 1995 case, the Supreme Court held that the 1990 Gun-Free School Zones Act was unconstitutional. The law prohibited the possession of weapons in schools and was based on a congressional finding that possession of firearms in educational settings would lead to violent crime, which in turn affects general economic conditions by causing damage and raising insurance costs and by limiting travel to and through unsafe areas. Students intimidated by a violent educational setting would also be affected, learning less and leading to a weaker educational system and economy. By a 5–4 margin, the Supreme Court found these arguments unpersuasive and overturned the law, holding that Congress lacked authority under the Commerce Clause to regulate the carrying of handguns into schools.United States v. Lopez, 514 U.S. 549 (1995). Then, five years later, the Supreme Court overturned a portion of the 1994 Violence Against Women Act, which gave a woman the right to sue her attacker in federal court for civil damages, holding that the effects of violence against women were too “attenuated” to be valid under the Commerce Clause.United States v. Morris, 529 U.S. 598 (2000). Any expected revolution in the scope of Congress’s authority failed to materialize, however, and these two cases are probably aberrations rather than predictors of where the Court is heading on this topic.

While the Constitution limits the federal government’s powers to those enumerated in Article I, Section 8, the states also have broad lawmaking authority. These powers stem from the states’ police powerThe general power of states to regulate for the health, safety, and general welfare of the public., which permits states to regulate broadly to protect and promote the public order, health, safety, morals, and general welfare. You’ve probably experienced this yourself. Different states have different speed limits, for example. Some states permit the sale of alcohol on Sundays, while others prohibit it. Some states permit casino gambling, while others do not. A few states permit same-sex marriage, while many do not. Some states prohibit smoking in bars and restaurants, including North Carolina, home to the nation’s tobacco industry. In California, an attempt to rein in obesity resulted in a state law to require calorie counts on restaurant menus and a ban on the use of trans fats. In Texas, teenagers must have parental permission to use tanning beds at a salon. Massachusetts bans dog racing. Many states are implementing bans on texting while driving.

Hyperlink: How Assisted Suicide Ruling Affects Doctors’ Work

http://www.npr.org/templates/story/story.php?storyId=5160904

In 1994 Oregon voters approved the country’s first physician-assisted suicide law, the Oregon Death with Dignity Act. The law permits certain patients to voluntarily hasten death by taking a lethal dose of prescription medication. To meet the law’s requirements, the patient must be terminally ill with less than six months to live, must be informed and voluntarily request the medication, must be able to consume the medication by himself or herself, must be referred to counseling, and must have the terminal diagnosis confirmed by a second doctor. Many patients, fearing a painful or torturous natural death, obtain the medication and never take it, but some do. In 2001 Attorney General John Ashcroft issued a rule interpreting the federal Controlled Substances Act as prohibiting any physician from prescribing medication under the Death with Dignity Act, subjecting any doctor who did so to federal prosecution. In a 6–3 decision, the Supreme Court decided that the Controlled Substances Act did not grant the attorney general the authority to override a state standard for regulating medicine.Gonzalez v. Oregon, 546 U.S. 243 (2006). In doing so, the Court held that the state police power is entitled to greater deference, in this case, than Congress’s powers under the Commerce Clause. Listen to the National Public Radio story for one physician’s account of how the Death with Dignity Act has affected his practice.

The Oregon Death with Dignity Act case illustrates how a state, in exercising its police power, can actually grant more civil rights to its citizens than the federal government does or wishes to. Similarly, states that have legalized same-sex marriage have done so under their police powers, which is permissible as long as the exercise of police power does not violate the federal Constitution. Generally, this means the state legislation must be reasonable and applied fairly rather than arbitrarily. Additionally, a critical limitation on the state police power is that it cannot interfere with Congress’s power to regulate interstate commerce. This concept is known as the dormant commerce clauseThe concept that restricts states from placing an undue burden on interstate commerce. because it restricts the states’ abilities to regulate commerce, rather than the federal government’s.

A state law that discriminates against out-of-state commerce, or places an undue burdenA constitutional test created by the Supreme Court to determine a law’s validity. on interstate commerce, would violate the dormant commerce clause. For example, if a state required out-of-state corporations to pay a higher tax or fee than an in-state corporation, that would be unconstitutional. A state that required health and safety inspections of out-of-state, but not in-state, produce or goods would be unconstitutional. In 2005 the Supreme Court held that state restrictions prohibiting out-of-state wineries from selling directly to consumers in-state was unconstitutional.Granholm v. Heald, 544 U.S. 460 (2005). Federal courts have repeatedly held that state attempts to regulate Internet content (typically to prevent pornography) are unduly burdensome on interstate commerce and therefore unconstitutional. Note, however, that this prohibition against out-of-state discrimination does not prevent a state from exercising its police power to protect state citizens, as long as the power is exercised evenly and equally. If a state wanted to weigh trucks on highways to ensure they did not exceed maximum weight rules, for example, that action would be permissible even if the trucks came from out of state, as long as the requirement applied equally to all trucks on that state’s highways.

In addition to the power to regulate commerce, the Constitution places two critical powers with Congress: the taxing powerThe power granted to Congress to raise revenue through taxation. and the power to spend the taxes it collects. The taxing power is a broad one, and the Supreme Court has not overturned a tax passed by Congress in nearly a century. As long as the tax bears some reasonable relationship to generating revenue, the tax is valid.

States are also permitted to tax, but only if the activity taxed has a nexusA sufficient connection to justify state taxation. to the state. A transaction (such as a sale) that takes place inside the state would create a nexus for sales tax to attach. Working typically creates a nexus for state or local income tax to apply, and owning real property creates a nexus for real estate tax to apply. What happens, however, if a state’s citizen purchases goods from a seller out of state? Traditionally, buyers do not pay sales tax to the government directly—rather, they pay the sales tax to the seller, who collects the tax on behalf of the government and turns it over to the government at regular intervals. In the past, mail-order catalog sellers from out of state would not collect sales tax in states where they don’t have a physical presence. As the popularity of e-commerce has skyrocketed, more and more states are reexamining how to tax transactions from out-of-state sellers by compelling those sellers to collect the applicable sales tax. Some states are so desperate they are starting to look for a nexus anywhere they can. In New York, for example, the legislature passed a law requiring Amazon.com to collect sales tax from New York residents based on the presence of New York citizens who link to Amazon’s Web site in turn for a commission generated by those links.

Congress also has the power to “pay the debts and provide for the common defense and general welfare.” This spending powerCongress’s power to spend public revenue to meet broad public objectives. is considered very broad. Courts have interpreted this power to mean that Congress can spend money not only to carry out its powers under Article I, Section 8 but also to promote any other objective, as long as it does not violate the Constitution or Bill of Rights. For example, in 1984 Congress passed the National Minimum Drinking Age Act, which required states to adopt a minimum age of twenty-one for the purchase and possession of alcohol. If a state did not adopt the age-twenty-one requirement, Congress would withhold federal highway funds from that state to repair and build new roads. One by one, states began adopting age twenty-one as the minimum drinking age, even though the age requirement would typically be a matter of state police power. In a challenge by South Dakota, which wanted to keep nineteen as the minimum drinking age, the Supreme Court upheld Congress’s use of withholding funds to force the states to raise the minimum drinking age.South Dakota v. Dole, 483 U.S. 203 (1987). Congress has used the spending power to coerce states to adopt a fifty-five-mile-per-hour speed limit (rescinded by the Clinton administration) and to lower the driving under the influence (DUI) blood alcohol level limit from 0.10 in most states to 0.08.

Key Takeaways

Article I, Section 8 of the Constitution grants certain specific powers to Congress. The power to regulate commerce is one of these powers, and the power of foreign commerce is explicit, total, and exclusive. During the Great Depression, the Supreme Court greatly expanded the interpretation of Congress’s ability to regulate domestic interstate commerce, and this expansion led to congressional authority to regulate virtually all human activity within the United States, with very few limited exceptions. This authority extends to civil rights, where Congress has passed several key pieces of legislation, including the Civil Rights Act of 1964 and the Americans with Disabilities Act, under the Commerce Clause. Attempts by judicial conservatives to circumscribe the power of the Commerce Clause appear to have failed for now. Unlike the federal government, states have broad police powers to regulate for the health, safety, and moral well-being of their citizens. The exercise of these police powers cannot violate the federal Constitution and, importantly, cannot violate the dormant commerce clause by discriminating against or placing an undue burden on interstate commerce. The power to tax is broad, and as long as a tax bears a reasonable relationship to raising revenue, the tax is upheld as constitutional. The power to spend is similarly broad, and Congress can spend funds to achieve broad objectives beyond its enumerated powers.

Exercises

  1. Article I, Section 8 of the Constitution establishes the seat of government, which today is Washington, DC. Residents of Washington, DC, have no representation in Congress other than a nonvoting delegate. Should Washington, DC, residents be granted more representation? What are the legal impediments toward such a move? What would be the political repercussions?
  2. Today the United States is one of the few remaining countries to refuse the adoption of the metric system for weights and measures. Would the decision to “go metric” be within the powers of Congress? For more information on this topic, explore the National Institute of Standards and Technology at http://www.nist.gov.
  3. Congressional authority to regulate foreign trade extends to the use of economic sanctions against rogue foreign nations. How effective have these sanctions been in the past? Do you believe it is more effective for Congress to ban trade with a foreign nation to encourage its citizens to overthrow hostile governments or for Congress to encourage trade so that those citizens may prosper economically?
  4. If states are prohibited by the dormant commerce clause from discriminating against out-of-state commerce, how can state universities charge a lower tuition rate to in-state residents? Can you distinguish the role the state is playing when it does so, between that of a spender and that of a collector of monies?
  5. Read the New York Times article on Amazon.com and its efforts to avoid a nexus to collect sales tax, at http://www.nytimes.com/2009/12/27/business/27digi.html. Amazon.com generates more than twenty billion dollars in sales annually but only collects sales taxes in five states, where it is headquartered and where it has facilities. Through a process called “entity isolation,” the company has created methods that allow it to avoid creating a nexus even in states where it has employees and facilities. What are the implications of this behavior?
  6. In 2005, in an effort to coerce states to tighten up standards for issuing identity cards and driver licenses in the fight against terrorism, Congress passed the REAL ID Act stipulating certain requirements for state-issued identification. States that failed to comply would be punished by its citizens being denied access to federally run facilities including airports. How is this an exercise of the spending power? Do you believe Congress should have the ability to stipulate who can use federally funded airports?