title: Indirect encroachment on federal authority by the taxing powers of the states,
text: ^V *°*fc ** °** ^ ^°-. V ^ •; "oV T Cv c '?*. *..-•• ^o- • «-«^\V\»»/^ o k° <V c^ ♦ • "*1k AT * V* r ^0* "bv* V*v vSSv v»y v^y *^\> *M ; ****** : ^w b.° -& n dy * ' •* V ^ %^r« # ^ \ <p % <0' % INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY BY THE TAXING POWERS OF THE STATES BY THOMAS REED POWELL [Reprinted from the Harvard Law Review, Volumes XXXI and XXXII] Copyright, 1918, 1919, By The Harvard Law Review Association NATIONAL TAX ASSOCIATION 195 Broadway NEW YORK CITY HARVARD LAW REVIEW VOL. XXXI JANUARY, 1918 NO. 3 INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY BY THE TAXING POWERS OF THE STATES "|\ /TARSHALL'S familiar dictum that "the power to tax involves ■*■**- the power to destroy" * has the vice, not uncommon among aphorisms, of being only partly true. It implies that where a state may tax at all, it may tax as it pleases. This would mean that those restrictions on the taxing power of the states which are in- cident to the federal system of government apply only to the sub- jects which may be selected for taxation and in no way concern the methods by which the amount of any tax is determined. This seems to be the opinion of Marshall, for, in denying the power of a state to include United States bonds among the kinds of prop- erty selected for taxation, he said: "If the right to impose the tax exists, it is a right which in its nature acknowledges no limits. It may be carried to. any extent within the jurisdiction of the state or corporation which imposes it, which the will of each state and corporation may prescribe." 2 The questions which the great Chief Justice was discussing called for no such statements. His argument in McCulloch v. Mary- 1 McCulloch v. Maryland, 4 Wheat. 316, 431 (1819). 2 Weston v. City Council of Charleston, 2 Pet. 449, 466 (1829). See also Marshall's statement in Brown v. Maryland, 12 Wheat. 419, 439 (1827): "It is obvious that the same power which imposes a light duty can impose a very heavy one, one which amounts to a prohibition. Questions of power do not depend on the degree to which it may be exercised. If it may be exercfeed at all, it must be exercised at the will of those in whose hands it is placed." JAN 29 192-fl 322 HARVARD LAW REVIEW land 3 and Weston v. City Council of Charleston 4 was in support of the proposition that a state could levy no tax whatever on an in- strumentality of the federal government, even though the parti- cular tax in issue might not appreciably interfere with that gov- ernment. He was seeking some general rule which would relieve the courts of the necessity of considering the precise economic effect of every tax that came before them. This he found in the doctrine that a state, if it cannot tax a federal instrumentality into impotence, cannot tax it at all. Marshall was designating sub- ject matters which he deemed entirely outside of state authority. He was not considering whether subject matters within the reach of the taxing power of a state could be subjected to whatever methods of assessment the state might choose to apply. His strong federalism, it would seem, would make him loth to assert by explicit decision that, if a state selects a proper subject for taxation, no method of assessment can make the tax an interfer- ence with the federal government or an encroachment on any of its powers. This implication, however, has frequently been drawn from his too terse pronouncement. Many decisions with respect to the taxing power of the states have proceeded on the theory that in- quiry need be directed only to the characteristics of the subject matter on which the tax is levied. If the subject is an instrumen- tality of the federal government, the state tax is invalid as an in- terference with the necessary effectiveness of that government. If the subject is not an instrumentality of the federal government, the tax cannot be held invalid as an interference with that govern- ment. If the subject matter is interstate commerce, the state tax is invalid as a regulation of such commerce. If the subject matter is not interstate commerce, the tax cannot be a regulation of such commerce. Such are the conclusions which find warrant in the language of many of the judges of the Supreme Court. But an examination of the decisions shows that the fine of demarcation between valid and invalid state taxes is not so clear and straight as this language implies. The so-called "subjects" of taxation with which the cases have had to deal have all been within the territorial jurisdiction of the state. They have been privileges granted by the state, or acts 3 4 Wheat. 316 (1819). 4 2 Pet. 449 (1829). ©CI.A561669 INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 323 done, business conducted or property located within the state. The immunity of the subject from state taxation has been urged, not because it was geographically outside the state's jurisdiction, but because it was legally withdrawn from that jurisdiction by the creation of the federal system of government. The act in ques- tion might be an act of interstate commerce. The property might be owned by the United States or consist of the bonds of the United States. It is on the ground that the subject on which the tax is imposed is an agency of the United States or is an agency of in- terstate commerce, that what is within the territorial jurisdiction of the state is held to be nevertheless outside of its legal juris- diction. 6 In discussing questions of legal jurisdiction, the use of such spatial terms as "within" and "without" involves possible con- fusion. It might be better to say "subject to" and "immune from" the jurisdiction of the state. In this connection "jurisdic- tion" has the connotation of "legal power to deal with," rather than that of "area within which action may be taken." And "power" must be understood not to refer to power in general, to all kinds of power, but to indicate only the specific exercise of au- thority in question. The same act or business or property may be immune from one exercise of authority by the state, and subject to other exercises of state power. Thus a state may tax goods from other states still in the original package, 6 but may not forbid their sale. 7 Goods originating in other states become subjects of the taxing jurisdiction of the state into which they are brought, before they become subjects of its police jurisdiction. So a state may not tax bonds of the United States, but may punish their theft or de- termine disputes as to their ownership. The jurisdiction of the state over any given subject matter cannot be predicated generally. 5 Cf. Marshall's statement in Brown v. Maryland, 12 Wheat. 419, 441 (1827): "The constitutional prohibition on the States to lay a duty on imports, a pro- hibition which a vast majority of them must feel an interest in preserving, may cer- tainly come in conflict with their acknowledged power to tax persons and property within their territory. The power, and the restriction on it, though quite distinguish- able when they do not approach each other, may yet, like the intervening colours between white and black, approach so nearly as to perplex the understanding, as colours perplex the vision in marking the distinction between them. Yet the dis- tinction exists, and must be marked as the cases arise." 6 Brown v. Houston, 114 U. S. 622, 5 Sup. Ct. Rep. 1091 (1885). 7 Leisy z>. Hardin, 135 U. S. 100, 10 Sup. Ct. Rep. 681 (1890). 3 2 4 HARVARD LAW REVIEW The question in each case is a specific one, limited to the particular exercise of state authority in issue. The determination of the question whether any act or business or privilege or property is a subject of interstate commerce or is an agency of the federal government depends of course on its relation to interstate commerce or to the federal government. This rela- tion may be direct or indirect, remote or immediate. The ques- tion is often one of degree. A somewhat arbitrary line has to be drawn. In drawing this line in respect to any mooted subject, economic considerations are always pertinent and frequently con- trolling. The doctrine of Chief Justice Marshall does not exclude economics from use as a test. His own arguments were frequently economic ones. 8 But his doctrine uses the economic test for the single purpose of determining whether the act or business or privi- lege or property on which the tax is levied is subject to or immune from the exercise of the state taxing power under consideration. If immunity exists, the immunity is complete. The tax is beyond state authority whether the amount imposed is a million dollars or a cent. If, however, the tax falls on an object within the power of the state, the power may be exercised to any extent that the state pleases. The power to tax at all involves the power to tax as the state wills. It is a power which "in its nature acknowledges no limits." In spite of Marshall's reiteration of this position, it must be borne in mind that his attention was fixed on its negative aspects. Quite probably he assumed that any tax which in fact interfered with the operations of the federal government or encroached on any of its powers must necessarily be one levied on a subject with- 8 See, for example, his argument in Brown v. Maryland, 12 Wheat. 419, 439 (1827) to establish that a tax on importers selling at wholesale is a tax on imports: "There is no difference, in effect, between a power to prohibit the sale of an article, and a power to prohibit its introduction into the country. The one would be a necessary conse- quence of the other. No goods would be imported if none could be sold. No object of any description can be accomplished by laying a duty on importation, which may not be accomplished with equal certainty by laying a duty on the thing imported in the hands of the importer." And on page 440: "A duty on imports is a tax on the article, which is paid by the consumer. The great importing States would thus levy a tax on the non-importing States, which would not be less a tax because their interest would afford ample security against its ever being so heavy as to expel commerce from their ports. This would necessarily produce countervailing measures on the part of those States whose situation was less favorable to importation." INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 325 drawn from the jurisdiction of the state, *'. e., that the effect of the tax determined the nature of the subject on which it was levied. It is not to be credited, for example, that Marshall, if confronted with a situation in which domestic commerce was economically integrated with interstate commerce, would have permitted a tax on the domestic commerce which imposed any serious burden on the interstate commerce. The cases presenting this problem did not arise till long after his day. The press of economic facts has forced Marshall's successors to abandon his theory that a state may levy any tribute it pleases on a subject not immune from its taxing power. Taxes on subjects within the power of the state have been held invalid as regulations of interstate commerce, for the reason that the measure adopted for determining their amount took toll from interstate commerce. 9 No. longer is the state taxing power an autocrat even in its own bailiwick. The absolute monarch has become a limited monarch. It has been subjected to the restraint of the maxim: Sic utere tuo ut alienam non laedas. This change of doctrine has thus far been confined to the field of interstate commerce. It has not yet been applied to state taxes on proper subjects which nevertheless tap the value contributed by federal securities. But logically the new principle is as relevant to economic burdens on the federal borrowing power as to those on interstate commerce. The recent increase in the volume of federal securities will compel a reconsideration of any doctrine that per- mits a state to affect their value indirectly to an extent that it is forbidden to do directly. A review of the origin and development and modification of the notion that the power to tax is one which "in its nature acknowledges no limits" is therefore of more than merely historical or speculative interest. It is readily apparent that a tax on a subject which is not an agency of interstate commerce or of the federal government may burden that commerce or that government more than other taxes levied directly on such an agency. A tax of one one-hundredth of one per cent on receipts from interstate commerce within the state may affect that commerce so slightly as to be inappreciable. 9 Western Union Telegraph Co. v. Kansas, 216 U. S. i, 30 Sup. Ct. Rep. 190 (1910); Pullman Co. v. Kansas, 216 U. S. 56, Jo Sup. Ct. Rep. 232 (1910); Ludwig v. Western Union Telegraph Co., 216 U. S. 146, 30 Sup. Ct. Rep. 280 (1910). 326 HARVARD LAW REVIEW A tax on the franchise to be a domestic corporation whose amount is determined by applying the rate of five per cent to the receipts from interstate commerce within the state may impose a serious burden on that commerce. Yet, under the doctrine that the court will regard only the subject taxed and will pay no attention to the amount of the tax or to the measure by which it is determined, the infinitesimal burden will be held invalid and the serious one sus- tained. Thus taxes on subjects not themselves interstate commerce or an agency of the federal government may in a practical sense be regulations of that commerce and interferences with the opera- tions of that government. Any purely formal division of subject matters of taxation into two mutually exclusive classes may sus- tain one tax and abate another though the two are identical in results. Such formal classification, however, has speculative advantages and doubtless some practical ones. It establishes fairly definite rules and thereby simplifies the task of deciding cases and makes somewhat more certain the law. 10 But these gains may be won at the cost of some of the results which the Constitution is deemed to intend. There are competing considerations here, as in most problems of constitutional interpretation. This explains and also excuses the inconsistencies and contradictions which appear in the judicial treatment of the problem under consideration. With the taxes which have been held to fall directly on inter- state commerce or on instrumentalities of the federal government we are only incidentally concerned. The doctrines of the Supreme Court have been consistent and involve only the difficulty of de- termining whether the particular subject matter on which each tax is levied is or is not interstate commerce or an instrumentality of the federal government. These questions have provoked dif- ference of opinion among the members of the Supreme Court, but 10 For eulogies on the merits of this method of marking the dividing line between state and federal powers, see Chief Justice Marshall in McCulloch v. Maryland, 4 Wheat. 316, 429-30 (1819), and Mr. Justice Nelson in Bank of Commerce v. New York, 2 Black 620, 634 (1863). The Chief Justice says: "If we measure the power of taxation residing in the State by the extent of sovereignty which the people of a single State possess, and can confer on its government, we have an intelligible standard applicable to every case to which the power may be applied." And Mr. Justice Nelson observes that, when the limits between the powers and functions of the state and na- tional governments are ascertained and fixed in accordance with the principles an- nounced by Marshall, "all perplexity and confusion disappear." INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 327 all have agreed that a state tax which was levied directly on inter- state commerce or on an instrumentality of the federal government was invalid however insignificant its effect. When, however, we turn to the cases where the subject of taxa- tion has admittedly been within the power of the state, we meet more fundamental differences of attitude. Some have thought that, if the subject taxed was within the zone of state authority, no tax thereon could be a regulation of matters beyond that zone. Others have held that the recognition that the subject was not immune from taxation did not compel the conclusion that the state might devise any method it pleased for determining the amount of the tax. It is the purpose of this article to review these diversities and to indicate as far as possible what considerations at present seem to be regarded by the Supreme Court as controlling. Interferences with Federal Instrumentalities The doctrine that a state cannot tax an instrumentality of the federal government is not based on any "express provision in the Constitution." It is said to rest "upon necessary implication" and to be "upheld by the great law of self-preservation; as any government, whose means employed in conducting its operations, if subject to the control of another and distinct government, can exist only at the mercy of that government." u The soundness of the principle must be universally conceded. The only room for difference of opinion lies in its application. An examination of the cases in which the doctrine has been applied shows that the Supreme Court has looked only to the subject matter on which the state tax fell. In Weston v. City Council of Charleston 12 the majority held that the tax in question was imposed directly on securities of the federal government — "on the contract subsisting between the government and the in- dividual" — and was therefore invalid. Mr. Justice Thompson, dissenting, insisted that the tax was on income. After quoting from the "Federalist," he observed that "it never entered into the discriminating mind of the writer referred to that merely investing n The Collector v. Day, 11 Wall. 113, 127 (1871). 12 2 Pet. 449 (1829). 328 HARVARD LAW REVIEW property, subject to taxation, in stock of the United States, would withdraw the property from taxation." 13 The property existed before its investment in stock by the national government. "In] the case now before us, the tax is not direct upon any means used by the government to carry on its operation. It is only a tax upon property acquired through one of the means employed by the government to carry on its operations, viz., the power of borrowing money upon the credit of the United States; and it is not perceived how any just distinction can be made in this respect, between bank stock and stock of the United States; both are acquired through the medium of means employed by the government in carrying on its operations; and both are held as private property; and it is immaterial to the pres- ent question in what manner it was acquired." 14 In illustration of his point, the dissenting justice remarked that, though the states cannot tax the mint, they can tax the money coined at the mint, when held and owned by individuals. And he concluded by saying: "The unqualified proposition that a State cannot directly or indi- rectly tax any instrument or means employed by the general govern- ment in the execution of its power, cannot be literally sustained. Con- gress has power to raise armies, such armies are made up of officers and soldiers, and are instruments employed by the government in executing its powers; and although the army, as such, cannot be taxed, yet it will not be claimed that all such officers and soldiers are exempt from State taxation. Upon the whole, considering that the tax in question is a gen- eral tax upon the interest of money on loan, I cannot think it any vio- lation of the Constitution of the United States to include therein interest accruing from stock of the United States." 15 But against this the majority opinion by Chief Justice Marshall declared that "the tax on government stock is thought by this court to be a tax on the contract, a tax on the power to borrow money on the credit of the United States, and consequently to be repugnant to the constitution." 16 Thus it is clear that the dispute related to the subject which the state had selected for taxation. Mr. Justice Johnson, who also wrote a dissenting opinion, conceded : "If I could bring myself to consider this question in the form in 13 2 Pet. 449, 477-78 (1829). 14 2 Pet. 449, 479 (1829). 15 2 Pet. 449, 480 (1829). 16 2 Pet. 449, 469 (1829). INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 329 which it is considered by the majority of the court, I should cer- tainly concur in the opinion that the tax was unconstitutional." 17 It is rather difficult to regard the tax involved in the Weston Case as a tax on income. The ordinance under which it was levied reads as follows: ". . . the following species of property, owned and possessed within the limits of the city of Charleston, shall be subject to taxation in the manner, and at the rate, and conformably to the provisions hereinafter specified; that is to say, all personal estate, consisting of bonds, notes, insurance stock, six and seven per cent stock of the United States, or other obligations upon which interest has been or will be received during the year, over and above the interest which has been paid (funded stock of this State, and stock of the incorporated banks of this State and the United States Bank excepted), twenty-five cents upon every hundred dollars." 18 The most natural inference from this language is that the tax is on property from which income is received, with a deduction al- lowed to the taxpayer of an amount equivalent to that on which he may be paying interest. The decision stands for the proposition that the subject of taxation in question is not some abstract con- cept of property distinct from the specific kinds of property which the taxpayer may hold, but is that specific property. If that property is an obligation of the United States to pay money, it is an agency of the United States, since it is the concrete expression of the power to borrow. Any tax on such agency is wholly outside the power of the state. This doctrine with regard to property was later applied in Bank of Commerce v. New York City 19 to the capital of a corporation. The statute there provided that the capital stock of every cor- poration liable to taxation shall be assessed at its actual value. Mr. Justice Nelson, in refuting the contention that Weston v. City Council of Charleston 20 was not in point because in that case there was discrimination against the stock of the United States, laid down the doctrine that a "court may appropriately determine whether property taxed was or was not within the taxing power, but if within, not that the power has or has not been discreetly exercised." 21 Therefore, he says, the Weston Case necessarily 17 2 Pet. 449, 472 (1829). 18 2 Pet. 449, 450 (1829). 19 2 Black 620 (1862). 2 ° Note 4, supra. 21 2 Black 620, 631 (1862). 330 HARVARD LAW REVIEW decided that the state could not tax federal securities at all, even though it taxed all other securities as well. After the Bank of Commerce decision, New York changed its statute, so as to read: "All banks, banking associations, etc., shall be liable to taxation on a valuation equal to the amount of their capital stock paid in, or secured to be paid in, and their surplus earnings, etc." 22 In Bank Tax Case 23 the Supreme Court held that this tax also was on the capital and therefore on the property in which the capital was invested, and that, in so far as this prop- erty consists of stocks of the United States, the case is indistin- guishable from the Bank of Commerce Case. Mr. Justice Nelson in the opinion for a unanimous court thus identified the capital of the corporation with the property in which it was invested : "Now, when the capital of the banks is required or authorized by the law to be invested in stocks, and, among others, in United States stock, under their charters or articles of association, and this capital thus invested is made the basis of taxation of the institutions, there is great difficulty in saying that it is not the stock thus constituting the corpus or body of the capital that is taxed. It is not easy to separate the property in which the capital is invested from the capital itself. It requires some refinement to separate the two thus intimately blended together. The capital is not an ideal, fictitious, arbitrary sum of money set down in the articles of association, but, in the theory and practical operation of the system, is composed of substantial property, and which gives value and solidity to the stock of the institution. It is the founda- tion of its credit in the business community. The Legislature well knew the peculiar system under which these institutions were incorporated, and the working of it; and, when providing for a tax on their capital at a valuation, they could not but have intended a tax upon the property in which the capital had been invested. We have seen that such is the prac- tical effect of the tax, and we think it would be doing injustice to the intelligence of the legislature to hold that such was not their intent in the enactment of the law." M The succeeding sentence of the opinion foreshadows the distinction which the court is soon to draw. 23 2 Wall. 200 (1865). 24 2 Wall. 200, 208-09 (1865). For another statement to the same effect see note 169, infra. INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 331 taxation of moneyed corporations from 1823 to the statute under review, and notes that "it will be seen in all of them that the tax is imposed on the property of the institutions, as contradistin- guished from a tax on their privileges or franchises." 25 1. Taxes on Privileges Four years later the court decided three cases 26 in which the majority held that the tax was not on property but on the franchise to be a corporation, and that it was therefore valid in spite of the fact that it was measured in part by property invested in federal securities. Chief Justice Chase and Justices Miller and Grier dis- sented, being of the opinion that the tax was a tax on the property and not on the franchises and privileges of the corporation. Two of the cases were from Massachusetts. The Massachusetts court had declared that, if the taxes were on property, they were invalid under the state constitution. That court, however, sus- tained the taxes as on "commodities" under the somewhat peculiar interpretation put on that term contained in the Massachusetts constitution. The definition of "commodities" uniformly given by the Massachusetts court was that it signifies "convenience, privilege, profit and gains." 27 Mr. Justice Clifford for the major- ity of the Supreme Court ruled that the decisions of the state court "must be regarded as conclusive authorities that the tax in this case is a tax on the privileges and franchises of the corporation and not a tax on the property." 28 The minority evidently saw no ground on which to hold the taxes unconstitutional except the denial that the subject of taxation was a privilege. The two cases differed slightly from each other. Provident Sav- ings Institution v. Massachusetts 29 involved a requirement that all institutions for savings incorporated under the laws of the state shall pay "a tax on account of their depositors of three-fourths of one per cent per annum on the amount of their deposits." 30 25 2 Wall. 200, 209 (1865). 26 Society for Savings v. Coite, 6 Wall. 594 (1868); Provident Savings Institution v. Massachusetts, 6 Wall. 611 (1868); Hamilton Manufacturing Co. v. Massachu- setts, 6 Wall. 632 (1868). 27 6 Wall. 632, 640 (1868). 28 6 Wall. 611, 628 (1868). 29 6 Wall. 611 (1868). 30 6 Wall. 611, 620 (1868). 332 HARVARD LAW REVIEW Hamilton Manufacturing Co. v. Massachusetts 31 had to do with a statute requiring certain classes of corporations to pay, in lieu of all other taxation, a tax of one and one-sixth per cent on the excess of the market value of their capital stock over the value of their real estate and machinery. The complaining corporation was denied exemption for the part of that excess value which was con- tributed by $300,000 of United States bonds owned by it. The Provident Savings Institution was denied any deduction from its $8,047,652.19 of deposits on account of $1,327,000 invested in the public funds of the United States. On the same day, in Society for Savings v. Coite, 32 the court declined to permit a Connecticut savings bank to deduct from a tax of one half of one per cent on its deposits of $4,758,273.37 the sum of $500,161 which "was then invested and held in securities of the United States, declared by act of Congress to be exempt from taxation." 33 The Connecticut corporation had no capital stock, which seemed to be regarded by Mr. Justice Clifford as significant in establishing that the tax could not be one levied on property. In the Provi- dent Savings Case the learned justice makes the questionable as- sertion that "there is no necessary relation between the average amount of the deposits and the amount of property owned by the institution." 34 In that case also he said: "The amount of the tax does not depend on the amount of the property held by the institu- tion, but it depends upon the capacity of the institution to exercise the privileges conferred by the charter." 35 He seems to be as- suming that uninvested deposits of the bank are for some reason not property of the bank. Manifestly a corporation without capital stock may still have legal title to property, and a tax demanded from the corporation may be levied either on its prop- erty or on its franchise as the state chooses. The Massachusetts taxes were plainly intended to be levied on the franchises as "com- modities." But the Connecticut statute is substantially similar in wording to that held in Bank Tax Case 36 to be one imposing a tax on property. INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 333 that the banks shall pay to the state "a sum equal to" a certain percentage of their deposits. Neither statute specifically named the franchise as the subject of taxation. Nor does it seem that the decision of the Massachusetts court holding that the taxes imposed by its statute were not property taxes, as that term is used in the state constitution, is necessarily conclusive of the "subject" on which the tax is levied from the standpoint of its effect on instru- mentalities of the federal government. If the test of whether or not the tax is an interference with a federal instrumentality is the "subject" on which the tax is levied, the federal Supreme Court ought to determine independently any dispute as to what that subject is. Otherwise a state by mere use of words can decide for itself whether or not it is interfering with the federal government. Yet this very power on the part of the state is inherent in the doc- trine that, in determining whether a tax encroaches on federal authority, the court will look only to the subject taxed and will not regard the economic effect of the measure by which the amount of the tax is determined. Such, nevertheless, is the doctrine clearly implied by Chief Justice Marshall and specifically sanctioned by the actual deci- sions in the three cases under review. Corporate franchises, says Mr. Justice Clifford, are legal estates, and not mere naked powers granted to a corporation. They are "as much the legitimate subjects of taxation as any other property of the citizens within the sovereign power of the State." 37 "All trades and avocations by which the citizens acquire a livelihood may also be taxed by the State for the support of the State government. Power to that effect resides in the State independent of the Federal gov- ernment, and is wholly unaffected by the fact that corporation or indi- vidual has or has not made investments in Federal securities. Unless such be the rule, the two systems of government, State and Federal, cannot both continue to exist, as the States will be left without any means of support or of discharging their public obligations." 38 And with respect to the Connecticut statute he says: "Reference is evidently made to the total amount of deposits on the day named, not as the subject-matter for assessment, but as the basis for computing the tax required to be paid by the corporation defendants. They enjoy important privileges, and it is just that they should con- 37 6 Wall. 594, 638 (1868). 38 6 Wall. 594, 638-39 (1S68). 334 HARVARD LAW REVIEW tribute to the public burdens. . . . Existence of the power is beyond doubt, and it rests in the discretion of the legislature whether they will levy a fixed sum, or if not, to determine in what manner the amount shall be ascertained." 39 These three decisions were the basis of Home Insurance Co. v. New York 40 which held that a tax on a corporate franchise, whose amount is determined by applying to the corporate stock the statutory rates for each one per cent of dividend declared, may include in this measure that part of the capital stock which is invested in United States bonds and the dividends thereon. Mr. Justice Field states the legal principle as follows: "The validity of the tax can in no way be dependent upon the mode which the State may deem fit to adopt in fixing the amount for any year which it will exact for the franchise. No constitutional objection lies in the way of a legislative body prescribing any mode of measurement to determine the amount it will charge for the privileges it bestows. It may well seek in this way to increase its revenue to the extent to which it has been cut off by exemption of other property from taxation. As its revenues to meet its expenses are lessened in one direction, it may look to any other property as sources of revenue, which is not exempted from taxation. Its action in this matter is not the subject of judicial inquiry in a federal tribunal." 41 Here seems to be a definite statement that, if the state finds that the capital of the bank as property is exempt from taxation be- cause invested in federal securities, it may make good its loss from this source by taxing the franchise and basing the amount of the tax on the same capital held immune from the former tax. 42 And yet earlier in this very opinion it is declared: 39 6 Wall. 594, 608 (1868). 40 134 U. S. 594, 10 Sup. Ct. Rep. 593 (1889). 41 134 U. S. 594, 600, 10 Sup. Ct. Rep. 593 (1889). 42 This distinction between taxes directly on property and taxes on franchises measured by the value of property has been applied in determining whether federal taxes were interferences with the powers of the states. In Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 15 Sup. Ct. Rep. 673 (1895), it was held that a general federal tax on incomes could not apply to incomes from state and municipal securities, because this would be an interference with the powers of the states. But in Flint v. Stone Tracy Co., 220 U. S. 107, 165, 166 (1911), the federal tax on corporations measured by their income was held valid as an excise tax, and in assessing the amount of the tax the court allowed the inclusion of income from state securities. The argu- ment to the contrary was said to confuse "the measure of the tax upon the privilege INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 335 " Nor can this inhibition upon the States be evaded by any change in the mode or form of the taxation provided the same result is effected — that is, an impediment is thereby interposed to the exercise of a power of the United States. That which cannot be accomplished directly can- not be accomplished indirectly. Through all such attempts the court will look to the end sought to be reached, and if that would trench upon a power of the government, the law creating it will be set aside or its enforcement restrained." 43 It is hardly surprising that such inconsistencies met with dissent. Very simply and without argument Mr. Justice Miller expresses his disagreement: "Mr. Justice Harlan and myself dissent from the judgment in this case, because we think that, notwithstanding the peculiar language of the Statute of New York, the tax in controversy is, in effect, a tax upon bonds of the United States held by the insurance company." u The doctrine of the absolute power of the state over taxation of corporate privileges was later applied to taxation of inheritances. In United States v. Perkins, 45 it was held, Mr. Justice Harlan alone dissenting, that a state may tax a bequest to the federal govern- ment, since the tax is not upon the property itself, but upon its transmission by will or descent. It is "in reality a limitation upon the power of a testator to bequeath his property to whom he pleases, a declaration that, in the exercise of that power, he shall contribute a certain percentage to the public use." 46 The statute with direct taxation of the state or of the thing taxed." After referring to the Home Insurance Case, Mr. Justice Day, speaking for a unanimous court, declared: "It is therefore well settled by the decisions of this court that when the sovereign authority has exercised the right to tax a legitimate subject of taxation as an exercise of a franchise or privilege, it is no objection that the measure of taxation is found in the income produced in part from property which of itself considered is non-taxable. Applying that doctrine to this case, the measure of taxation being the income of the corporation from all sources, as that is but the measure of a privilege tax within the lawful authority of Congress to impose, it is no valid objection that this measure includes, in part at least, property which, as such, could not be directly taxed. . .. "... There is no rule which permits a court to say that the measure of a tax for the privilege of doing business, where income from property is the basis, must be limited to that derived from property which may be strictly said to be actively used in the business." 43 134 U. S. 594, 598, 10 Sup. Ct. Rep. 593 (1889). 44 134 U. S. 594, 607, 10 Sup. Ct. Rep. 593 (1889). 46 163 U. S. 625, 16 Sup. Ct. Rep.^1073 (1896). 46 163 U. S. 625, 628, 16 Sup. Ct. Rep. 1073 (1896). 336 HARVARD LAW REVIEW was said not to be an attempt to tax the property of the United States, "since the tax is imposed upon the legacy before it reaches the hands of the government." 47 This is a somewhat novel use of the doctrine that time may be of the essence. Here again the court looks at what was taxed, entirely disregarding where the burden fell. 48 Ten years later it was held in Plummer v. Coler,* 9 Mr. Justice White alone dissenting, that a state inheritance tax may lawfully be imposed on the bequest to an individual of a life interest in United States bonds. The principle underlying this decision was thus stated by Mr. Justice Shiras: "We think the conclusion, fairly to be drawn from the State and Fed- eral cases, is, that the right to take property by will or descent is derived from and regulated by municipal law; that, in assessing a tax upon such right or privilege, the State may lawfully measure or fix the amount of the tax by referring to the value of the property passing; and that the inci- dental fact that such property is composed, in whole or in part, of Fed- eral securities, does not invalidate the tax or the law under which it is imposed." 50 Counsel for the legatee in this case had urged upon the court the economic argument: "The States have no power to inpose any tax or other burden which would have the effect to prevent or hinde r the government of the United States from borrowing such amounts of money as it may require for its purposes, on terms as beneficial and favorable to itself, in all respects, as it could do if no such tax were imposed by the State." 51 To this Mr. Justice Shiras answered that the recognition of the doctrine would require the overruling of earlier decisions. "For, if it were our duty to hold that taxation of inheritances, in the cases where United States bonds pass, is unlawful because it might in- 47 163 U. S. 625, 630, 16 Sup. Ct. Rep. 1073 (1896). 48 See United States v. Fox, 94 U. S. 315 (1877), holding that a state may forbid a devise of land to the United States. It is held also that a federal inheritance tax may- be applied to a legacy to a municipal corporation, Snyder v. Bettman, 190 U. S. 249, 23 Sup. Ct. Rep. 803 (1903). But a federal income tax cannot be applied to income received by a city, United States v. Baltimore & Ohio Railroad Co., 17 Wall. 322 (1873)- 49 178 U. S. 115, 20 Sup. Ct. Rep. 829 (1900). 60 178 U. S. 115, 134, 20 Sup. Ct. Rep. 829 (1900). 61 178 U. S. 115, 119, 20 Sup. Ct. Rep. 829 (1900). 