Helvering v. Davis

Background

A shareholder of an electricity company in Boston sued to stop the company from making payroll deductions and paying employer taxes required by the new Social Security law. The law created payroll taxes on employers and a matching deduction from employees’ wages, established an Old-Age Reserve Account, and promised monthly pensions starting in 1942 for people aged 65 who met work-and-earnings tests. Lower courts split: the trial court upheld the employer tax, but the Court of Appeals held the benefit program and taxes invalid under the Tenth Amendment.

Reasoning

The Supreme Court’s majority held that Congress may spend to promote the general welfare and that the old-age benefit program is a national response to widespread economic need. The Court described evidence of growing dependency among the aged and found Congress had a reasonable basis for the plan. It also held the employer payroll tax is a valid excise tied to the employment relationship, and therefore constitutional. The Court reversed the appeals court and affirmed the trial court. The majority declined to decide whether the employer tax depended on the benefits provision.

Real world impact

The ruling allows employers to collect and pay the payroll taxes and to deduct employee contributions from wages. It lets the federal government establish and finance a national old-age pension system under the terms Congress set, including eligibility rules, benefit limits, and a $3,000 wage cap for tax calculations. That program’s details and funding may still change in later proceedings or legislation.

Dissents or concurrances

Two Justices dissented, believing the Tenth Amendment forbids this federal takeover of traditional state powers.