Steward MacHine Co. v. Davis

1937-05-24

Headline: Federal payroll tax on employers of eight or more is upheld, letting the Government’s tax-and-credit plan stand and pushing states toward adopting unemployment laws to earn big tax credits.

Holding: The Court upheld the federal payroll tax on employers of eight or more and sustained the tax-and-credit scheme, ruling it a valid exercise of Congress’s power and not an unconstitutional coercion of the states.

Real World Impact:

Upheld federal payroll tax on employers of eight or more nationwide.
Encourages states to adopt unemployment laws to qualify for large tax credits.
Creates a federal Unemployment Trust Fund where states may deposit and requisition funds.

Topics: unemployment insurance, payroll tax, state sovereignty, government finance

Summary

Background

An Alabama corporation paid the new Social Security payroll tax, sought a $46.14 refund, and sued claiming the law violated the Constitution; lower courts dismissed the suit and the case reached the high Court. The relevant parts of the federal law taxed employers with eight or more workers, excluded certain work like farm and private domestic service, and allowed up to a 90% credit if a State had an approved unemployment law. Approved state unemployment receipts could be deposited in a federal Unemployment Trust Fund held by the Treasury. Title III authorized future grants to help states administer unemployment programs but made no immediate appropriation.

Reasoning

The Court asked whether the tax was a valid federal tax and whether the tax-plus-credit scheme unlawfully coerced States or required them to surrender essential powers. The majority (Justice Cardozo) held the levy was an excise within congressional power, met the uniformity rule, and the exemptions were not arbitrary. The Court concluded the credit and the federal Trust Fund were inducements, not coercion: States could choose whether to adopt qualifying laws, could repeal them later, and retained practical control over their systems. The Court rejected the stronger objections rooted in the Tenth and Fifth Amendments and affirmed the lower-court judgment.

Real world impact

The ruling lets the federal payroll tax stand and encourages States to pass or shape unemployment laws to obtain large federal tax credits. Employers with eight or more employees nationwide face the tax unless their State’s law is approved. States that deposit funds in the Trust Fund may draw by requisition, but approval and compliance conditions remain important. The decision leaves some doctrinal lines open for future cases.

Dissents or concurrances

Several Justices wrote separately. Dissenters warned the administrative rules, the Treasury custody of state deposits, and federal oversight risked undermining state sovereignty and could amount to undue federal control; one dissent would have reversed the lower court.