Transcript of Oral Argument on Thursday, April 8, 1937
MR. MARTIN: May it please the Court this is a suit by Charles C. Steward Machine Co., a manufacturer of mining machinery, a corporation of Alabama, brought against the respondent.
Harwell G. Davis, who is collector of the District of Alabama, to recover from him a sum of money paid by the petitioner as a tax under section 901 of the Social Seem-icy Act.
The complaint sets out, in short, that the payment was made.
That the law under which it.
was exacted is invalid in that the law is a part of a plan and scheme on the part of Congress to compel the States to engage in an unemployment compensation plan, and that it conflicts or interferes with the local powers of the States in conflict with the Ninth and Tenth Amendments; further, that it takes the property of the petitioner without just compensation; further, that the taxes Imposed are not for the general support of the Government but for an end sought which is not within the powers of Congress.
The complaint was demurred to by the Government, setting up that the law was valid, the tax was legal, and that the complaint showed no grounds why relief should be granted.
The district court dismissed the bill of complaint.
Upon appeal to the court of appeals it was there submitted and the Judgment of the district court affirmed.
The court of appeals set out a' number of grounds in its opinion, found in the record, why the tax was valid.
Among those grounds are, first, that the law, at least title III of the Social Security Act, providing for an appropriation for the administration of State unemployment compensation laws, was itself valid in that it was not 80 vitally connected with title IX imposing the tax as to say that the tax imposed by title IX was for the specific purpose of providing the appropriation authorized by title III.
Second, that experience had shown that Congress had undertaken during the past years to bring relief to unemployed in times of depression, and that this was within the judgment of Congress, a measure which was intended, first, to reimburse the Treasury for expenditures theretofore made; second, to provide a future method of handling matters such as this when they arose in the future.
The Court held that the tax was an excise tax; that title IX was not in any degree severable; the credit features of the tax were for the purpose of allowing the credit following the decision of the Court in Florida v, Mellon (273 U. S. 12); that if the credit features were eliminated that would not help the petitioner, because otherwise he would have to pay the entire tax; and that there was no coercion or compulsion on the part of the State in adopting the unemployment compensation law nor was the credit a penalty.
I do not deem it necessary to enter into an analysis of the features of the Federal law, which were discussed at great length by Mr. Burr yesterday.
In short, title III provides for an appropriation, The Social Security Board fixes an amount to be appropriated to a State which adopts an unemployment compensation law based on first, the population of the State, the number of unemployed, and such other factors as the Board may find relevant.
The administration fund is granted on other provisions, among which are that the State adopts a law which provides for the payment of benefits beginning at a period 2 years after the adoption of the act; second, that the benefits are payable through some public agency approved by the Board; third, that the State payments are all l00-percent paid for benefits, and that they are paid promptly upon collection into an unemployment trust fund which is deposited in the Federal Treasury.
The legislature must retain the right to amend or repeal the law.
On December 31 of each year the Social Security Board may revise its discretion exercised in the past year and at that time determine whether or not the State commission enforcing the State law has compiled with the provisions of the act.
Title IX imposes the tax by section 901, grants the credits by section 902; 903 fixes the provisions of the State law which are required to be contained in the State law before the credit can be extended, and they include most of the ones that are found in title III—
MR. JUSTICE MCREYNOLDS: I am sorry but I am having a great deal of trouble in following you.
This suit was brought by somebody who was required by the collector to pay the tax.
MR. MARTIN: Yes, Sir.
MR. JUSTICE MCREYNOLDS: Under the Social Security Act.
MR. MARTIN: Yes, sir.
MR. JUSTICE MCREYNOLDS: He protested upon what ground.
MR. MARTIN: On the ground that the act of Congress under which the tax is imposed or sought to be imposed did not provide for a true tax.
MR. JUSTICE MCREYNOLDS: A true tax.
MR. MARTIN: Not a true tax.
It is not for the benefit of the Treasury, but for a purpose of bringing about a system of unemployment compensation laws to be passed by the States.
MR. JUSTICE MCREYNOLDS: For the purpose of coercing the State into legislation—
MR. MARTIN: Yes, sir.
MR. JUSTICE MCREYNOLDS: Which they otherwise would not have passed is that correct.
MR. MARTIN: Yes, sir.
MR. JUSTICE MCREYNOLDS:
MR. MARTIN: And that the legislation itself, or the plan of Congress, conflicts with the Ninth Amendment and with the Tenth Amendment in undertaking to compel the States through this method to adopt unemployment compensation laws which are admittedly beyond the specific power of Congress to do; that Congress through that means has brought about this policy throughout the Nation, which it was without the power to do.
MR. JUSTICE MCREYNOLDS: Congress levies the tax; and what does it do with it.
MR. MARTIN: The tax goes into the Treasury; but behind that, sir, is the purpose of levying that tax.
MR. JUSTICE MCREYNOLDS: Is the purpose expressed in the act?
MR. MARTIN: No, sir; it is not.
There is apparently no connection between the appropriation under title III and as to the result of the tax under title IX, but the history of the act, its beginning, its consideration before committees and in Congress, makes it inevitable that is the purpose of it and that Congress never would have passed the statute if it had not been for that purpose.
That brings me to that question: The origin of this law, the Social Security Act, is found in the message of the President of June 4, 1934, in which he set out in a message to Congress that it is the duty of Congress to provide for security for the people of the Nation, that the lessons of the depression must be learned, and that he is appointing-
MR. JUSTICE MCREYNOLDS: Have you the statute in your brief, please?
MR. MARTIN: No, sir; It is in the Government brief, Mr. Justice McReynolds, the appendix on page 1.
That the President is appointing a Social Security Commission or an economic security commission for the purpose of studying this question and at a later date he will make a report to Congress on that subject.
The Commission engages in a study, makes a lengthy report, which the President sends to Congress on January 17 1935, adopting the report of the Commission and recommending legislation in compliance therewith.
The bill is introduced carrying out the result of the investigation by the Commission and submitted to the committees of the Senate and of the House.
Lengthy hearings are held, beginning in January and lasting for something like 20 days in one branch and 30 days in another.
The history of the evils to be met and the evils of the history of the times and the purposes of the legislation are set out at length.
There are some 2,500 pages of hearings before these two committees.
The purposes are undisguised.
One would think that in considering a tax act, if it is a tax act, the fiscal officers of the Government would appear before the committees with plans and programs for the expenditure of funds, with budgets, with forecasts, but there does not appear in the hearings before the House committee any executive of the Treasury except on two occasions, when the Secretary of the Treasury appeared.
He has not a word to say about unemployment compensation tax.
He devotes his discussion to the old-age tax, to the actuarial studies which are necessary to indicate how many billions Congress will have to appropriate at an extended number of years from the present, and he discusses also the question there of the difficulty of administering the law unless agricultural workers and domestic servants or casuals or transients are eliminated from its terms.
Nothing is said by him about unemployment compensation or about title IX, which provides for the unemployment-compensation law.
Another officer of the Treasury touched neither one of these subjects, but discussed the matter of public health.
Those who did appear before the committees did not discuss the matter from a tax standpoint.
They discussed it openly and frankly from an unemployment compensation standpoint.
Those who are skilled in knowledge of that matter were present before the committee, many of them.
Mr. Andrews, representing the labor legislation committee of New York; Mr. Epstein, one of the outstanding writers on that subject; Mr. William Green! of the American Federation of Labor; Mr. Hansen, an analyst of the State Department.
Senator Hastings appeared before both committees, discussing the matter at length.
Mr. Latimer, Chairman of the Railroad Retirement Board; Mr. Leiserson, Chairman of the Mediation Board; Miss Perkins, Secretary of Labor; Senator Wagner, and Dr.
Witte, who was a member of the Committee on Economic Security.
They discussed these features at length, the purpose of the proposed legislation being, among other things, to take care of unemployed who had lost their jobs through no fault of their own and without requiring a means test, of maintaining wage standards, of bringing about equitable distribution of income, of stimulating a more intelligent stabilization of industry, of providing for security for the workers.
One of the purposes of the law, as stated frankly, was to avoid the question of competition among the States, so as to permit any State which wished to put this plan in effect to do so, because, if the Federal Government imposed a tax of 1 percent and gave the credit, the State' governments could then enforce the plan and it would cost its citizens no more when they had a plan than when they did not have one, and that would remove the difficult question of competition which had theretofore arisen among the States and which had, according to the arguments before the committees, delayed so long the provision of this plan, Wisconsin having been the first State to adopt It.
The question of the act being a tax act or whether it would be approved by the Supreme Court as a tax act arose in a number of instances, and the arguments that appeared before the committees were carried on into the Congress and there appeared.
They appeal' also to some extent in the reports, although the reports tread rather timidly on the question of the constitutionality of the measure.
Disputes arose in the committee between members of the committee and those appearing before it.
Some suggested that the entire credit should be given on the Federal tax; that the State that enforced the law should have a hundred percent credit; but Miss Perkins, who was chairman of the committee, insisted that 10 percent was needed for administration.
This is not denied throughout the whole hearings, it is adopted by the President, adopted by the Congress and that is the purpose of the 10 percent-to administer the laws of the States-and finds its place in title III of the Social Security Act.
It is evident from the hearings that the tax never would have been imposed except for this purpose.
There is no suggestion as to imposing the tax for general purposes of government.
The entire history of it goes to show that the sole purpose is the unemployment compensation plan of Congress.
There were three plans considered by the committees.
One was that which is now in effect; another was a plan by which Congress would exercise the power as it has attempted to do in title II and VIII, being the old-age pension provisions, of setting up and constructing the entire system itself.
But that plan was soon discarded because of doubts of its validity.
A third plan was the grant and aid plan, by which Congress would make direct grants to States for the purpose of administering such a plan as this, the entire funds coming from the Federal Treasury.
But the objection to that was that the States would be too hard to satisfy, the funds would be practically inexhaustible, and the Federal Government would find it difficult to find funds enough to satisfy it.
So this plan was adopted as probably the best device that could be hit upon.
One argument made in its favor was that the courts could not look to the motive of Congress in passing the act; that is, if Congress said this was a tax act for a certain purpose, the courts could not say it was not.
That was argued by the Attorney General-or the Assistant Attorney General-in his appearance before the committees, when he submitted his brief.
His advice to the committee was that if the tax act was separated from the appropriation act no one could raise a question as to either, and therefore they probably would be held constitutional under the prior cases of Massachusetts V. Mellon (262 U. S. 447) and Florida V. Mellon.
Miss Perkins, in her statements before the committee, said this: She felt that the device of utilizing the taxing power of the Federal Government as a method of raising revenue for the Government and for encouraging and stimulating the passage of proper and suitable unemployment-insurance laws was the best scheme, the best method which the committee could recommend at the time.
The committee considered raising the funds by general taxation, but discarded that idea also and came back to the question of raising them by taxes on employers] on the theory that the employer himself was to a degree responsible for non-employment; that it was an incident of employment, and therefore the tax should be imposed upon him.
The question of the reserve powers of the State arose.
That was debated at length, and several members of the committees and many Members of Congress took the position that this tax was a pretext and that the purpose of Congress was to engage in this activity over which it had no control and to regulate the local affairs of the States.
It is interesting to note that at the time the discuss ions came on this Court had not declared invalid any of the late acts of Congress except a part.
of the National Industrial Recovery Act in Panama. Refining Co. v, Ryan (293 U. S. 388) decided January 6, 1935.
Arguments were made in support of the measure that the Agricultural Adjustment Act was a precedent for this act, that had been held valid by the district court in that proceeding, and therefore taxes could be imposed for one purpose and used for another.
But before the act finally came on for passage in the Senate, after it had passed the House, the court of appeals had reversed that decision.
MR. JUSTICE MCREYNOLDS: What did the court below put its judgment on; do you know?
MR. MARTIN: The judgment was placed on the power of Congress to pass the act as a tax act.
MR. JUSTICE MCREYNOLDS: As a tax act?
MR. MARTIN: Yes, sir; then there was no vital connection between the expenditure and the tax act which the court could say vitally affected the tax act; that the two were apparently separated so that the questions could not be raised as to the appropriation.
MR. JUSTICE MCREYNOLDS: Did it discuss the power of Congress to appropriate money for the purpose of influencing the act of the State in respect to its own matters?
MR. MARTIN: Yes, sir; that was discussed at length in briefs.
MR. JUSTICE MCREYNOLDS: I was referring to the court.
MR. MARTIN: Oh, to the court?
The court put its decision on this ground, that Congress had heretofore spent many billions of dollars on relief; that to protect the Treasury from the possibility of future drafts it had this power to provide for the system, and that, therefore, under its fiscal powers it could impose the tax and impose a system for that purpose; that the States themselves had been recipients of bounty at the hands of the Federal Government, and that while the protection of the unemployed and the relief of poverty is primarily the duty of the States, the Federal Government had undertaken it, and perhaps would have to undertake it again in the future and therefore a tax was valid for the purpose of looking toward that future date.
MR. JUSTICE STONE: What did they say about the coercive effect?
MR. MARTIN: Mr. Justice Stone "Undue coercion", Mr. Sterne suggests is stated.
MR. JUSTICE MCREYNOLDS: What, from your viewpoint, is the coercive feature of this statute?
MR. MARTIN: The coercive feature is this: This is a tax of one percent.
The act of Congress says that if a State will—
MR. JUSTICE MCREYNOLDS: If what?
MR. MARTIN: That if a State will enact a law according to a certain plan a credit will be given to that tax equal to 90 percent of the Federal tax.
MR. JUSTICE MCREYNOLDS: Credit would be given to whom?
MR. JUSTICE MCREYNOLDS: To the taxpayer?
MR. JUSTICE MCREYNOLDS: If a State enacts a law according to that, 90 percent of what the taxpayer pays will be remitted to him.
MR. MARTIN: Will be credited to him on his return of the Federal tax.
THE CHIEF JUSTICE: Is that 90 percent of what the taxpayer pays?
THE CHIEF JUSTICE: Under the Alabama act?
THE CHIEF JUSTICE: It is all the taxpayer pays.
MR. MARTIN: Yes, sir.
THE CHIEF JUSTICE: But 90 percent of the amount the State puts into the fund?
MR. MARTIN: No, sir.
THE CHIEF JUSTICE: What is it 90 percent of?
MR. MARTIN: Ninety percent of the proposed Federal tax, the Federal tax.
THE CHIEF JUSTICE: That is the credit?
THE CHIEF JUSTICE: Which is allowed to whom?
MR. MARTIN: Allowed to the taxpayer.
THE CHIEF JUSTICE: The 90 percent is allowed to whom?
MR. MARTIN: To the taxpayer, sir.
MR. JUSTICE MCREYNOLDS: John Smith is assessed for a hundred dollars.
MR. JUSTICE MCREYNOLDS: Now, if the State does something what adopts this plan--?
MR. JUSTICE MCREYNOLDS:
MR. MARTIN: Under it, under the plan, if he is an employer under the Plan then he gets credit for the amount he pays the State, not in excess.
THE CHIEF JUSTICE: Ninety percent of what he pays the State?
MR. MARTIN: No, sir; all that he pays the State.
The Federal tax for last year, we will say, was 1 percent, which it was.
MR. JUSTICE SUTHERLAND: What it comes to is this, that 90 percent of the Federal tax goes to the State in that event?
MR. JUSTICE SUTHERLAND: But gives the State an option to pass it or not as It please?
MR. MARTIN: That is correct.
MR. JUSTICE SUTHERLAND: And if it passes it, then its taxpayers get the benefit of a credit upon the State tax?
MR. MARTIN: And the money is spent within the State.
MR. JUSTICE SUTHERLAND: Yes I know, but that is the real situation?
MR. MARTIN: That is correct, sir And of course, States facing that situation saw millions of dollars go outside the.
MR. JUSTICE SUTHERLAND: You distinguish It from the situation Involved in the Mellon case, I suppose, sooner or later, so far as that matter is concerned?
MR. MARTIN: Yes, sir.
It is quite simple there.
The State had its choice there of accepting this grant and putting up 50 percent or the same amount of money, as I recall it, for these purposes under the Maternity Act.
The State was free to do as it pleased but it suffered no penalty for not doing it.
Here the State is free to do as it pleases but if it does not follow the plan of the Federal Government its citizens who are employers are taxed and that money is spent elsewhere, goes outside of the State.
MR. JUSTICE SUTHERLAND: They are citizens of the United States also.
MR. MARTIN: Yes, sir; that is correct, but if they do .
adopt the plan, under its supervisory powers, under the Social Security Board, then the money imposed on the taxpayer in Alabama is spent in Alabama, That is the difference.
MR. JUSTICE BRANDEIS: I did not get just what you said as to the penalty in the one case and not in the other.
MR. MARTIN: If the State does not enact a law, the employers within this class pay their entire 1 percent to the Government of the United States.
MR. JUSTICE BRANDEIS: Yes.
MR. MARTIN: And that 1 percent is spent, according to our argument in the administration of these laws in other States.
MR. JUSTICE BRANDEIS: That is, the Federal Government has the power to dispose of that 1 percent as In the act provided?
MR. MARTIN: Yes, sir.
MR. JUSTICE BRANDEIS: Whatever it is?
MR. MARTIN: Yes, sir.
MR. JUSTICE BRANDEIS: But there is not any penalty about it is there?
MR. MARTIN: The penalty is this, that if the State does not enact the law then the money is spent elsewhere.
If It does enact the law, then the money comes back to the State to be spent, the 90 percent.
It is a purchase, we will say.
MR. JUSTICE BRANDEIS: How does It differ from the Florida case?
MR. MARTIN: Well, in that instance Congress had the undoubted right to impose a tax on the estates and that is all it did.
MR. JUSTICE BRANDEIS: It said if the State imposes the tax, we will deduct that amount?
MR. MARTIN: That is correct.
MR. JUSTICE BRANDEIS: We will deduct 80 percent?
MR. MARTIN: Yes.
MR. JUSTICE BRANDEIS: Well, what is the difference?
MR. MARTIN: The difference is in that case the Government imposed no numerous conditions on the conduct of the States as are here imposed under this law.
In order to secure the credit it did not say that the State of Florida shall erect so many universities and shall maintain them in such and such a way if the credit is granted.
MR. JUSTICE BRANDEIS: It said, if you care to use the expression, you must pass a law taxing people practically at this rate on their estates, those who died who were domiciled in Florida.
This says that you cannot get a deduction unless you establish a system in Florida?
MR. MARTIN: That is correct.
MR. JUSTICE BRANDEIS: By which you tax on this basis the citizen who dies or who is domiciled and dies there.
MR. MARTIN: Yes, sir; as I recall it, the act had been in effect in many States prior to this, prior to the act of Congress, prior to the credit system.
MR. JUSTICE BRANDEIS: The historical circumstances may be different, but in each case, in order to reduce the tax which the Federal Government levied, it was necessary for the State to pass some legislation?
MR. MARTIN: If it had not done so already.
MR. JUSTICE BRANDEIS: If it had not done it.
For instance, Wisconsin had done so before the Federal act?
MR. MARTIN: Correct, sir.
MR. JUSTICE BRANDEIS: In regard to unemployment.
MR. MARTIN: Yes, sir.
MR. JUSTICE BRANDEIS: Consequently in that respect it was the same situation as in regard to Florida?
MR. JUSTICE BRANDEIS: I beg your pardon?
MR. MARTIN: Wisconsin had its representative, or some representative before the committees hearing this act and pleaded with the committees not to tear down the system which Wisconsin had built up; let it maintain its system where industries were divided and where the asserted risk was being considered.
But the committee said "No", and to amend those laws after that to comply with the act of Congress, in order to get the credits and prevent Its citizens from losing them and having the additional burden.
MR. JUSTICE BRANDEIS: What.
amendments did it make?
MR. MARTIN: As I recall it, it made amendments to adopt the pooling system required by the Federal act, sir.
MR. JUSTICE SUTHERLAND: Adopt the what?
I did not hear you.
MR. MARTIN: I am sorry.
It did not do it.
I have it here in my brief.
I am sorry Mr. Justice.
MR. JUSTICE MCREYNOLDS: Do I understand that you mean to argue that the Federal Government has no right to lay a tax the payment of which is conditioned upon whether or not some States would put in a plan of relief?
Is not that the substance of your agreement?
MR. MARTIN: That is the substance of it; yes, sir.
It is interference with the rights of the State.
MR. JUSTICE MCREYNOLDS: You want to argue that the Federal Government has no right to lay a tax upon its citizens the payment of which is conditioned upon whether or not the State in which they live will put in effect a certain system of relief'?
MR. MARTIN: That is the substance of it.
MR. JUSTICE BRANDEIS: I s that the substance of what you want to argue?
MR. MARTIN: Yes, sir; that is the substance of it.
MR. JUSTICE BRANDEIS: I want to be sure In following it.
Is It your contention here that that is only an indirect method of coercing these States into adopting this plan?
MR. MARTIN: Yes, sir.
It is a question of sovereignty right here.
MR. JUSTICE BRANDEIS: Based upon human nature, you think that is the effect of it; is that the idea?
MR. MARTIN: I don't think it is based entirely on human nature.
I think it is based on the intended effect of this act of Congress; based, as one witness said before a committee—
paradoxically, the more successful the plan is the less money we have in the Treasury from it, because if every State enacts it, then all that goes to the Treasury is 10 percent of the tax.
On the face of the act.
MR. JUSTICE BRANDEIS: There will be less need for the Treasury fund, will there not?
MR. MARTIN: Less need?
MR. JUSTICE BRANDEIS: Yes.
MR. MARTIN: No.
MR. JUSTICE BRANDEIS: If each State takes care of its own unemployed then the Federal Government does not need money to take care of the unemployed; but if Alabama or any other State had not passed these laws then the Federal Government, according to the recent experience: would have to provide the money to do it.
MR. MARTIN: I cannot agree that the Federal Government would have to do it.
MR. JUSTICE BRANDEIS: Well, it has done it, has it not?
MR. JUSTICE BRANDEIS: It has done it?
MR. JUSTICE BRANDEIS: And it might reasonably be asked, upon Its experience—
MR. MARTIN: Yes, sir.
MR. JUSTICE BRANDEIS: To do it because it was needed and deems necessary by its representatives, as has been done?
MR. MARTIN: Yes, Sir.
MR. JUSTICE BRANDEIS: But I mean that is the situation?
MR. MARTIN: That is correct.
MR. JUSTICE BRANDEIS: Insofar as this tax is rebated-it may be called and is left to the State that reduction corresponds exactly to the extent to which the Federal Government is relieved from the necessity of taking care of the unemployed in the several States?
MR. MARTIN: No.
It goes to the unemployed whether or not he is needy.
MR. JUSTICE BRANDEIS: Beg your pardon?
MR. MARTIN: This goes to the unemployed whether or not he is needy.
He may be needy probably will be needy.
MR. JUSTICE BRANDEIS: I said "relieved", not "needy.
" He may be absolutely destitute or he may not be.
MR. MARTIN: Yes, sir.
MR. JUSTICE BRANDEIS: But the Federal Government is the one that is being relieved from what it deems to be its duty.
If Alabama makes this collection and the money is expended as indicated, to that extent, the Federal Government would be relieved from a duty which it has recently performed, if it is a duty.
MR. MARTIN: Yes.
MR. JUSTICE MCREYNOLDS: Where do you find any duty imposed on the Federal Government to pay old-age pensions?
MR. MARTIN: As I see it, there is no duty.
That duty is primarily on the States.
MR. JUSTICE BRANDEIS: Beg your pardon?
MR. MARTIN: That duty is primarily on the States, as I see it.
MR. JUSTICE MCREYNOLDS: Is there any duty there at all?
MR. MARTIN: On the States?
MR. JUSTICE MCREYNOLDS: Yes; or anybody else.
I mean in the form of an absolute duty.
MR. MARTIN: No; I would not say it is a duty; no, sir.
Not a duty on the Government; it may be a duty of the people.
MR. JUSTICE MCREYNOLDS: We have been 150 years without it, have we not?
MR. MARTIN: Yes, sir; so far as the Federal Government is concerned.
MR. JUSTICE MCREYNOLDS: Yes; and most of the States.
MR. MARTIN: Yes, sir; that is correct.
MR. JUSTICE STONE:
MR. MARTIN: Oh, no, sir.
It is permissible entirely within the general welfare, as stated.
MR. JUSTICE STONE: The National Government might do it?
MR. MARTIN: It might do it: yes, sir.
MR. JUSTICE STONE: And the State government might do it?
MR. MARTIN: Yes, sir.
I cannot say that the power of the National Government cannot be invoked for that purpose.
I would say this that no one would question the right of Congress to exercise the power and to tax and spend the taxes as they have been spent lately, but when Congress undertakes to take advantage of the situation—
MR. JUSTICE MCREYNOLDS: That is a discretionary matter with the State, is it not?
MR. JUSTICE MCREYNOLDS: As I understand your argument, this thing is intended to take away from the States their discretion and require them to do a particular sort of thing.
is that right, or not?
MR. MARTIN: That is correct, sir.
I did not think it necessary to argue the matter of discretion on the part of the State.
The State has the power to put in this system if it pleases.
MR. JUSTICE MCREYNOLDS: Yes; but can you bribe the State to do it, is the question?
MR. MARTIN: That is the question; yes, sir; and that is what has been done.
The fact that 42 States have adopted this law, the model law prepared by the proponents of the measure, submitted in committee hearings and later brought down to date and issued now as a governmental document by the Government Printing Office.
That is the basis of the laws passed by the States.
That is where they get the many provisions; including one that was discussed at length prior to adjournment as to the merit and rating system.
That is where it comes from.
It comes from the model acts prepared by the Social Security Board.
MR. JUSTICE BRANDEIS: What you speak of as model acts is not a model that has been adopted in all the States?
MR. MARTIN: In a great many.
MR. JUSTICE BRANDEIS: But they do differ from each other?
MR. MARTIN: They differ some what.
As a general rule I would say substantially they follow one of the three Federal model acts.
There are three acts prepared by the Federal Government.
MR. JUSTICE BUTLER: Is it not the purpose of your argument to show the source of the standard by which they go?
MR. MARTIN: And a comparison with the three model acts.
MR. JUSTICE BUTLER: State by State they have followed the act prepared by the Committee on Economic Security and issued by the Social Security Board in January 1936?
MR. MARTIN: Yes sir.
MR. JUSTICE BUTLER: And a later one in September?
MR. MARTIN: Yes sir.
There were three of them altogether.
MR. JUSTICE BUTLER: By an examination of this document you can find out the origin of the passages designated by these letters?
MR. MARTIN: Yes, sir; and the similarity of the laws of the different States.
MR. JUSTICE BRANDEIS: Do you think, also, that you can find out the changes that have been made?
Has the recent change in Oregon changed the character of the act?
MR. JUSTICE BUTLER: Has the Board promulgated a recommendation as yet?
MR. MARTIN: The Social Security Board?
MR. JUSTICE BUTLER: Yes.
MR. MARTIN: It has had many regulations.
MR. JUSTICE BUTLER: The act contemplated some regulations in the adjustment of State measures.
MR. MARTIN: Yes.
MR. JUSTICE BUTLER: Regulations were to be promulgated.
Am I right about that?
MR. MARTIN: Yes, sir.
MR. JUSTICE BUTLER: Have such regulations been promulgated?
MR. MARTIN: Many have been promulgated, Mr. Justice Butler.
MR. JUSTICE BUTLER: And you can furnish these?
MR. MARTIN: Yes.
Sir; we can.
We will be very glad to do so.
MR. JUSTICE BUTLER: Does the act define the scope in any way of the regulations that are contemplated to be made or intended to be authorized?
MR. MARTIN: No, sir; it does not.
MR. JUSTICE BUTLER: And the 10 percent that is retained is for the administration of the Social Security Board that is authorized to promulgate the regulations for the distributions of the funds to the various States?
MR. MARTIN: It is not so stated in the .
MR. JUSTICE BUTLER: What is the purpose of it then?
MR. MARTIN: The purpose of it is the purpose of administration.
MR. JUSTICE BUTLER: Is it administration on the part of the Government?
MR. MARTIN: The United States Government by the Social Security Board.
MR. JUSTICE BUTLER: Yes.
And each State has a board, I suppose?
MR. MARTIN: Yes sir.
Each State has a board.
MR. JUSTICE BUTLER: Does the United States Government control the action of that board through these regulations?
MR. MARTIN: Practically; yes, sir.
I would say throughout.
And do they select the board and fix their pay?
MR. MARTIN: The statute provides that, except as to personnel, the Social Security Board shall supervise the methods of administration of the State act.
MR. JUSTICE BUTLER: That is, the State appoints a Social security board?
MR. MARTIN: Administers.
MR. JUSTICE BUTLER: Administer; and that 10 percent of the money paid by the States-is that it?
MR. MARTIN: Oh, no.
No; the 10 percent comes from the Federal tax.
MR. JUSTICE BUTLER: Right- that is out of the amount of the Federal tax; that is the nondeductable part?
MR. MARTIN: Yes, sir; that is right, and intended for that purpose.
MR. STERNE: decides how much the State shall spend, based on three factors.
MR. JUSTICE BUTLER: Are the States not free to expend all of the amount contributed and limited against spending anything above that?
MR. MARTIN: I did not make myself clear.
I was speaking of the administration fund provided by the Social Security Board for the administration of the State commission.
MR. JUSTICE BUTLER: Yes.
MR. MARTIN: The State is required to spend all of this 90 percent for unemployment compensation or benefits.
It may go into its treasury the State may, and provide another appropriation for the maintenance of the commission.
MR. JUSTICE BUTLER: Is that amount required to be expended year by year, or may it accumulate into a fund and, then taken out when needed?
Suppose, for example, we had good times when people were not unemployed I mean those who get the benefit, for there are always people unemployed-but I mean those who are benefited?
MR. MARTIN: It would accumulate.
MR. JUSTICE BUTLER: It would accumulate?
MR. MARTIN: Yes.
MR. JUSTICE BUTLER: And then in hard times, under the government of the Social Security Board or the United States, they would take out up to the limit accumulated?
MR. MARTIN: Then the State is free to make requisitions on the Secretary of the Treasury.
MR. JUSTICE BUTLER: Up to the limit?
MR. MARTIN: Up to the limit of its deposits.
MR. JUSTICE BUTLER: And does the Secretary of the Treasury keep a separate fund?
MR. MARTIN: No, sir.
The fund is all together.
He keeps books.
MR. JUSTICE BUTLER: I know, but is it required by the act?
MR. MARTIN: Yes, sir.
MR. JUSTICE BUTLER: There shall be an accounting?
MR. MARTIN: Yes sir; an accounting.
MR. JUSTICE BUTLER: That is what I mean.
Then these funds have to be invested, as I understand it, in securities of the Government.
MR. MARTIN: Correct, sir.
MR. JUSTICE BUTLER: To be chosen by the Government, and may not be invested by the State?
MR. MARTIN: No, sir, it has nothing to do with it.
MR. JUSTICE BUTLER: And cannot be disposed of by the State for any other conceivable purpose?
MR. MARTIN: No, sir; the theory is, as I get it from the brief of the Government, as to the necessity that the Government handle the funds, exactly on the fiscal necessities of the Government; that if each State faced an unemployment situation or depression such as we have gone through and undertook then to market its securities, if we had a fund of this kind it would unbalance the market, bring difficulties to the Federal Government in the sale of its securities, and bring about confusion generally in financial markets.
For that reason the Federal Government takes the position that it alone should have the control of these securities, so it could use them or sell them in time of need, so as not to be concerned with the conflicting State financial markets.
The brief of the Government stresses the matter of grants and bounties.
They say that since the Government began Congress has made grants to States.
MR. JUSTICE SUTHERLAND: Let me ask you one question: Suppose no State in the Union should pass any law on this subject; what, then would become of the funds gathered by this tax?
MR. MARTIN: They would go into the Federal Treasury if the act remained on the statute books.
MR. JUSTICE SUTHERLAND: Go to the Treasury of the United States?
MR. MARTIN: Yes, sir.
MR. JUSTICE SUTHERLAND: To be used as other taxes?
MR. MARTIN: Yes, sir; but that was not the purpose of it when it was provided.
MR. JUSTICE SUTHERLAND: I am not asking you about that.
I just wanted to know what the fact was.
In other words the term in this law is to devote the amount of the tax collected to this purpose?
MR. MARTIN: No express provision.
MR. JUSTICE SUTHERLAND: Only when the States pass legislation?
MR. MARTIN: There is no express provision for that in the law itself, sir.
MR. JUSTICE SUTHERLAND: What?
MR. MARTIN: There is no express provision in the law between the titles; that is, the titles fixing the tax and the title appropriating the money.
It does not matter whether the State passes the law or not; there is no express connection in the terms of the law between the appropriation and the tax itself.
MR. JUSTICE STONE: And the tax that is collected by the Federal Government does not go into the reserve?
MR. MARTIN: You mean into the administration fund?
MR. JUSTICE STONE: Yes.
MR. MARTIN: Not necessarily; no, sir.
As Miss Perkins explained before one of the committees, that are a mere bookkeeping entry any how, so far as the Treasury goes, and it is not necessary to earmark it.
MR. JUSTICE BRANDEIS:
MR. MARTIN: That was the fact as of April 1 Mr. Justice Brandeis.
MR. JUSTICE BRANDEIS: Then there are six other States in which the law applied?
MR. MARTIN: Yes, sir.
MR. JUSTICE BRANDEIS: And where a 100-percent collection was presumed to be made?
MR. MARTIN: Yes, sir.
MR. JUSTICE BRANDEIS: And what becomes of that 90 percent of that hundred?
Ten percent you say goes into the administration fund?
MR. MARTIN: Yes, sir.
MR. JUSTICE BRANDEIS: What becomes of the other 90?
MR. MARTIN: Well, I suppose-there was an appropriation authorized of $49,000,000, which was in excess by some $29,000,000 of the 10 percent which would go to the Government if all the States had adopted the act last year.
There was some $220,000,000 available from the 1 percent last year.
The Congress appropriated $49,000,000.
MR. JUSTICE BUTLER: Is it set aside?
MR. MARTIN: No, sir; nothing set aside.
MR. JUSTICE BUTLER: But they appropriated it?
MR. MARTIN: Appropriated-oh, yes; for the purpose of administering the State commission.
MR. JUSTICE BUTLER: The $49,000,000?
MR. MARTIN: Yes, sir; that was the purpose of the $49,000,000.
MR. JUSTICE BRANDEIS: My inquiries related to what would happen in respect to those six States if they passed no law, and I presume that the whole hundred percent will be collected in those six States.
MR. MARTIN: I assume that would go into the Treasury.
MR. JUSTICE BRANDEIS: How would that be done under the law or what does the law provide shall be done if it provides anything?
MR. MARTIN: It provides nothing.
MR. JUSTICE BRANDEIS: It does not?
MR. MARTIN: No sir.
MR. JUSTICE BRANDEIS: All that would go into the Treasury of the United States?
MR. MARTIN: Yes sir; if the act fails as to those States.
MR. JUSTICE BUTLER: There is no provision at all for the relief of the unemployed in those statutes?
MR. MARTIN: Not in those six States that do not adopt the law.
MR. JUSTICE BUTLER: What are the six States?
MR. MARTIN: I do not know, sir.
I looked at it just now, but my brief indicates only those States that have got it.
Missouri is one.
MR. JUSTICE MCREYNOLDS:
MR. JUSTICE MCREYNOLDS: That would be kept in the Treasury?
MR. MARTIN: Yes, sir.
MR. JUSTICE MCREYNOLDS: Unappropriated?
MR. MARTIN: Yes, sir.
MR. JUSTICE MCREYNOLDS: The Government has not obligated itself to provide any relief out of that fund?
MR. MARTIN: No sir.
MR. JUSTICE MCREYNOLDS: If the State adopts the plan that has been prescribed for it, this fund is paid over to them?
MR. MARTIN: Only upon the discretion of the Social Security Board.
MR. JUSTICE MCREYNOLDS: Upon what?
MR. MARTIN: Upon the discretion of the Social Security Board in Washington.
MR. JUSTICE MCREYNOLDS: You mean if the plan meets with the approval of the Social Security Board, then the funds are paid?
MR. MARTIN: The administration fund is paid.
MR. JUSTICE MCREYNOLDS: To whom do they go?
MR. JUSTICE MCREYNOLDS: They go to the State commission?
MR. MARTIN: Yes, sir.
MR. JUSTICE MCREYNOLDS: And is the purpose for which the State commission may use them prescribed?
MR. MARTIN: In the administration of this unemployment law it is not specifically prescribed; no sir.
It is not prescribed in detail.
MR. JUSTICE MCREYNOLDS: This law must be approved by the Federal board?
MR. MARTIN: Yes, sir; oh, yes, sir.
MR. JUSTICE MCREYNOLDS: And then after having approved the law, the funds are paid over from the Treasury to the State board?
MR. MARTIN: Yes, sir.
MR. JUSTICE MCREYNOLDS: To carry out that law?
MR. MARTIN: For the administration of that law.
MR. JUSTICE SUTHERLAND: Let me understand: Does it go to the board or does it go to the treasury?
MR. MARTIN: It goes to the board.
It does not go to the State treasury.
MR. JUSTICE SUTHERLAND: You mean it goes to the credit of the board?
MR. MARTIN: 1 think they draw it out by the month.
I do not know what the arrangement is, but I assume that payments are made monthly to the State commissions by the Security Board.
I know the amount involved in my State is about $1,000 a day or more in the administration of this provision, and none of it is paid out of the State treasury.
THE CHIEF JUSTICE: I suppose we have to return to the text of the act.
MR. MARTIN: Yes, sir.
THE CHIEF JUSTICE: The moneys that are collected from this act go into the Treasury of the United States?
MR. MARTIN: Yes, sir.
THE CHIEF JUSTICE: Whatever becomes of them is another question?
MR. MARTIN: Yes, sir.
THE CHIEF JUSTICE: Now, under section 302A of title III, the Social Security Board may certify to the Secretary of the Treasury for payment to any State of the amount specified; isn't that right?
MR. MARTIN: Yes, Sir.
THE CHIEF JUSTICE: 302A?
MR. MARTIN: Yes, sir; that is correct, sir.
THE CHIEF JUSTICE: Yes.
So that the payment would be made by the Secretary of the Treasury to the appropriate fiscal officer of the State?
MR. MARTIN: But the fiscal officer under the law is the—
THE CHIEF JUSTICE: That is a matter for the State to determine?
MR. MARTIN: That is correct.
THE CHIEF JUSTICE: But it would go to the State treasury it would not go to the board or commission, I assume, unless that commission were made the State treasurer by some act of the State.
MR. MARTIN: But the act of the State provides for a commission to select a treasurer.
THE CHIEF JUSTICE: Then he becomes in effect the treasurer of the State?
MR. MARTIN: For this fund.
THE CHIEF JUSTICE: He represents the State for that fund?
THE CHIEF JUSTICE: The payment is made to the State.
MR. JUSTICE BUTLER: The payment is for this use?
MR. MARTIN: For this work.
MR. JUSTICE BUTLER: I mean the payment; it is not for the State to use it for schools?
MR. MARTIN: Oh, no; not at all.
THE CHIEF JUSTICE: It is for the purpose designated in the act of course?
MR. MARTIN: Yes, sir.
THE CHIEF JUSTICE: The payment is made to the State?
MR. MARTIN: Yes, sir.
Coming to the question of grants and bounties by the Federal -Government, which, of course, have been extended from the beginning of the Government, they may be divided, I should think, into two main subjects.
One is lands and the other is funds.
We have "undertaken to set out in short in our brief an analysis of the various kinds of grants and to indicate without repetition, the many conditions that have been imposed by Congress upon the acceptance of these grants.
Lands, of course, apply to railroads and schools and canals and water courses.
Funds apply in recent years to the many governmental agencies with which we are familiar.
But in none of these conditions can we find anything approximating the conditions imposed by Congress in the alleged grant contained in title III of the Social Security Act.
The conditions as to water courses, for instance, require free transportation to the Government by anyone who builds a canal with Government money.
Schools are required to donate the results of the sales of land for school purposes, and many conditions with which we are familiar none of which can approach any condition imposed by this law on any of the States if they accept this grant under title II of the act.
So we feel therefore, that the 42 States which have accepted the terms of the act as provided by Congress have passed their own laws, have done so not as a matter of choice but because they felt compelled to do so under the terms of the law in order to protect their own citizens from being required to pay a tax which admittedly would be spent elsewhere than in the States.
MR. JUSTICE BRANDEIS: Would admittedly what?
MR. MARTIN: Would admittedly be spent elsewhere than in the States, the States spending it.
MR. JUSTICE BRANDEIS: Does that follow necessarily?
Why may not, if Alabama had not passed this law, why would it not have been quite probable that the Federal Government would have used the money that came from Alabama in affording the relief that it had afforded during the last 4 years, 3 or 4 years, to the unemployed in Alabama?
MR. MARTIN: Well, if the unemployed—
MR. JUSTICE BRANDEIS: That is, the Federal Government would have done it instead of leaving it to the State Government to do it?
MR. MARTIN: If the panic remained that is true, Mr. Mr. Justice Brandeis but that is not the purpose of it.
MR. JUSTICE BRANDEIS: Well, it is both.
The State could manage it themselves.
MR. MARTIN: Yes, sir.
MR. JUSTICE BRANDEIS: But if the State chose not to do so, the Federal Government, having the money, would .
perhaps presumably have applied the money itself, by Federal volition, in relieving the distress of the unemployed?
MR. MARTIN: If it wishes to do so, it could use that.
MR. JUSTICE MCREYNOLDS: Does it apply this money for old-age pensions?
MR. MARTIN: No, sir.
That is under another title.
MR. JUSTICE MCREYNOLDS: That is under another title?
MR. JUSTICE MCREYNOLDS: What does this provide?
What must this money go to?
MR. MARTIN: This 1 percent?
That goes into the Treasury, Federal Treasury.
MR. JUSTICE MCREYNOLDS: What is the State required to do with their money that is remitted to them, to use this fund?
MR. MARTIN: Use it for the administration of the unemployment compensation law only.
MR. JUSTICE BRANDEIS: And if there were not any in Alabama it could be used by the Federal Government perhaps in taking care of the unemployed in Alabama?
MR. MARTIN: That is possible; yes, sir; but that is not the purpose.
THE CHIEF JUSTICE: Your time has expired.
MR. WYZANSKI: May it please the Court: In the course of the Government's argument I will first, to use The CHIEF JUSTICE.
's words, recur to the text of the statute.
Thereafter I shall discuss the circumstances which furnish the occasion for the exercise of congressional power.
I will then come to the argument on the merits, discussing first whether this is an exercise of the power of Congress under Article I, section 8, clause 1, of the Constitution; and second, whether, if it is such an exercise, it meets the standards of the Fifth Amendment.
Thereafter Mr. Assistant Attorney General Jackson will take up the question whether the tax violates the Tenth Amendment or some similar principle underlying our dual form of government, and he will then consider title III to see whether it is involved and, if so, whether it affects the validity of the tax imposed by title IX.
The particular facts in this refund suit have been adequately stated by the petitioner, but I think it necessary to recur to the text of the statute to correct certain errors which have been made, it seems to me in the last three arguments.
The statute itself, the Social Security Act, is in 11 separate titles.
Only two of those titles have any general application to the other titles.
One is title VII, which sets up the Social Security Board as an independent agency in the executive branch of the Government, and the other is title XI, which contains certain definitions, such as that the term "person" includes corporation, partnership and so forth and the word "State" includes Hawaii, District of Columbia, and the like, and also has a separability clause.
Outside of those two general titles, the nine other titles might each have been enacted as a separate statute.
We are here solely concerned with title IX and, possibly, though we doubt it, title III.
We have nothing to do with the old-age pensions or other parts of the statute.
Title IX will be found in the Government's brief, the appendix to the-Government's brief, at page 44.
Section 901 lays the tax: “On and after January 1 1936, every employer”, as that term is defined in section 907, which, speaking generally, is an employer of eight or more, "shall pay an excise tax with respect to having individuals in his employ", and the tax shall be equal to the following percentage of the wages paid by him for employment covered by the terms of the act.
The percentage is 1 percent for the calendar year 1936.
That is the tax which is here at bar.
Two percent for 1937, 3 percent thereafter.
That tax is collected, as section 905 shows, in exactly the same way as any other internal-revenue tax.
It is paid to appropriate Treasury officials, and there are the other usual provisions with respect to penalties, refunds, and interest.
Against that tax there is allowed this year a credit.
The credit provision is in section 902.
Now the credit which is allowed is allowed for the amount which the taxpayer pays into a fund, an unemployment fund created under State law.
He cannot have a credit larger than 90 percent of the tax, and he may have a credit smaller than 90 percent of the tax.
It depends on how much he pays into the State fund.
Now the unemployment-compensation law, in order to serve as the basis of the credit, must meet certain standards which are enumerated in section 903A.
Those standards have been referred to at various times at the bar and will be referred to in detail in our argument.
It is enough for the moment for me to say that the standards describe what is an unemployment-compensation law.
They are definitional standards.
For example, the fourth standard say that under the law it is necessary that all the money should be utilized for unemployment compensation, and it is provided in section 903A2 that.
MR. JUSTICE SUTHERLAND: I do not quite understand.
Those are Limitations upon what fund?
MR. WYZANSKI: That is a description of the State law.
MR. JUSTICE SUTHERLAND: Not upon the Federal?
MR. WYZANSKI: No.
The money which is collected by the Federal Government goes into the Federal Treasury.
The amount which is credited against the tax is paid by the taxpayer to the, State fund, Now that State fund is in turn deposited as a trust fund in the Treasury of the United States if the statute is to be the sort of statute which may be certified as meeting the requirements of sections 902, 903, and so forth.
MR. JUSTICE BUTLER:
MR. WYZANSKI: Yes, Your Honor.
MR. JUSTICE BUTLER: You made some statements I want to be sure I followed.
The tax is paid into an unemployment State fund in a certain amount.
MR. WYZANSKI: Yes.
MR. JUSTICE BUTLER: He shall have it to his credit if certain conditions are complied with?
MR. WYZANSKI: That is correct.
He notes it exactly as he would note a charitable deduction on the income-tax blank.
MR. JUSTICE BUTLER: Yes; and those conditions are specified in 903A1?
MR. WYZANSKI: That is right.
MR. JUSTICE BUTLER: You partially postponed the description of those conditions and then you retracted a little and gave some of them.
Now I would like, if it is wholly convenient for you at this time, to give them all with such detail and such moderation of speed as will enable us to follow you.
MR. WYZANSKI: All right, Your Honor; 903A has six different Clauses.
They are the clauses which describe the State law itself which will satisfy the requirements for a credit.
The first requirement is that the State law shall provide that unemployment compensation benefits shall be paid through a public employment office or such other agency as the board shall approve, the Board meaning the Social Security Board.
MR. JUSTICE BUTLER: Is it your understanding that that contemplates that the State, in order to enable its taxpayers to get relief from some burden, shall erect public employment agencies?
MR. WYZANSKI: No, Your Honor.
There is no necessity that the, State should erect them.
If they are already available, that is all right.
The State may pay through some other agency.
MR. JUSTICE BUTLER: That they must have them?
MR. WYZANSKI: What is that?
MR. JUSTICE BUTLER: That they must have the public employment offices?
MR. WYZANSKI: I think not, Your Honor.
MR. JUSTICE BUTLER: What are the words, something like that that "compensation is to be paid to public employment offices in the State or such other agencies as the Board may approve"?
MR. WYZANSKI: Yes, well, now, for example, the Board might say it was all right for the employer to pay the benefit, if the State law so provided.
MR. JUSTICE BUTLER: Who might say that?
MR. WYZANSKI: First of all, the State would have to do so.
That is the State would have to provide that the benefits should be paid under its law by employers in that State.
If the State law did provide that, then the question would be whether the Board would approve of that.
MR. JUSTICE BUTLER: Then by what standards may we know whether the Board-by what standards would the Board be guided?
MR. WYZANSKI: Now, that is a relaxation of a strict standard.
MR. JUSTICE BUTLER: I know, but where would we go to find the standard by which the Social Security Board is guided in respect of the employment offices or other agencies that they approve?
MR. WYZANSKI: I should suppose that the clause ought to be read in an ejusdem generis manner.
The clause authorizes approval of an agency where employment is ordinarily secured.
I think that is the normal reading of the clause.
MR. JUSTICE BUTLER: So that the Board would have, so far as the standard is concerned, unlimited discretion?
MR. WYZANSKI: Unless that is construed in the way in which I have just construed it.
The second provision is that the State law, in order to be certified, must provide that benefits shall not be paid until 2 years after contributions had begun.
The third clause is a clause which provides that the funds collected by a State shall go in to the Federal Treasury as a trust fund, the unemployment trust fund set up in section 904.
Now I want to make an observation at this point which is very material in view of some representations which have undoubtedly been innocently made at the bar.
There is no reason why the State cannot withdraw the money which it deposited in the Treasury for any purpose it sees fit.
It is true that if it withdraws it for other purposes than unemployment insurance it will then lose its status as a certified State law on the basis of which credit or deduction may be taken but there is nothing what so ever to prohibit or restrain a State at any moment from making demand upon the Treasury of the United States for the amount standing to its credit.
MR. JUSTICE SUTHERLAND: You mean by that, that if it abandoned its laws it may then get the money?
MR. WYZANSKI: It may do that, or if it did not abandon its law, it could just decide it did not care to have the law certified.
THE CHIEF JUSTICE: Where do you get that?
THE CHIEF JUSTICE: What about the provision 4?
MR. WYZANSKI: I agree that the consequence will be that the State law will cease to be a certified State law.
THE CHIEF JUSTICE: It says all money withdrawn from the fund by a State agency shall be used in a particular way.
MR. WYZANSKI: If the law is to continue to be certified.
The State for example the State of Alabama, might decide that "We don't care about having our citizens get this credit.
We are going to have this money back because we need it now for some special purpose.
We had an earthquake which we did not envisage when we passed that law.
We are going to withdraw that money right away, even though our citizens will lose the benefit from it which they would otherwise derive.
We want that money for that purpose.
" And no one can hold it back from them.
MR. JUSTICE BUTLER: I would like for you to go on through those conditions by which they can get the deduction, not what will happen if the State changes its mind about granting those conditions upon which deductions are allowed, and I wanted you to stick to that until we get through.
Let us go to the second one here.
MR. WYZANSKI: Yes.
MR. JUSTICE BUTLER: Do I understand you rightly that one of the conditions is that there shall not be any compensation to any employee for a specified time of the year?
MR. WYZANSKI: Out of contributions collected under the State law of course.
MR. JUSTICE BUTLER: We are still talking about the conditions on which the deductions may be made.
MR. WYZANSKI: That is right.
MR. JUSTICE BUTLER: Now, let us stick to that and not go some place else.
What is the third one?
MR. WYZANSKI: The third one is the one about depositing the unemployment trust fund, to which I have already referred.
The fourth condition is that all the money collected under the State unemployment compensation law shall be used exclusively for unemployment compensation and not for administration or some other purpose, not for relief, or what not.
MR. JUSTICE BUTLER: The particular language is [reading].
All money withdrawn from the unemployment trust fund by the State agency shall be used solely in the payment of compensation, exclusive of expenses of administration.
MR. WYZANSKI: Yes, sir; then the fifth clause states in substance that the credit shall not be allowed unless the State law contains three different sorts of provisions: First, that the employee shall not be required to take a position which is vacant due to a strike or a lock-out.
MR. JUSTICE BUTLER: It shall not be denied him.
It says it shall not be allowed.
It shall not be denied him.
MR. WYZANSKI: That is right.
He shall not be required to take a position which provides substantially lower working conditions than those which prevail in that community; and the third one is that he shall not be required to join a company union or sign a "yellow dog" contract.
Then the next and last of the conditions is that the State law shall be subject to amendment from time to time by the State legislature.
Now I hope I have not trespassed too much on Mr. Jackson's argument but I am going to come back again to the description of the statute in a little more detail.
I have remarked on the fact that all the funds which are collected go into the General Treasury, all the funds which are collected by the Federal Government.
They are not specifically earmarked for any purpose.
Later on we will deal with the contention that they are in fact utilized for a particular purpose, but they are not in form, at any rate, earmarked for any purpose whatsoever.
The amounts which are collected by States as unemployment compensation contributions, and which are claimed as deductions from the Federal statute, are collected in the first instance by the State collectors, then deposited in the unemployment trust fund in the United States Treasury, and there held separate and apart from the regular funds of the Government.
Hence it may be said that none of the money of the Federal Government is utilized for unemployment compensation.
The money which the States have left on deposit in a trust fund is utilized for unemployment compensation.
Now, title IX, which I have described, is the only title which impinges on the petitioner in this case.
He claims however, that title III is also involved, and title III will be found on page 14 of the appendix to our brief.
That title is not, as has been asserted at bar, an appropriation statute.
It is an authority to appropriate, and the authority is an authority to appropriate $4,000,000 in the first year and $49,000,000 in the years beginning with the fiscal year 1937.
As Your Honors well know, the reason that that provision is put into a title, or any other statute, is to satisfy clause 2 of section 21 of Jefferson's Manual; that is, the House of Representatives will not consider an appropriation statute unless there already exists a statute giving an authority to appropriate.
The actual amounts which have been appropriated under that statute vary.
In the first year only a little more than $2,000,000 was appropriated; in the current year some $29,000,000 was appropriated.
The money which is appropriated under that title is utilized for grants in aid or subventions to States for use in connection with administration expenses of their unemployment compensation laws.
Again, you will notice that the money is not used directly or indirectly for unemployment-compensation benefits.
It is a grant in aid or a subvention for the administration of an unemployment compensation law.
Now, having described the statute and before coming to the detailed legal argument on the statute, which, as I shall show, rests exclusively on the power of Congress under Article 1, section 8, clause 1, of the Constitution, I want briefly to describe in the.
Time remaining to me this afternoon the Circumstances which furnished the occasion for the exercise of Congressional taxing powers.
I think that this discussion, though it does not relate to the validity of the tax as a tax, has a bearing in connection with certain general welfare or spending aspects of the statute and may prove of some value in view of the character of this particular argument and Its relation to the prior arguments which have been made in connection with the Alabama State statute.
But I want to make it clear that I am not now discussing the power of Congress but the circumstances which furnished the occasion for the exercise of that power.
Experience had shown prior to the enactment of this legislation that unemployment had become one of the major permanent characteristics of our industrial civilization.
Its magnitude in normal times, in boom times, in depression times, is impressive.
We have collected statistics so far as they are avail able to show the point.
From 1897 to 1920 unemployment averaged as high us 10 percent, 10 percent for the whole period, and sometimes reached the figure of 3. 000,000 in nonfarm industry.
In the period from 1922 to 1929, which on the whole may be regarded as a boom period, unemployment fluctuated again, industrial unemployment, between 1,400,000 and 4,000,000, and even in the prosperous year 1929 it was probably as high as 2,000,000 at some times and other times as high as 1,800.000.
MR. JUSTICE BUTLER: Two million unemployed?
MR. WYZANSKI: Two million unemployed.
Now, Your Honor recognizes that there are no official statistics with respect to unemployment.
We have stated in our brief the particular sources upon which we rely, but we, of course do not guarantee their accuracy, as Government tables, for no records are kept on that subject.
MR. JUSTICE BUTLER: What is the status indicating the number of unemployed as compared with other years, and what and how those figures are arrived at, if you could give them a little more specifically I observe that the count is against the number of employed.
See what I mean?
MR. WYZANSKI: You are quite right about that, Your Honor.
MR. JUSTICE BUTLER: For instance, also, I take it that in the rural districts in many years post there hove been always many you cannot induce to accept work.
MR. WYZANSKI: I should say they are unemployable.
MR. JUSTICE BUTLER: Yes; and that, perhaps, comes to my question.
The way this thing is put up, it would include the unemployable, would it not?
MR. WYZANSKI: I hope not, Your Honor.
MR. JUSTICE BUTLER: Now make that clear.
MR. WYZANSKI: I will be very glad to.
MR. JUSTICE BUTLER: Because, if there is a fault of that sort in your statistics- now, take it in the grain raising country in the Northwest; when the farmer needs help in harvesting grain, you can go into the town where you know the people, and there will probably be twos or threes, or by the dozen, perfectly able-bodied men that do not work, and you cannot get them to work.
Now, are they counted as unemployed?
MR. WYZANSKI: I will tell you exactly how the statistics are arrived at, Your Honor.
The agency of the Government which collects statistics on employment is the Bureau of Labor Statistics in the Department of Labor.
The Bureau has a cooperative arrangement with St ate labor departments.
The State labor departments check the factory pay rolls in every State.
They get regular reporting, pursuant to a voluntary agreement usually.
They, in turn, transmit their figures to the Bureau of Labor Statistics in the United States Department of Labor.
In some States there are no State departments of labor, and there the reporting is direct to the Federal Government, pursuant to a voluntary arrangement.
From those statistics the Government concludes how many persons are in any given month employed.
THE CHIEF JUSTICE: Employed on what?
MR. WYZANSKI: Employed in factories and in industrial nonfarm labor.
THE CHIEF JUSTICE: In other words, yon are dealing entirely with that sort of occupation?
MR. WYZANSKI: Absolutely, Your Honor.
The statute deals only with that sort of occupation, and that is all I am addressing myself to.
Now, from the number who are employed they calculate the number who are Unemployed.
MR. JUSTICE BUTLER: How?
MR. WYZANSKI: They have an index year, and I think the Bureau of Labor Statistics at the present time uses the index year’s 1923-25 as 100 percent, and from that they calculate the number of unemployed.
Mr. Paul H. Douglas, to whom we have referred in the brief, uses a somewhat different system.
His is a private system.
MR. JUSTICE BUTLER: Before the late war, for many purposes 1914 as used.
MR. WYZANSKI: Yes.
MR. JUSTICE BUTLER: Since the war, 1926.
Now it always seemed to me to be a very Simple matter to ascertain how many were employed in 1926 and then how many are employed today, and that would be the difference.
Of course, many have been born since and some have died, and all of that, but how is that worked out so that it would mean something when you got it?
MR. WYZANSKI: The reason the period 1923 to 25 is taken.
Your Honor is that the Federal Reserve bank uses that base period for its figures, and it was thought that that, on the whole was a normal period and .
MR. JUSTICE BUTLER: What did the Federal Reserve use it for?
MR. WYZANSKI: They used it for things like production fluctuations and similar matters.
MR. JUSTICE BUTLER: For an entirely different purpose?
MR. WYZANSKI: Yes, sir; that is true.
Unemployment in the depression, of course, sank for below the figures that I have mentioned; and although the estimates vary to a certain extent, it is true that between 1929 and the end of 1936, looking at the period as a whole, unemployment averaged 10,000,000, and according to the most conservative estimates it at times reached the phenomenal total of 15 or 16 million persons, which means that one-third of the wage earners in this country were unemployed.
MR. JUSTICE BUTLER: You will have to add to that, as I sensed it the classes of people in the rural districts who never were employed.
MR. WYZANSKI: Well, that is true.
MR. JUSTICE BUTLER: Has anybody ever figured how many that would be on top of 16,000,000?
MR. WYZANSKI: I have not, Your Honor.
I don't know whether anybody else has.
The causes of this unemployment are given by different experts as being technological advance, labor reserve cyclical depression the mere complexity of our modern industrial Civilization, but no expert states that in a majority of cases of unemployment-I am not talking now about unemployable persons, but in the majority of cases of unemployment-the causes were due to personal in capacity or dereliction of the worker; and when he becomes unemployed, the worker and his family face a very grave emergency.
At once they curtail their expenses, obviously, for luxuries, for clothing, and for food.
We have made reference in our brief to studies which have been made of the nutrition of the families of the unemployed and the alarming fact that even expectant mothers and minor children go without milk or adequate food.
Also they change their housing accommodations, many of them being evicted, others of them doubling up with their relatives, and others going into poorer quarters than they were accustomed to.
This misfortune is not by any means purely an individual misfortune; for the moment that their purchasing power is cut off and they are unable to buy from other people, these unemployed workers cause further unemployment; for, our production being keyed to anticipated sales, one consequence of unemployment is more unemployment, and the disease really augments itself.
Although these workers, or most of the intelligent ones, recognize that the day of unemployment may come, they are almost powerless to deal with the situation by saving in advance for it.
In 1928, 46,000,000 people received incomes in the United States, and the arithmetical average of their income was $1,816.
Even more impressive than the arithmetical average is the distribution of the money.
Eighty percent of the individuals in the United States who received incomes received less than $2,000, and that was in the prosperous year 1928.
If we look at family income instead of individual income, we see that in that same year 55 percent of all families got less than $2,000 and 76 percent of all families got less than $3,000.
The situation is even worse in the neighborhood in which this petitioner does business.
Table 14, page 71, of our appendix shows that in Birmingham in 1933-37 a study of white families in the neighborhood showed that the average income was $1,440 and the average expenditures $1,461, so that the families were operating at a deficit, These workers who get so little are hardly able to meet the ordinary demands of sickness, of occasional unemployment, and of death, without mentioning cyclical unemployment.
For sickness alone, studies show that families with an income of less than $1,200 spend an average of $49, and families which get an income between $1,200 and $2,500 spend in a year $86.
In other words, 4 percent of their income or better goes for sickness.
So far as part-time unemployment goes and occasional periods of unemployment, the figures of Professor Douglas are very illuminating.
It appears that the average worker loses 8 percent of his time in unemployment, and that the average man who has a 45-year span of working goes through 8 or 10 periods in which he is unemployed.
Having so little money saved, the worker can hardly be expected to deal with a cyclical depression.
If we look at the history of saving-bank accounts and insurance companies during the last depression, we have the point well brought home; 13,000,000 bank accounts savings-bank accounts were closed, withdrawing over $7,000,000,000; 11,000,000 insurance policies were surrendered, involving $24,000,000,000, having a face value of that amount at least; 32,000,000 policies were allowed to lapse, having a face value of $7,500,000,000.
MR. JUSTICE SUTHERLAND: Who were these policies held by; industrial Workers?
MR. JUSTICE BUTLER: How many policies were there?
MR. WYZANSKI: I am afraid I cannot tell you, Your Honor.
I am sorry.
MR. JUSTICE SUTHERLAND: The same is true of a savings account for industrial workers?
MR. WYZANSKI: Well, I am not able to say that, Your Honor, but I think that we may assume that most savings-bank accounts are held by persons who would be covered by unemployment-compensation laws because people with more money ordinarily do not invent most of their money in savings banks.
Of course, there are exceptions.
May I continue tomorrow, Your Honor?
THE CHIEF JUSTICE: Yes.
THE CHIEF JUSTICE: Proceed with the cause on argument, No.
837, Charles C.
Steward Machine Company against Harwell G.
Davis, us collector of internal revenue.
MR. WYZANSKI: May it please the Court?
THE CHIEF JUSTICE: Mr. Wyzanski In the argument yesterday I had gotten so far as to describe the magnitude of unemployment, its effect upon individuals and society and the inability of the individual workers to cope with that problem.
I turn now to the question of who does take care of the unemployed.
Obviously the family of the unemployed, being in the same economic circumstances, generally speaking, as the unemployed himself, does not long provide for his needs.
Employers in a few cases have set up unemployment-compensation plans.
Those plans are thoroughly reviewed in the economic brief filed by the State of New York in No.
49, and from an inspection of those plans Your Honors will see that they are few in number and relatively inadequate to take care of the needs of the workers.
Private charities do much but still they are far from adequate.
A dramatic example will bring this home.
In the winter of 1931-32 the public-spirited citizens of New York City endeavored to raise money for the needs of the unemployed.
After an energetic campaign they secured the total of $20,000,000, which would not have carried the relief roll in New York City for even 2 months in 1934.
Recent statistics show that in 1935 private charities supported only to the extent of 1.
1 percent the needs of those who were out of work.
In 1936 the percentage had risen to only 2.
Obviously resort is early had to local governments, State governments and municipal governments, but they, unless they have some special tax system, ordinarily soon fail to meet the complete needs of the unemployed.
A few statistics I think will bring this home very readily, showing the percentage which is contributed by the States, the percentage which is contributed by the municipal and other local divisions, and the percentage contributed by the Federal Government.
From 1933 to July 1, 1936, the States supplied $689,000,000, local subdivisions supplied $775,000,000, and the Federal Government supplied, just for direct relief, $2,929,000,000, two-thirds of the total.
Indeed, the situation in some States, as in Alabama, for example, was even more critical than that.
Our tables in the appendix show that in Alabama the Federal Government spent $47,000,000, which was 94 percent of the total amount spent for the relief of the unemployed-94 percent from the Federal Government alone.
Of course, the Federal Government's total expenditures for relief and recovery are far in excess of what I have just indicated.
The President, in his Budget message for the fiscal year 1938, estimated that in 3 years some $8,681,000,000 had been spent for relief and recovery.
Of course, that includes many different forms of activity, but all involved the same taxing and spending power here involved.
First, the Federal Government, as Your Honors well know, made loan s to private corporation s through the agency of the Reconstruction Finance Corporation.
Thereafter it made grants to States and local divisions of government.
Thereafter it made direct expenditures for public works, including the Civilian Conservation Corps and allied efforts.
Then it also made direct expenditures for relief.
Now, this situation, so alarming to the Nation, long disturbed not only those in Washington but those in the States, and in the local governments, and after much discussion it was determined that one possible means of dealing with this problem was by unemployment compensation.
It should be borne in mind that no one claims that unemployment compensation is a complete panacea, or will meet all the needs in periods of cyclical depression; but at the same time it is pointed out that if unemployment-compensation systems are set up promptly there will not be the exhaustion of local resources in advance of a cyclical depression.
So that when the day of the cyclical depression comes, the individual workers will have funds, States and local governments will have funds, and will not be forced in the face of a resistant bond market, tax delinquency, and other factors which are always present in a depression, to raise the sums which are necessary to take care of the unemployed.
Now, unemployment compensation will provide the funds which will keep the worker going, and will keep the economic system functioning so that a fund of purchasing power is available to prevent the worst effects of a depression.
There are certain collateral consequences of unemployment compensation which, I think, in view of the questions, by Mr. Justice Butler yesterday, deserve some mention.
One of the consequences of unemployment compensation is that money is paid only to the person who is looking for a job.
We do not have the question of whether the man is unemployable or unemployed, because we have a test to determine whether or not he is looking for a job.
We also get adequate statistics on the number of person who is unemployed.
MR. JUSTICE SUTHERLAND: What is the provision of the law with reference to that?
MR. WYZANSKI: There is no provision, of course, in the Federal law, because the Federal law does not set up unemployment compensation.
But the Federal law establishes as a condition for the certification of a State law, that the State law shall provide that benefits shall be paid through public employment exchanges, Now, if a benefit is paid through a public employment exchange as it is in all countries abroad where there is unemployment compensation, the consequence is that when the worker comes to the office, he is offered a Job.
If he turns down the Job, he does not get a chance to get his benefit.
In other words, you immediately test his willingness to work.
MR. JUSTICE SUTHERLAND: Do I understand that is what you expect or is that what the law definitely provides?
MR. WYZANSKI: The law definitely provides that before a State statute may be certified under- section 903 (a) (1) (appendix, p.
45), the State law must provide that benefits shall be paid through public employment exchanges or other agencies approved by the Board And, as I said to Mr. Justice Butler yesterday—
MR. JUSTICE SUTHERLAND: Does the New York measure provide that the payments shall only go to workers, to people who are really seeking work?
MR. WYZANSKI: Well, a public employment exchange is a place at which you test the willingness of the man to work.
That seems to me to be its function, and that is the function under all existing unemployment-compensation laws, both here and abroad.
The device of unemployment compensation is not a novel device by any means.
Eighteen foreign countries have it and, indeed, only one country, Russia that ever started with unemployment compensation has abandoned it.
It is not merely experts who recommend this method of dealing with the problem, but men of affairs.
In the New York brief, in Chamberlin V. Andrews, No. 49, reference was made to statements of people like Mr. Owen D. Young and Mr. Gerard Swope, of General Electric, who advocated unemployment compensation; Mr. Dennison, of the Henry Dennison Manufacturing Co; Mr. Folsom, the treasurer of Eastman Kodak Co.; Mr. Teagle, of Standard Oil Co. of New Jersey; It IS unnecessary to go through the entire list.
MR. JUSTICE BUTLER: Have they provided it for their employees?
MR. WYZANSKI: In the General Electric Co. for example and in the Dennison Manufacturing Co., there are plans.
Those plans unfortunately, were not adequate to deal with the needs of the depression as they developed.
MR. JUSTICE BUTLER: And has any of the larger employers established compensation for unemployment?
MR. WYZANSKI: General Electric, Your Honor.
I should call that a rather large employer.
The Dennison Co.
is perhaps a middle sized employer.
MR. JUSTICE BUTLER: What is the General Electric plan?
How much does it pay?
MR. WYZANSKI: The exact features of that Your Honor are de scribed in the economic brief filed by New York in Chamberlin V. Andrews, No. 49.
I must admit I have not got them at my fingertips, but the whole plan is outlined there.
MR. JUSTICE BUTLER: Why did they call it "unemployment compensation" I Alabama has no means test?
MR. WYZANSKI: The Alabama statute happens to have no means test.
MR. JUSTICE BUTLER: It has not, has it?
MR. WYZANSKI: No.
That is correct, Your Honor.
MR. JUSTICE BUTLER: Why do they call it "compensation"?
It is compensation for what?
MR. WYZANSKI: Using the language which Mr. Justice Cardozo used the other day, I should say that it is compensation for an industrial accident, just as workmen's compensation is compensation for industrial accidents.
MR. JUSTICE BUTLER: Compensation for a man who is hurt is quite understandable, but I do not get the underlying conception of "compensation" for a man who has lost his job, whether with or without fault.
MR. WYZANSKI: I think he is being compensated for an accident which I tried to explain was not within his control.
MR. JUSTICE BUTLER: It is not for service?
MR. WYZANSKI: No; that is true; but neither in workmen's compensation can you say it was in return for service.
He may have cut his finger.
MR. JUSTICE BUTLER: I was wondering if that could not be described a little better.
Could you not call it compensation for” readiness to serve or “readiness to work for hire" You know that in the public utility field there is an element of charge for being ready at any time to turn on the current or what not.
Gould not this accomplish the result by omitting the word "relief", which brings forward the idea of the amount paid out in relief of the poor, as the justification for the measure or the act that is being developed I Instead of using the word " relief" or the term "means tests", or anything of that sort, why not just call it “compensation for readiness to serve”?
MR. WYZANSKI: I think that is a very fortunate definition.
I am willing to accept it.
MR. JUSTICE BUTLER: I should think that would simplify the matter.
MR. WYZANSKI: Yes, Your Honor.
The question came up, however, Your Honor, as to how the unemployment compensation could be stimulated in the United States.
Most States were very anxious to have such a system.
In the New York brief in No.
49 you will find listed all the bills which were introduced in the New York Legislature with respect to that subject, and the experience of New York am by no means unique.
But the difficulties with the States going alone were numerous.
In the first place, it was felt that if a State went alone; the economic disadvantage would be material for its own employers.
That point was brought out again and again by the manufacturers’ associations and by various groups who had the interests of the employers as well as the general public at heart.
Moreover, it was felt that if a State went ahead alone it could not protect itself by an embargo, under the decision of the Court in Baldwin V. Seelig (294 U. S. 511), which well illustrates the point.
It might not even include within its system, if it were a tax system, employers engaged in interstate commerce, or employees who were engaged in interstate commerce.
It was also felt that in this field the technical resources of a single State were so inadequate that it might be dangerous to proceed without the benefit of technical advice furnished by some more wealthy government than the State governments.
To solve this dilemma, three different proposals were actually brought forward.
One suggested that the relief system of the United States be transmuted into an unemployment- compensation system, and that the Federal Government, instead of giving out money for relief, give out money for unemployment compensation on the basis of the, willingness of the worker to take a job.
A second suggestion which was presented was that a special tax should be laid.
The first suggestion involved no special tax but a mere continuation either of inheritance taxes, income taxes bonds or the ordinary methods of getting revenue.
The second suggestion was there should be laid a special tax, the funds taken into the Federal, Treasury, and then given to the States by subventions or grants -in-aid.
The third suggestion was that a special tax be imposed by the Federal Government with a credit against the tax for the amounts which individual taxpayers had contributed to State unemployment compensation funds.
Now, it is the third method that was adopted by Congress, and that method was chosen for reasons of policy and reasons of law, to which I want briefly to advert.
It was felt that this system gave to the States in a new field an opportunity to decide whether or not they wanted an employment compensation system, free from the fear of competitive disadvantage.
It was, recognized that if the States chose to go ahead they might, go ahead in any one of a number of ways and serve as laboratories for Social experimentation.
It was further felt that these local systems would promote local initiative local responsibility, and would result in vigilance with respect to the funds; that is, local people would watch how local money was being spent.
Quite apart from those considerations of policy, Congress chose this method, for some reasons of law.
MR. JUSTICE STONE: Mr. Wyzanski if I might interrupt you, there was one point that was not quite clear to me after the argument yesterday.
That was whether the money which comes from a State is actually spent there.
MR. WYZANSKI: The money which is collected by the Federal Government?
MR. JUSTICE STONE: Yes.
MR. WYZANSKI: That is, the 10 percent?
Is that what you are talking about, Your Honor?
MR. JUSTICE STONE: No.
MR. WYZANSKI: Or the 90 percent?
MR. JUSTICE STONE: The 90 percent.
MR. WYZANSKI: The 90 percent, Your Honor, is taken by the individual taxpayer and paid to the State official, who, in turn, transmits funds to Washington, where they are deposited as a trust fund in the Treasury of the United States, subject to draft.
MR. JUSTICE STONE: That is a trust fund for that State?
Mr. Wyzanski For that State, subject to draft at any time by that State; but if drawn for any purpose other than unemployment compensation, the State law ceases to be certified.
However, the State may at its option withdraw the money for schools, fire departments anything it wants.
MR. JUSTICE BUTLER: Who determines the entire amount to be allowed to any State?
MR. JACKSON: because we think that is not involved here, and that there are special considerations which relate to it.
MR. JUSTICE BUTLER: You think that makes no difference, who determines it?
Is that it?
MR. WYZANSKI: I think that the whole question of subventions and grants in-aid is not before the Court, for reasons which Mr. Jackson will clear up.
I do not want to take his part of the argument, if you would allow that argument to be suspended.
MR. JUSTICE BUTLER: Very well; just so it is not overlooked later.
MR. WYZANSKI: I was saying that there were reasons of law as well as of policy which has led Congress to choose this particular method.
MR. JUSTICE SUTHERLAND: Before you come to that I want to clear up something that I do not quite understand.
To what extent, if at all, are conditions imposed upon the States, with reference to State legislation-that, is, the character of it?
MR. WYZANSKI: In order for a State statute to be certified so that it may form the basis of a deduction by a taxpayer?
MR. JUSTICE SUTHERLAND: I mean any Specific provision with reference to the character of the legislation which the State should pass.
MR. WYZANSKI: Yes.
Those provisions are found in section 903 (a), Your Honor, They are the six provisions which Mr. Justice Butler asked me about yesterday.
MR. JUSTICE SUTHERLAND: Unfortunately, I did not hear.
Mr. Wyzanski I am sorry.
Do you want me to go over them again?
MR. JUSTICE SUTHERLAND: Oh, no; no.
MR. WYZANSKI: You will find them 0n page 45 of the appendix.
MR. JUSTICE SUTHERLAND: The query in my mind was this that you have got now the Wisconsin, the New York, and the Alabama laws, which seem to be three different types of laws, in certain respects.
MR. WYZANSKI: Yes.
MR. JUSTICE SUTHERLAND: And yet, as I understand it, so far as the national act is concerned, they all satisfy that.
MR. WYZANSKI: That is a very important point, your Honor Mr. Jackson will bring out the point that there is great freedom of choice among the States as to the type of unemployment compensation law.
That will be developed at great length by Mr. Jackson.
Now, the reason in law why this particular method was chosen was that there was a precedent.
The Revenue Act of 1926, section 301 dealing with the Federal estate tax, was considered by this Court in Florida V. Mellon (273. U. S. 12).
Now, I shall have occasion again and again to refer to Florida V. Mellon and I want to make three preliminary points with respect to it, so that they are in the minds of YOUR Honors.
In that case there was upheld the Federal estate tax which allowed a credit up to 80 percent of the tax for amount paid pursuant to State death tax laws.
It has been suggested that case is not a holding on the merits, but I call your Honors attention to the fact that in Mr. Justice Robert opinion in Poe V. Seaborn (282 U. S. 101) and in Mr. Justice Brandies opinion in Phillips V. The Commissioner (283 U. S. 589), that case is cited as an authority on the merits.
It has also been suggested that in that case no argument was advanced to this Court that the State of Florida or any other State was coerced.
A reading of the report as prepared by Mr. Knacbel makes it clear that the argument of coercion was advanced to this Court.
The word “coerce” appear in the excerpt of the brief at page 13 (273 U. S.).
I think there are some inadvertent statements to the contrary in the briefs which have been submitted at bar by our opponents.
A third suggestion which has been made about Florida v, Mellon, which should be repudiated at the outset, is that Congress in enacting that legislation was concerned solely with revenue.
That is not the case.
MR. JUSTICE BUTLER: How many States were there at that time that did not have some sort of tax?
MR. WYZANSKI: There were 3 that did not.
But 36 States changed their laws and 3 States amended their constitution in order to get the benefit of the act.
MR. JUSTICE BUTLER: What were the three States?
MR. WYZANSKI: Florida was one of them, I must Say to Your Honor.
I do not know what the other two are.
I am told by counsel that Alabama and Arizona are the other of the three States.
MR. JUSTICE BUTLER: They were comparatively small States?
MR. JUSTICE BUTLER: Was there this element in that legislation that taxes from so many sources were becoming heavy?
I think a message from President.
We illustrated that in some cases, the way it stood then with the State taxes, and so on.
There was a multiple taxation, sometimes as many as eight.
MR. WYZANSKI: I think we are going to have something to say in this case about double financial burdens.
MR. JUSTICE BUTLER: I was wondering whether it was just exactly well founded to say that this grant by the Congress was for the purpose of inducing the States to do something.
MR. WYZANSKI: I think that the legislative history will bear me out on that point, Your Honor, and we refer, at page 118 of our brief, to a specific place in the Congressional Record where that is discussed.
MR. JUSTICE BUTLER: It occurs to me that the contemporaneous Congress might have thought of lessening the burden.
MR. WYZANSKI: Perhaps so.
I turn now to the first major inquiry, which is whether title IX is a valid exercise of the power vested in Congress, By Article 1, Section 8, clause 1, the Constitution empowers Congress—
to lay and collect taxes, duties, imposts, and excises to pay the debts and provide for the common defense and general welfare of the United States.
In this inquiry I shall deal, first, with the question whether the tax has the indicia of a tax, and then whether it raises revenue.
I shall then consider whether we have a right to look at the policies which Congress may have had in mind and if so whether those policies are reasonably related to Article 1, Section 8, clause 1, both in their intent and in their execution.
This act originated as a bill in the House of Representatives and was considered by the Ways and Means Committee there and by the Finance Committee of the Senate.
The tax is laid upon the privilege of receiving services, or, to use the suggestion which Mr. Justice Brandeis made the other day, on the "function of employment.
Regarded as a tax upon the receipt of services, it is quite analogous to the tax on the receipt of property, considered in Knowlton V. Moore (178 U. S. 41).
Regarded as a tax on doing business in a certain form, it is quite analogous to the corporate tax sustained in Flint v, S tone Tracy Co (220 U. S. 107).
I call Your Honors attention to the fact that no counsel who has argued formally at the bar has questioned that this is an excise tax.
However, Mr. McClennen, in a brief filed as a friend of the Court, has raised that point, and we have dealt with it in the appendix to our brief at page 80 and following.
It is interesting to note that there is for this tax an authority, an English precedent antedating the Constitution of the United States.
In 1777 the British Parliament passed a tax levying upon employers of domestic servants a tax of 21 shillings per domestic servant, as described in certain categories, and that tax of 1777 was reenacted in substantially the same form, with some variation as to rate, in 1803, 1812, 1853, and again in 1869, and it is still on the books in England, and the tax is specifically denominated an excise tax, in some of those statutes to which I have referred.
I also submit that there can be no question but under the rule laid down in Florida V. Mellon, Poe v, Seaborn, and Knowlton V. Moore, this tax satisfies the constitutional canon of uniformity.
I now come to the question as to how the tax operates.
It operates clearly in the usual revenue fashion.
I referred yesterday to section 905 of the act, which makes applicable to this tax the usual refund and penalty and other administrative provisions I did not refer to a very important fact yesterday, and that was that this tax was expected to raise, and has raised, substantial sums of money.
The House committee was very much interested in what the probable yield would be, and then economists estimated that when the tax was 1 percent it would yield about $22,000,000, and when the tax rose to 3 percent it would yield at least $90,000,000.
They were very conservative.
A number of people like the petitioner in this case, have paid then tax in advance of the due date.
Your Honors will bear in mind that as a result of the extension by the Commissioner of Internal Revenue, the first quarterly payment of this tax was not due until April 1937-8 days ago.
We have no figures-according to information from the Treasury Department this morning-we have no figure as to the status of collections as of April 1 because the collectors have not yet reported, but I can say that as of the last day of February 1937, $9,000,000 had been collected.
That was in advance of the first date on which a quarterly payment wall due about 4 weeks in advance of the date when the first quarterly payment was due, and the Treasury now estimates that for this time we will get between fifty-five and seventy millions of dollars under the tax laid by title IX of the Social Security Act.
MR. JUSTICE SUTHERLAND: That is the 1 percent?
MR. WYZANSKI: That is the l percent tax.
I can compare it very readily with the case which Your Honors decided just the other day, Sonzinsky V. United States (No. 614), winch involved the National Firearms tax, in which, as Mr. Justice Stone pointed out in the first footnote of his opinion, only $5,400 was raised in 1934 and $4,400 in 1935.
This is a tax which is a substantial revenue measure.
If you debit $29,000,000 to $70,000,000, you still have a substantial amount of money coming into the Federal Treasury.
We submit that under those circumstances, where the tax on its face has all the indicia of a tax and where it raises substantial revenue, under the doctrine recently reaffirmed in the Sonzinsky Case, Your Honors should sustain the tax as a revenue measure with out further inquiry; and all the cases, from Veazie Bank v, Fenno (8 Wall. 533) to the Sonzinsky Case, (Mar. 29, 1937), support us in that position.
If, however, contrary to the rules of those cases, you do inquire in to the policies of this tax law, we submit that the policies are reasonable, relate to the power conferred, and have been executed in the manner provided in Section 8, clause 1, of the first Article of the United States Constitution.
There are two policies which were in the mind of Congress and we candidly admit that there were two policies.
There was first, a policy of avoiding double taxation in a State like Wisconsin, which already was tailing care of the unemployed in that State by a law which taxed employers.
We submit that the policy with respect to double taxation is a policy which is reasonably related to Article I, Section 8, clause 1, of the Constitution, Double taxation was indeed referred to by Hamilton, in the thirty-third paper in the Federalist, and was referred to by Edmund Randolph, who later became Attorney General of the United States, in the Virginia constitutional Convention.
Each of them said that they expected that the Union would so apply its taxes as not to double up on the same subject which had been adverted to very recently in this Court in connection with State law.
I referred to Henneford V. Silas Maxon Co. (No. 418), in which Mr. Justice Cardozo delivered the opinion on the 29th of March; and, of course, Florida V. Mellon is another case in which double taxation was clearly a consideration and time again Congress has referred to this.
There is an exhaustive report which was prepared by the House Ways and Means Committee in 1933 dealing with the whole subject.
Quite apart from the policy of double taxation we submit that there is another policy responsibly related to the taxing and spending power conferred by Article I.
Section 8, clause I, which supports this legislation and that is the power to expend funds for the general welfare, And we want to make it clear how we construe for the purposes of this case Article I, Section 8, clause I.
We do not say that that clause gives to Congress the power to provide in some popular or loose sense for the general welfare and to reward good conduct by credits and punish bad conduct by taxes.
We refer to the explanation of the clause given by Mr. Justice Robert in the Butler case, that the power granted is the power “to tax for the purpose of providing funds for payments of the nation’s debts and making provision or the general welfare.
” And we understand “making provision” means to make a financial provision, and that is what this Statute does.
I have already outlined in some detail the needs which unemployment Compensation will meet.
I have remarked on the break down which takes place in the family of the individual worker who is unemployed, the Cumulative effect of unemployment upon his health, and upon the health of his family; the effort of the employment upon crime upon vagrancy is obvious.
The effect upon the purse strings of the taxpayer is also obvious.
Only on the 29th of March did this Court, speaking in West Coast Hotel Co. v Parrish (No. 293), advert to a very similar situation.
“What these workers lose in wages,” this Court said, “the tax payers are called upon to pay.
The bare cost of living must be met.
” Your Honor said: “We may take the judicial notice of the unparalleled demand for reliefs which arose during the recent period of depression and still continue to an alarming extend despite the degree of economic recovery which has been achieved.
It is unnecessary to cite official statistics.
Your Honors said, "to establish what is of common knowledge through the length and breadth of the land," .
We submit that this situation with which we are now dealing here is no emergency situation.
Mr. Hopkins, Administrator of the Works Progress.
Administration has admitted that we are facing a Permanent army of 4. 000,000 unemployed, and that is a conservative estimate.
This is a situation in which, despite the degree of economics recovery already achieved, the Federal Government is still spending vast sum for relief and we says that since this act will operate to relieve the drain upon the Federal Treasury and will provide funds for the general welfare, it is reasonably related to the policies and purpose of Article I, Section 8, clause 1 of the Constitution.
But the question be raised, Can these policies be carried out by a tax and Credit?
To that we cite as an answer Florida v, Mellon, for there the policies which Congress had in mind were carried out by a tax and credit, substantially like the one here involved, and a tax and credit which was in the mind of Congress when this legislation was enacted.
We, suggest as an alternative, if Your Honors do not follow the doctrine of the Sonzinsky case, and do not follow the doctrine of Florida v, Mellon, there is still another way in which this tax may be said to fall within the purpose of Article I.
Section 8, clause 1, of the Constitution, At the time that the Constitution was adopted the framers had in mind three different methods of raising revenue for the general welfare of the United States, We have cited in our brief the Federalists paper No.
36, written by Hamilton the Federalists paper No.
45, written by Madison, and the report given to the governor of Connecticut by the delegates from the State at the Constitutional Convention, and those delegates were Roger Sherman, who took a leading part in the drafting of this particular clause and Oliver Ellsworth, subsequently Chief Justice of this Court.
From an examination of those documents we find that there were three different ways in which revenue to take care of the general welfare of the United States was contemplated to be raised.
The first method was direct Federal taxation collected by Federal officers.
Now that is the method with which we are all familiar and which is the customary method of rising interval revenue taxes.
The second method which was suggested was that the Federal Government lay the tax but the collection is by the State officers that method was proposed in the first Congress & there is a debate in the first volume of the Annals of Congress dealing with the matter.
But so far as we are aware, that particular method of collecting revenue for the general welfare of the United States has never been utilized.
There is a third method which was contemplated, and that is that the, States might raise the revenue for general welfare of the United States.
When the state known that the Union can apply itself without their agency.
It will be powerful motive for exertion on their part.
This method of which I am speaking was in fact utilized by congress in the amendment which was passed in May 13, 1862, to the act of Aug, 5, 1861, providing for direct taxes.
Direct taxes are relatively unfamiliar today, but they were used fairly frequently in the early days on the Government.
Direct taxes originated in 1798, fell into disuse, were revived in the war of 1812, and then were revived again in the Civil War.
The direct tax is, of course, a tax upon the individual.
But the 1862 amendment to the 1861 direct tax provided that the direct tax upon the individual might be assumed by the State in which he lived, and might be paid by the State, not to the Treasury directly but by payments toward raising troops and supplying troops \with their equipment-in other words, as a credit against individual direct taxes, there was allowed the amount which the State expended for the purpose of enrolling and supplying troops.
That is very similar to this situation where, as a credit against an individual person's tax there is allowed the amount which he contributes to the State for unemployment compensation, which takes care of the general welfare of the United States.
We point out that the Constitution does not say who shall provide for the general welfare.
Of course, it means that funds shall be provided for the general welfare, but it does not say that the United States shall provide the funds, and there is no more reason for reading in the words "United States" in that clause than there was in Massachusett8 V. Mellon for reading in a restriction which would have required the application of the funds to be by the United States.
In Massachusetts V. Mellon Your Honors allowed an application of funds which was made by the States to satisfy the test of that clause, and we submit that a provision, which is made by the States also satisfies that clause.
But whichever one of these approaches Your Honors take, whether it be the approach of the Sonzinsky Case or that of Florida V. Mellon: or that of the 1862 tax we submit that a realistic reading of Article 1, Section 8, clause 1 of the Constitution supports this tax, for this is a tax to provide funds for the general welfare of the United States, and it would be unrealistic to require the United States to collect the funds through its own agents, disburse them through its own agents by relief, or through State agents by grants in aid.
Such an unrealistic interpretation of the clause seems to us entirely untenable.
I turn now from that first major inquiry as to the power here exercised, to the question whether the exercise of the power meets the standards laid down in the Fifth Amendment, and I begin by pointing out that this Court has said, in Magnano V. Hamilton (292 U. S. 40), and at other times, that the Fifth Amendment is rarely applied to restrain the exercise of the Federal taxing power.
It has been suggested that there are three different attacks which might be made upon this tax under the Fifth Amendment.
First, it is said it is taking money from one group and giving it to another.
As a matter of fact, this tax does not work that way at all.
This tax collects money, from individuals and puts it into the Federal Treasury, to be used for any purpose whatsoever.
Moreover, even if you take into account the_90 percent credit, and say that all the money raised is used to pay for those who are out of jobs, to pay benefits to them, we say that that payment is proper under the due-process clause, for the reasons advanced by the Attorney General of Alabama in his argument for the reasons advanced by the Solicitor General of New York in the argument in No.
49, and for the reasons which I have already discussed, in connection with the general-welfare clause.
It is said in the second place that the due-process clause of the Fifth Amendment is violated by the selections of the tax.
Flint V. Stone Tracy Co. lays down the familiar rule that the Federal Government has a large measure of choice with respect to selection of taxable subjects.
It is said, however, that we had no right to select employers of eight or more, while leaving employers of less than eight untaxed.
I think that the cases referred to by Mr. Justice Sutherland, in respect to the Workmen's Compensation Act of Ohio, for example, are sufficient authority for us. Jeffery Mfg. Co. V. Blagg (235 U. S. 571) involved the Ohio Workmen's Compensation Act, which applied only to employers of five or more, and Quong Wing V. Kirkendall (223 U. S. 59) related to laundry workers where more than two were employed.
St. Louis Consolidated Coal Co. V. Illinois (185 U. S. 203) related to regulation of mines where more than five were involved.
The power of classification which exists with respect to taxes is certainly broader than that which exists with respect to the police power, as Your Honors have pointed out in Connally V. General Construction. Co (269 U. S. 385).
But quite apart from that general doctrine I refer to a table which will be found at page 66 of our brief, which shows that unemployment occurs to a greater extent in large than in small establishments.
In establishments where 1 to 20 are employed the figures show that the man-hours worked fell off only about 3 percent, whereas in those which employed from 20 to 100 workers they fell off some 13. 8 percent, and they fell off even more in establishments larger than 100.
Moreover, there are certain administrative reasons which would have justified taxing employers of eight or more and not taxing employers of less than eight.
The bookkeeping records and whatnot would be very expensive both for the Treasury and for the person affected.
The other exemptions from the tax are not really attacked by those who oppose us in the cases at bar.
Obviously the United States does not have to tax itself, and hence employment for the United States is not included within the scope of the act.
Employment by a State is not included within the scope of the act, for the obvious reason that the Constitution forbids the Federal Government to tax people who work for State governments.
Seamen are excluded because of administrative difficulties, and the same may be said with respect to agricultural employment, domestic servants, and employment within a family.
One last charge is leveled under the Fifth Amendment, and it is the last point to which I shall refer, and that only briefly in view of the character of Mr. Jackson's argument.
It is said that the 90 percent credit violates the due process clause.
The 90 percent credit is a valid classification.
It seems to us, on several grounds.
First, it is a valid classification to avoid double taxation.
Second, it is a valid classification to distinguish between those who provide funds for the general welfare of the United States and others who leave the Government in the predicament in which it has found itself in the last 3 years.
MR. JACKSON: May it please the Court, the question to which I shall address myself is the reserved power of the States and of the people, the effect of this legislation upon those powers, including the question whether, even if the technical letter of the Constitution and the word of the decisions of this Court have been observed, there is still in this combination of devices some effect which upsets the balance of power between the State and the Federal Government.
The challenge of unemployment is being answered at this time by a combination of State and Federal power.
Under this plan, the State is bringing to the solution of the problem.
Its taxing power and whatever of local regulatory power.
It may require, subject, of course to its Constitution and to the Fourteenth Amendment.
The Federal Government is bringing to bear upon the same, problem its taxing power and its spending power.
We do not claim that new power exists by virtue of the conditions which Mr. Wyzanski has detailed or that this is an emergency power matter.
We claim that the Federal Government and the State Governments are cooperating by each contribution what it may of its own power to the solution, of a common problem.
This unemployment compensation plan is perhaps the most extensive effort at Federal and State cooperation that has ever been under taken in the United States, and this law concededly presents a combination of methods of exercise of Federal power that has not been presented to the Court before.
The act is intended to and if it is successful will, have a deep effect on the economic and social life of this country, and it seems to us a very fair question which must be answered as to what effect this exercise of Federal power has upon the, States.
Although the combination in this particular act is new the device or method which are used here are device and method which separately have been approved by this Court.
The device used by the Federal Government consist first of a grant in aid, to pay the State the cost of administration of unemployment compensation law.
That we think was approved in Massachusett8 V. Mellon.
A second device is the tax with credit, a large credit a credit designed to enable the State to free them selves of the competition of neighbors and to go ahead with their own plans; and the device for that purpose we think we approved in Florida V. Mellon, Taking up each of these devices separately, the first in order in the act is the grant-in-aid, which is embodied in title III at page 14 of our appendix.
The grant-in-aid is contain in section 301 which rends: For the purpose of assisting the State in the administration of their unemployment compensation laws there is here by authorized to be appropriate for the fiscal year ending June, 30, 1936 the sum of $ 4,000,000 and for each fiscal year thereafter the sum of $49,000,000, to be used as hereinafter provided.
We should observe the outset in determining whether this title is involved here that this is not an appropriate; it is an authorization of an appropriation.
We may also observe that there sums were not in fact paid but separation appropriation act were passed for the year 1936,which was $2,250,000 in place of the $4,000,000 instead of the $49,000,000 authorized.
So that the question may arise is there any relation between the tax and this title, which enable them to bring this title into consideration, and whether they are attacking this authorization, which is a mere declaration of policy, or whether they are attacking separate appropriation act which are made from year to year?
The relation of this tax to the appropriation is really entirely unestablished either by the act itself or by the facts in the case.
In the first place, the appropriation under section 301, if it be construed as an appropriation, began before the tax was payable.
The tax was not payable until January 31. 193; and the first appropriation were for the year ending: June 30. 1936, the, appropriation is not measured by the proceeds of the tax.
The tax is not earmarked for this purpose.
Now, it is apparent on the very face of it that there could not be an equivalence because the more State laws are enacted the more money would how to be expended under section 301 for aid in their administration.
But the more State laws are enacted the less revenue would be produced, because of the effects of the credit.
The maximum productivity of the Federal tax would be attained if no State enacted a compensation law.
The maximum expenditure would be if all States enacted them; so that there is no equivalence and no relationship.
Furthermore, we have a stable appropriation after 1937 of $49,000. 000, and a tax that is increased from 1. 2, to 3 percent.
This section is by the provisions of the act made separable, and we think that the separability presumed from this section of the act is not overcome, as it was in the Butler case by any relation between the tax and the appropriation objects.
So, it is our position that there is no standing to challenge this grant-in-aid except as the whole operation of the act including the grant in-aid may be considered here under the tenth amendment.
MR. WYZANSKI: and that the form of spending by the grant-in-aid is validated by history, since it, has been repeated by resorted to and resorted to upon condition.
The conditions which have accompanied grant-in-aid in our history are set forth in our adversary’s brief at page 160 with more particularity than they are set forth in our own.
And the conditions upon, which grant-in-aid have been made to the several States in many of the instances which they cite are similar to the grants made here similar to the conditions laid here, For example on 160 they point out that the Morrill Art granting 30,000 acres of land to each State for each Senator and Representative in Congress provided that all money derived from the sale of the land should be invested in the bonds of the United States, or other States or other safe stocks, yielding not less than 5 percent.
The use of the money should be devoted to certain purposes, but no portion of the principal or interest should be applied to purchase, erection, or repair of buildings.
They point out on page 163 that grants for canals and navigation specified that the tolls to be collected should not be in excess of the amount necessary for repairs and maintenance, and should be expended exclusively in a specified way.
MR. JUSTICE BUTLER: How about provisions for military education?
MR. JACKSON: I think military education was one of the purposes of it.
MR. JUSTICE BUTLER: Was it not solely for that purpose?
Was it not passed first without that and voted by President Buchanan, and afterward, during the War, the Senate, to foster military training had it approved by President Lincoln?
Was not that the way it was done?
MR. JACKSON: I think the Morrill Act was passed undoubtedly with that purpose in view.
MR. JUSTICE BUTLER: That was a source of attack.
It was vetoed for lack of power, until they got the element in of military training is not that true?
MR. JACKSON: I would not be able to say that it was vetoed for lack of power, for I do not know that.
MR. JUSTICE BUTLER: I am stating the case from memory, but I think President Buchanan vetoed the act for lack of power.
MR. JACKSON: But be that as it may, whatever the source of attack there is further pointed out here the right to make the grant, if at all upon condition, and that is the point that I am addressing myself to.
MR. JUSTICE BUTLER: Those funds are used all over the country, are they not for military training and for institutions that bind themselves to the Government?
MR. JACKSON: Unquestionably.
MR. JUSTICE BUTLER: To furnish military education?
MR. JACKSON: But the grant is to the State, and upon a condition that a certain purpose be accomplished.
MR. JUSTICE BUTLER: To prepare men to fight for the United States?
MR. JACKSON: And in this case you make a grant conditioned upon the enactment of laws which will keep men from becoming destitute and socially restive.
My point is that the power to make the grant upon a condition exists.
MR. JUSTICE STONE: I think it was a condition that it should be used for certain specified kinds of education and educational institutions besides military.
MR. JACKSON: It was not confined to military training and, in fact, as our adversaries point out on page 166, the grants for experiment stations and extension work by agricultural colleges provided that the plans for the work to be carried on under the act were to be submitted and approved by the Secretary of Agriculture.
MR. JUSTICE SUTHERLAND: Do you think it would make any difference that these were land grants, justified under the property clause of the Constitution, as giving the Congress power to dispose of the territory or the property of the United States?
MR. JACKSON: I would not think so.
MR. JUSTICE SUTHERLAND: I am not saying it would.
I am just wondering.
MR. JACKSON: No; I would not think that it would, and some of these acts gave an option to take land or scrip.
MR. JUSTICE BRANDEIS: Have not a very large number of grants been made for social purposes in aid of the advancement of obligations which were strictly State obligations, such as the care of children?
MR. JACKSON: Health and hygiene.
MR. JUSTICE BRANDEIS: And for the Department of Labor and the Children's Bureau?
MR. JACKSON: They have both had grants for health and hygiene purposes, and of course in the Massachusetts V. Mellon case the grant was for maternal welfare.
We have pointed out the amounts of money paid out under the Morrill Act, aggregating about $318,000,000 the 77 million acres of land that has been granted for purposes of education and other purposes within the States.
MR. JUSTICE BRANDEIS: I suppose the grants in aid, of that character, were annually renewed; I mean that they would run along those lines that I have referred to.
I do not know how many others.
MR. JACKSON: Many of them do.
MR. JUSTICE BRANDEIS: But those lines go right along from year to year is not that the fact?
MR. JACKSON: .
That is the fact.
Many of them are now included in the Social Security Act, of course.
MR. JUSTICE BRANDEIS: Having in mind customary social legislation?
MR. JACKSON: The Social Security Act continues some of them in the other titles of the act.
The payments to the States, the amounts, are to be determined by the Social Security Board.
That Board is to determine the amount by considering the population, the number of persons covered by the State law and the cost of proper administration and such other factors as it finds relevant.
This is not a power in the Board to make an appropriation because the total amount which the Board may allot must not exceed the amount appropriated.
It seems clear to us the delegation is only a power of allotment or apportionment-disbursement.
It is committed to the Board to determine the amount and there is no unlawful delegation.
There are certain provisions of the State laws which are required to be inserted in order to obtain the grants in aid but in as much as those conditions are very similar, although not exactly the same as the conditions for the credit, where I think they play a more important part on State relationships, I would like to reserve consideration of the conditions.
Our position, therefore, is that the grants in aid first can not be challenged by this taxpayer because there is no connection between the tax which he pays and the appropriations.
In the second place.
Coming to the tax credit and conditions found in section 902 the credit being the second device in this act which operates as it is claimed, on the Federal and State relationship, we find in the first place the tax which Mr. Wyzanski has described, laid upon the employment of eight or more, and, measured by the extent to which that right is exercised and then section 902 provides the credit which it is claimed is the inducement to State action or the coercion of State action or the "bribe" of State action, according to how one looks at it.
Section 902 provides that the taxpayer may credit against the tax imposed the amount of any contribution with respect to unemployment during the taxable year paid by him into an unemployment fund under a State law.
The total credit is limited to 90 percent, and the State law must be a certified law.
The certification involves the conditions and I pass that for the moment.
Considering alone the credit not the conditions of a credit, whether there is, anything in that credit which is an unlawful interference with the rights of the State it will be observed that this credit is given to the taxpayer upon the condition that he has made a contribution, that he has made it to the State and that it is for the general purpose of unemployment compensation.
They say that unemployment is no concern of the Federal Government and that because unemployment is no concern of the Federal Government there is no right to give a credit which relates to unemployment compensation.
MR. WYZANSKI: I think has given the first answer to that; that is that it is a concern of the Federal Government, but if your Honors do not go along with us upon that argument, there is still a right to give a credit, even though the purpose served by that credit is not a Federal purpose.
Always then has been the right in the adjustment of a tax structure to recognize equities, to recognize the extent to which the taxpayer has assumed and performed other obligations the extent to which he has contributed to purposes which were wholly unrelated to the Federal Government.
Let us take the credits and the exemptions and the deductions which are granted in our laws customarily.
Every credit, of course, is an inducement to some kind of conduct, just as every tax is an economic impediment to some kind of conduct.
Now, first of all, we have the excise tax on estates, on which an 80 percent credit was given and was approved by this Court.
That credit was given because that taxpayer contributed to the State government in the litigated case, to the State of Florida.
Of course, it was not for Federal purposes.
His 80 percent, for which he was given a credit, was contributed to the State without any restriction upon its use and was solely for State purposes, Therefore the 80-percent credit approved by this Court was approved although it was devoted to purposes which could not be justified as coming with the powers of the Federal Government.
We have in our laws, and have had for many years, a form of tax credit by which we give one a credit who has contributed to the burden of foreign government, though it would be hard to relate that to any Federal purpose.
We have, of course the marriage exemption and the dependant exemption, although it is perfectly plain that the Federal Government cannot command one to marry and cannot prevent him from marrying and cannot regulate the relationship.
It can and does give an exemption from some tax to one who assumes what is supposed to be an obligation of society.
It is not considered any invasion of State power when those credits are given.
Furthermore, we have, and have always, recognized the charitable deduction in our tax laws, so that one who makes a charitable contribution for purpose wholly apart from any purpose to which the Nation might properly devote its funds may have a credit, and he may have a deduction in contributing to his church, although it is wholly apart from the power of Nation to impose religious obligation or deny religious freedom.
But if the citizen sees fit to make a contribution to religious purpose, though there is no power to regulate, there has always been recognized a power to give him credit.
If the State of Alabama should say.
"We will have none of this Federal act, we will lay a tax of our own let us say a tax on real estate, for the purpose of taking care of the poor and the unemployed" and this particular taxpayer should pay that tax, he would be entitled to a deduction on his income tax for having paid it, although it might not be a purpose served by the Federal Government, and we go this far: That in computing tax liability we give a man credit if he sets aside a depreciation reserve to take care of his worn-out machinery, and we say that we will allow him to expense it, treat it as a part of the cost of his doing business and we will reduce his tax liability according because he has taken that item of expense.
It seems to me that if in the excise tax upon income derived from business we have a right to say to a man that he may have a credit if he will take care of a depreciation reserve on his old machinery that we have the right to allow this credit for unemployment compensation to the man who run the machine.
MR. JUSTICE BUTLER: Is there any limit that can be used to the privilege of deduction, by the Federal Government, by Congress?
MR. JACKSON: For the conduct of the individual or of the State?
MR. JUSTICE BUTLER: Of the State.
MR. JACKSON: Eighty percent was sustained.
MR. JUSTICE BUTLER: I do not mean the amount of the deduction, but I mean the condition.
MR. JACKSON: I think there would be.
MR. JUSTICE BUTLER: What, for instance?
Where would you stop?
Where would you have to stop, I mean-not where you might stop as a matter of policy but where would the Government have to stop?
MR. JACKSON: Of course, I question whether the power of review extends to a grant of an exemption, unless it transgresses some particular provision of the Constitution.
MR. JUSTICE BUTLER: What provision would be transgresses by a condition attached to a deduction from a tax of this Sort.
I am not able quite to think of one.
MR. JACKSON: I do not either.
I do not think of one but I do not think that that mean's this is not valid.
MR. JUSTICE BUTLER:
MR. JACKSON: Right.
MR. JUSTICE BUTLER: And I was wondering about your suggestion of the deduction of that which you give to your church.
Suppose that following the analogy of this compensation for unemployment, there were create a religious board, and they should specify the condition upon which you might deduct your contribution to the church perhaps the denomination, and so forth and the Government would continue to rise the exaction starting with 1, the 2, and then 3, and up to 10, if need be- I mean against churchgoers, in order to induce the state to pass a law providing for that sort of things.
Would that be perfectly good too?
MR. JACKSON: Of Course you cannot use the tax law to regulate the exercise of the religious privilege.
MR. JUSTICE BUTLER:
MR. JACKSON: You would have to stop short of that.
MR. JUSTICE BUTLER: Or the ordinary relations between master and employee?
MR. JACKSON: I think that is Correct
MR. JUSTICE BUTLER: You have to stop there?
MR. JACKSON: The Child Labor Tax case (259 U. S. 20) is an example of the transgressing of a Limitation on the use of taxes.
MR. JUSTICE BUTLER: So we may take it to be the position then that broadly speaking, without speculating and trying to find a case where this method of persuasion would not be useful, we are bound to assume, are we not, that the Government's position is that it is useful wherever and whenever it is possible to extend it?
MR. JACKSON: I think broadly stated that is true, although I would not want to say that there might not be abuses.
MR. JUSTICE BUTLER: And they would not even stop when it came to taxing people of the State, or employers in the State-they need not stop at 3 percent or 10 percent or 15 or 20-they can keep on going until they make-what shall I say- the social advantages so attractive?
I am merely wondering where it would end.
MR. JACKSON: I think that the amount of the deduction is wholly in the discretion of Congress.
MR. JUSTICE BUTLER: And the rate of the exemption?
MR. JACKSON: And the rate of exemption; yes.
MR. JUSTICE BUTLER: And you go further.
You say the regulation is on how the amount deducted shall be used?
MR. JACKSON: But I do not want to be understood as saying that there might not be such abuse of that power that you would find upon a review of all of its effects that it had transcended the proper limitations imposed by the Tenth Amendment.
MR. JUSTICE BUTLER: For example?
MR. JACKSON: I do not think of an example.
You know the makers of the Constitution did not, define very accurately the limitations.
MR. JUSTICE BUTLER: No; but yon have been living this great attention, of course, and if there are any outposts, would like to know what they are.
MR. JACKSON: I think that when the rate of 80 percent, in Florida V. Mellon, was found not to be coercive, that 90 percent in this case cannot be found to be coercive.
MR. JUSTICE BUTLER: Suppose we make it 10 percent in Alabama?
MR. JACKSON: The tax?
MR. JUSTICE BUTLER: Yes; the rate of tax, and then give them all the deduction.
I am talking about the amount that can be deducted, talking about the inducement that has to be made.
Now, they say if you take that tax, 10 percent, on a certain group of people, and if you use it the way that the Congress thinks it ought to be used, in order to relieve it from expenditures which it has assumed to make for the relief of the poor, or what not I am just wondering if there is any possible limit.
MR. JACKSON: I would not want to suggest any.
I would not want to suggest that there is not any.
MR. JUSTICE BUTLER: Yon really believe, do you not, that there is not any?
Well, I will withdraw that.
MR. JACKSON: No; I have no hidden beliefs about it.
MR. JUSTICE BUTLER: I really think I went too far.
MR. JACKSON: I just really have not tried to think as to the limit of the power.
I think it is great enough to include what we have here done.
MR. JUSTICE BUTLER:
MR. JACKSON: That is true.
MR. JUSTICE BRANDEIS: Is there any instance in which the Court has held that a deduction prescribed by Congress from the tax, whether the income tax or any other tax, may be allowed, might have been held unconstitutional?
MR. JACKSON: Not that I know of Your Honor.
MR. JUSTICE STONE: It is practically concurrent, with this power of selection, is not?
MR. JACKSON: I would think so.
MR. JUSTICE BRANDEIS: Do you recall any suggestion in any of the cases, even if there was not a holding, that the Court intimated that certain deductions would be beyond the power of the Congress?
MR. JACKSON: I have never found any limitation laid down in any option as to the power of granting exemptions deductions or credits but, of course we have to bear in mind that on exemption, deduction, or a credit is seldom challenged because the taxpayer usually benefits by it, and therefore we do not find that comprising a very large part of the tax litigation.
THE CHIEF JUSTICE: I suppose yon would start with the question whether it is a valid tax, apart from any deduction.
MR. JACKSON: That is right.
THE CHIEF JUSTICE: You would expect deductions and would expect uniformity?
MR. JACKSON: Certainly.
THE CHIEF JUSTICE: I suppose the deduction, if allowed I would also be uniform geographically, to comply with the constitutional provision?
MR. JACKSON: I presume that would be necessary.
THE CHIEF JUSTICE: And I Suppose if Congress provided for a tax, 100 percent, it could provide for not paying the tax to 98 percent of it, if it wanted to.
MR. JACKSON: I think it can.
MR. JUSTICE BUTLER: And then, that they could condition the use of the equivalent of the deduction in any conceivable way they saw fit?
MR. JACKSON: I would not say that.
MR. JUSTICE BUTLER: Give me an exception beyond the limit.
It is not a question of taxing alone.
It is not a question of deducting alone but you go further, as I feel, under the explanation that Mr. Wyzanski gave of this statute.
You go further and say what shall be done with the amount.
MR. JACKSON: No; we do not do that.
MR. JUSTICE BUTLER: What do you do?
You say, "You shall not have it unless you do so-and-so with it.
MR. JACKSON: The next point which I am going to take up is the matter of conditions which are laid down, and I do not want to say that there could not be conditions that are bad.
MR. JUSTICE BUTLER: Tell me one that would be.
MR. JACKSON: I cannot tell you one that would be now.
I frankly have not thought of that.
THE CHIEF JUSTICE: You would Say that if they laid a tax and provided a deduction of 50 percent provided a man would attend a certain church that would be bad, would it not.
MR. JACKSON: Certainly I would.
MR. JUSTICE BUTLER: On what principle?
MR. JACKSON: Upon the ground that it was a regulatory statute.
MR. JUSTICE BUTLER: Regulating what?
MR. JACKSON: Regulating his attendance at church.
MR. JUSTICE BUTLER: And it does not regulate what you are paying some man who was formerly in your employ?
MR. JACKSON: No; this statute, so far as the Federal Government goes does not do that.
This statute, so far as the Federal Government goes, says, we will recognize the contribution which you have paid to your State law as a proper deduction and proper credit.
MR. JUSTICE BUTLER: Your State law being so-and-so, you, mean?
MR. JACKSON: Your State law, that it shall have certain provisions.
MR. JUSTICE BUTLER: You cannot do it unless your State will produce so and so, and so and so?
MR. JACKSON: But where I am not able to answer our question is that I am not able to see that there are not things-I cannot say that there might not be conditions which would be bad.
I am directing my point to the fact that the conditions laid down in this law are good, and that is quite as far as I want to undertake to go in the time that is left to me.
Our position with reference to credit, leaving out the effect of the condition is that irrespective of whether the relief of unemployment in Alabama is a Federal or a State function the Federal Government in adjusting its tax structure, may recognize the contribution to that worthy Purpose, the contribution made to the State, and may give the credit for it.
The next question is whether it may lay down conditions upon which that credit will be granted.
I take it that if the Government has a right to give a man a credit it has it right to see that that credit is a genuine credit for the purpose intended.
In Florida v Mellon there was no necessity for a description of that estate-tax law because the estate ·tax laws were well known, and the mere mention of the payment of a State succession tax was sufficient to define that tax.
But if it were it relatively new matter, I take it that the Federal Government would have had a right in the estate tax law to say that a credit of 80 percent, approved in, that case, shall be allowed provided the laws of the State make Provision for succession in title to the property at death and provided the law also provide some method for ascertaining the succession in case of intestacy and for the probate of a will, and that it would have the power in laying out that credit generally to define the conditions upon which it could be given.
I think that in the case of a charitable deduction we would surely have right to lay down regulation which would provide that the deduction to charity should be charity in which there no private profit motive was.
Perhaps we could even required that it be an incorporated or otherwise recognized charity.
But this credit goes beyond those credits which serve purely personal purposes.
It serves the fiscal purpose of the Treasury of the United State.
This person who has contributed 90 percent of this tax to the unemployment fund of his state has to that extent relieved his State or relieved the Federal Government of what is assumed to be an obligation to take up certain duties, when unemployment passes the capacity of the State to handle it.
And, if it is to serve such a purpose, we clearly have the right to lay down the tests which will see that the unemployment purpose has been honestly served.
Now, let us turn to these conditions at section 903, and see what it is that the Federal Government is laying down as a condition of the State laws to be certified.
When I first read these condition was impressed, as you may well be that they did not leave much for the state to do.
I was impressed, as I think you have been, that these condition prescribed pretty nearly the field of action; and it is only when you contemplate what the field of action in these situation really is that you will find that these conditions are the minimum requirements of good, safe, operating, workable unemployment compensation act, Without which no taxpayer ought to be entitled to a credit.
Provision 1, which must be contained in the State law, is that all compensation is to be paid through public employment offices in the State, or such other agencies us the board may approve.
That might at first sight appear like an interference with the rights of the State to select its own agencies.
The purpose of that provision, as Mr. Wyzanski has said, is the purpose to stop the “cracker barrel loafer” who has been referred to here, from getting a relief or getting a dole in the form of relief.
The purpose of that provision is to assure that when the credit is taken against Federal tax the money which the Federal Government loses goes to people who are in good faith out of employment.
Now, if you set up some kind of agencies to which .
the man may simply go and as a matter of form gets his compensation from week to week or from month to month, there is no assurance that he is ready and willing to work, the purpose to see is that this money, withheld from the Federal Treasury, goes through the employment office, so that when the man applies for his unemployment compensation he may be confronted with a job, if there is an available and suitable job.
The employment office may find a job suitable to his skill, so that he may be tested from month to month as to whether he is necessarily unemployed, or whether he is one of the volunteers in the army of the unemployed.
The States before this act took effect had in large part set up employment offices under what is known as the Wagner-Payser Act by which the Federal Government aids States in the expense of employment offices.
Twenty States had these offices before this act was passed, and it is for the purpose of utilizing those agencies that this provision was put in, to make sure that this does not become a dole.
The Federal Government is not in the business of subsidizing a dole.
The provision that “such other agencies as the Board may approve” the last provision, was criticized in the argument yesterday.
MR. WYZANSKI: gave the correct answer.
The people who were working with this unemployment act knew what that meant.
I would grant, as a matter of reading the act that it looks like a pretty broad, direction, but who can question it?
MR. JUSTICE BUTLER: Who call question it?
MR. JACKSON: Yes.
There is no case or controversy here concerning it.
Alabama has had its own act approved and it does pay the compensation through the public employment office.
No discretion, under this discretionary clause, has been exercised or denied in this case, and, as a matter of fact, in all of the laws, over 40, there has never been a disagreement or controversy over the application of that provision.
The purpose was to give great latitude to the State.
If it wanted to pay, instead of through a public employment office, through what it might choose to call a commissioner of labor that served the same function that was acceptable.
It was intended of course to prohibit payment, for example, through a liquor dispensary or some other agency which would not see to it that it should not become a dole.
It seems to me this is one of the essentially conservative and progressive provisions, if we are to have a scheme of this kind.
The second provision is that no compensation shall be payable in respect to any unemployment occurring within 2 years of the beginning of the act.
That has been conceded at the bar to be a reasonable requirement, and, of course, the purpose is to protect the solvency of the fund because the Federal Government does not want to subsidize by this credit the building up of an insolvent fund which will raise hopes only to disappoint them.
MR. JUSTICE BRANDEIS: That means 2 years from the commencement of the payment of the compensation tax, not necessarily 2 years from the commencement of the tax under this act?
MR. JACKSON: No.
MR. JUSTICE BRANDEIS:
MR. JACKSON: It is 2 years after the first day of the first period with respect to which contributions are required by the State law.
MR. JUSTICE BRANDEIS: Yes; by the State law.
MR. JACKSON: That is right.
MR. JUSTICE BRANDEIS: Consequently depending upon when they began, whether before or after the passage of this act?
MR. JACKSON: All money withdrawn from the unemployment Trust Fund by the State agency shall be used solely in the payment of compensation, exclusive of expenses of administration.
It will be remembered that the Government is furnishing the expenses of administration by the grant-in-aid, and it seems perfectly reasonable if it is going to grant the taxpayer this credit, that.
It shall see that the money is actually used for the purpose for which the credit is granted.
The purpose of that is perfectly obvious.
The State may use any labor policy it wants.
The State may compensate men while on strike or not compensate them, as it wishes, but it is provided that this act cannot be used to compel a man to become a strikebreaker upon the penalty of losing his compensation.
(B) It the wages, hours, or other conditions of the work offered are substantially less favorable to the Individual than those prevailing for similar work in the locality.
And the purpose of that, of course, is to see that this credit which the Government is giving shall not be used to drive the wage scale down in any community, to create further problems of unemployment.
MR. JUSTICE SUTHERLAND: I do not know whether it makes any difference but that is rather a vague provision, is it not, “prevailing for similar work in the locality”?
MR. JACKSON: “Locality” is rather vague, and “similar work”—
I suppose that there is room for improvement in the language of this act.
MR. JUSTICE SUTHERLAND: I think we struck down a law of that character as not being definite, as being vague and denying due process.
MR. JACKSON: I think that in actual usage as matters stand today, this is a very common provision, that the prevailing rate of wage shall be paid.
It is found in many contracts it is required in all municipal contracts in the State of New York, and in all State contracts, and while it has a good many variables, of course, as a practical proposition there is seldom any difficulty about it.
It as a condition of being employed the individual would be required to join a company union or to resign from or refrain from joining a bona-fide labor organization.
The purpose back of this subsection 5 is to protect this law from the controversies which ensue the moment the law becomes used as an instrument of labor policy.
We do not have to look far to know that there are men who are short-sighted in their own interests, and if this law becomes the center of a controversy as to whether it will be under the control of labor or employer interests it immediately impairs the usefulness of this law for the purpose for which the Government has granted this credit, and therefore subsection 5 is simply designed to free this law from labor controversies.
All the rights, privileges, or immunities conferred by such low or by nets done pursuant thereto shall exist subject to the power at the legislature to remand or repent such law at any time.
This is an experiment.
Nobody considers that it has reached perfection, even that, it has reached a satisfactory stage, and clearly if the States were to set up statutes in which vested rights accrued so that they could not alter them as experience may prove, we would find ourselves in an unpleasant position.
Turning to 904, we find that the Treasury sets up a trust fund to be known as the unemployment trust fund.
The Secretary is directed to make investment of this fund only in the interest bearing obligation of the United States, by purchase of obligation at the market price.
It is also provided that he may issue to himself as trustee nonnegotiable obligation of the Treasury.
This fund according to (e) on page 48, “shall be invested as a single fund, but the Secretary of the Treasury shall maintain a separate book account for each State agency and shall credit” it with all accruals and (f) at the bottom of page 48 [reading]: The Secretary of the Treasury is authorized and directed to pay out of the fund to any State agency such amount as it may duly requisition, not exceeding the amount standing to the account of such State agency at the time of such payment.
It was stated yesterday in the argument that Alabama's funds were “frozen in the Treasury” “invested at the Treasury’s convenience”, “removal from the control of the Stare” and that if the State law were repealed it “could not redistribute them.
” None of those statements is correct.
This fund is every moment the property of the state of Alabama.
This fund is subject to withdrawal at any moment Alabama wants to withdrawn it.
It may withdrawn it and quite the compensation business, or it may withdrawn it and continue compensation under some other kind of plan.
The only penalty for withdrawing it and using it for any other purpose it chooses is that its taxpayers will lose the credit.
Now, the purpose of this provision was not as has been suggested, to finance the Government of the United States.
It has not reached the point where bonuses have to be offered for that purpose.
Of course it is always recognized as a proper function of the tax laws to make a discrimination in favor of those who assist, the financing of the Government, but that is not the paramount purpose of this, although it is one of its effects; nor is it the purpose of this section to protect the State against the larceny or the Improvidence of its own agents.
The difficulty with unemployment insurance is that the legitimate operation of the fund creates reserves in good times to be invested at high prices and the withdrawals from the fund to come at bad times, when it is difficult to realize upon obligations even at low prices, and that is the reason, or one of the reasons, that no private company will touch unemployment insurance, because it would be collecting its premium and accumulating its reserves in good times and then it would be required to make large liquidations in bad times.
Of course, where the payments are conditioned by death or some event of that kind they do not tend to come all at once as unemployment compensation does.
It has been estimated that if these unemployment systems had been in effect in all States from 1922 to 1929 at a 3-percent tax rate the reserve in the 'Treasury in 1920 would have been from 2 to 2 1billion dollars.
Now, counsel inadvertently started the other day that this reserve would among to 48 billions.
He was referring to the reserve under the old age title of this act, and it must be borne in mind in reading his brief that in several cases he has confused the two titles, and I am not surprised that he does.
The unemployment system is a State and Federal system.
The old age benefit system is a Federal system only, and that reserve is the one that he has in mind when he suggests that is will amount to these enormous figures.
MR. JUSTICE BUTLER: What would be the probable annua1 collection under the Fredera1 act on unemployment, at 3 percent?
MR. JACKSON: Mr. Wyzanski has that.
MR. JUSTICE BUTLER: Has that been figured out?
MR. WYZANSKI: The Treasury estimates that between 55 and 70 million dollars will be collected this year at 1-percent tax, allowing the full credit.
MR. JUSTICE BUTLER: And at 3 percent it would he three times that?
MR. WYZANSKI: Of course, it might be more, if employment were greater than that, 2 years from now.
MR. JUSTICE BUTLER: I mean if it were 3 percent, on the same basis, it would be three times as much?
MR. WYZANSKI: Yes.
MR. JACKSON: It was conceived by Congress that if these unemployment reserves were built up in the separate State treasuries, and we then faced another period of unemployment and all of those State treasuries were required to rush to liquidation within a short period, it would not only produce great loss to the States, but it would produce also a great dislocation to our entire economy.
Also within the knowledge of Congress was the experience that the great, insurance companies had when they were faced with large demands for cash values of policies and for loans which eventually forced the United States, through Reconstruction Finance Corporation loans, and otherwise to go into the banking business, and to go into the insurance business indirectly by making loans to those ventures.
Therefore, it was desired to place these reserves in a position where they would always be liquid and available, in a position where the State would suffer no loss through liquidation, and where they could be liquidated in an orderly fashion by the Treasury, with the aid of the Federal Reserve System, and in a way that would not disturb the economy of the United States.
Now, if those things are laid down as conditions of this grant, you may properly ask, “What is there left for the State to do?
And I take my adversary’s brief, because it is, I think more graphic than ours.
A shows not only the great field that is left to the State- not only that, but it shows how completely and fully the State have exercise their own powers of control and regulation.
MR. JUSTICE BUTLER: Before you get into the detail of that, I would like to have in mind the principle that should govern us when we are considering that, I suppose the field allowed the State under this act would be broadened out at will by Congress?
MR. JACKSON: No.
MR. JUSTICE BUTLER: You believe that Congress could leave more things to a State, do you not?
MR. JACKSON: Congress could repeal some of tile conditions.
MR. JUSTICE BUTLER: That is what I say.
MR. JACKSON: Yes.
MR. JUSTICE BUTLER: That would be broadening the field that is left for the State to act in?
MR. JACKSON: It would broaden the field in which the State could act, and still get the credit.
MR. JUSTICE BUTLER: And if it could do that it might still have the deduction?
MR. JACKSON: Yes.
MR. JUSTICE BUTLER: Now, they could narrow it, too, could they not?
MR. JACKSON: I think they can narrow this credit.
MR. JUSTICE BUTLER: And narrow it as much as they wanted to?
MR. JUSTICE BUTLER: Tell me where the limit is.
MR. JACKSON: I do not know that I can define the limit.
MR. JUSTICE BUTLER: I do not ask you to define it.
That was not my purpose.
I did not expect you to.
I asked you to illustrate it by any substantial practical illustration.
What troubles me about it is the scope of the field that is opened by this system of taxation and deduction.
MR. JACKSON: I quite understand your concern, because it is the underlying question here, Your Honor.
MR. JUSTICE BUTLER: Yes.
It is of the utmost importance, and now you are defending this particular act on the ground that it leaves many things open for the State to do in respect to this compensation.
If it is true that that is all within the will of Congress, that they can relax the restrictions, or narrow them as they see fit, that is a fact to be taken into account, is it not?
MR. JACKSON: I think it is.
MR. JUSTICE BUTLER: And then are you inviting us to deal with this on the basis that there is no limit to the power, in respect of narrowing the field in which the State may act in respect to this subject?
MR. JACKSON: Oh, no, No; I do not.
MR. JUSTICE BUTLER: If you do not, then, most respectfully I suggest it would be interesting to find some intimation of a boundary line.
MR. JACKSON: I really think, Your Honor that my burden is to show that this act does not in fringe, rather than to show that none could have passed that would.
MR. JUSTICE BUTLER: Yes; but you are discussing the power.
The whole question is one of power, in my mind, to use this device in that way.
The mere fact that this might not be objectionable would not be detached and apart, because if they have the power to do this, they have the power to leave more to the State, or to leave none to the State.
I am suggesting it emphatically, for the purpose of calling your attention to the field, and I am bound to say that I think on the question of power, we are permitted to look beyond the terms of the act-somewhere beyond it.
MR. JACKSON: The power to tax has been said to be the power to destroy, but I do not think that we can deny the power of Congress to raise revenue, because it may use those powers in a destructive fashion, and I have attempted to go beyond that point, to meet the reasonable fears which I think many people may properly entertain that act may go too far by showing the reasonableness of the conditions which are imposed here.
MR. JUSTICE BUTLER: You encourage me to make another suggestion.
Suppose this power to tax and to deduct were, in an analogous or similar fashion, in the field of public education, carried on by the States in this country.
It is a fact, is it not, that during this period of depression large sums have been furnished by the Government to use in the public schools, and to maintain the schools and so on?
MR. JACKSON: I think that is true.
MR. JUSTICE BUTLER: And the same pressing need of these who are financially distressed was upon the Government to do that, as to relieve the unemployment?
Is not that true?
MR. JACKSON: I do not know as there was the same pressure.
MR. JUSTICE BUTLER: It was enough to call the power of the Government into action?
MR. JACKSON: So they acted, anyway.
MR. JUSTICE BUTLER: Suppose that by this method-and I describe it briefly as taxing and deducting to put the public schools of this country in to the shape that they were putting the employers here with respect to the conduct of their schools the amount of money that they shall pay to schools, for attending schools, or to teachers or the kind of buildings, and so for this that within the power of Congress by taxation deduction?
MR. JACKSON: I think that the grant and the deduction can be made upon a condition, and that that condition can at least be related to the purpose of the act.
MR. JUSTICE BUTLER: Then, is there any field that has been referred to the States by the Constitution that may not be occupied in a similar manner?
MR. JUSTICE BUTLER: This is not Federal money.
MR. JACKSON: It is money that is permitted to go to the State.
MR. JUSTICE BUTLER: It is the money that the Federal Government would take under- the power of taxation if the State failed to comply with conditions in respect of its teaching or in respect to its internal affairs?
MR. JACKSON: That is right.
MR. JUSTICE BUTLER: That is not Government money because the Government never had it.
MR. JACKSON: But, it amounts to the same thing, in that it is a grant by way of credit, rather than a grant by way of an appropriation and I think that Congress has the power to prescribe the limitations and the conditions upon the use of money withheld by credit as well as upon grants.
MR. JUSTICE STONE: I suppose there are certain specific limitations in the Constitution which would have to be looked into to see whether it was an exercise and proper exercise of national power.
MR. JUSTICE STONE: To go back to the favoring of religion—
MR. JACKSON: Certainly.
MR. JUSTICE STONE: And if the law operated, even by indirection, to transgress that prohibition, I suppose it would be open to the question at least as to whether that is an exercise of national power for the general welfare?
MR. JACKSON: Unquestionably, but I dill not understand Mr. Justice Butler to include any question—
MR. JUSTICE STONE: I was only Suggestion one possible limitation.
MR. JUSTICE BUTLER: I did not in my illustration inquire concerning the power of the Government by detached tax and deduction methods to require the State to pass and enforce ex post factor laws in violation of the Constitution or to pass something that would violate the Federal Constitution.
I put that to one side, and we are concerned with the ordinary relation between employer and employee between the State and its schools, and things of that sort, and I suggest that it is not fantastic to say that if one is within the reach and desire of congress the other is not far away.
MR. JACKSON: I could not agree with you about that, Your Honor.
MR. JUSTICE BUTLER: Well so far as reach is concerned, you do agree?
MR. JACKSON: There may be the power.
MR. JUSTICE BUTLER: So far as the reach is concerned you do agree with me?
MR. JACKSON: Certainly there is no problem concerning the schools, or concerning any such subject as you have used in your illustration that compare with this unemployment problem.
MR. JUSTICE BRANDEIS: Aside from the question of whether there is one comparable or not, I suppose our question that we have got to decide in this case is whether this particular purpose and these particular limitations exceed the power of Congress.
MR. JACKSON: I think that is correct.
MR. JUSTICE BRANDEIS: Now, it is very interesting to consider as an academic matter where you draw the line.
MR. JUSTICE BUTLER: If there is a line.
MR. JUSTICE BRANDEIS: If there is a line, where you draw it, but I have difficulty in seeing how that is related directly to this question.
MR. JACKSON: I do not think it is related to it.
MR. JUSTICE BRANDEIS: If a deduction can be allowed at all that is a question which underlies this.
If deduction cannot, be allowed then this deduction could not be allowed: but if, deduction may be made then I surprised the question that comes up is whether the specific deduction prescribed by Congress is with its power.
MR. JACKSON: It seems to me the Court is always very careful to avoid trying to lay down just where the limitation are, and I do not think that I would want to undertake to do what the Court refrains from doing.
MR. JUSTICE BUTLER: But I am sure you are not inviting us to look at this through the keyhole.
MR. JACKSON: No.
MR. JACKSON: In taking up the, scope and variety of State action under the unemployment-compensation plan, I do so with a view to its reasonableness.
One of the rights of individuals, or Federal Government or of the State government is absolute and preciously measured rights, and as due process is a test by which the individual rights may be measured, as in Nebbia V. New York (291 U. S.502) so the Tenth Amendment has to be interpreted in the light of a reasonable consideration of those things which the State and Federal Government are attempting to do.
The question is, as I am addressing my argument to the reasonableness of the exercise of power undertaken in this particular case, to show that it is not an attempt to invade the powers of the State, to undertake to regulate its industry or to do those things which have been generally held to be prohibited ends; because if by reasonable examination to the statutes in question the end is found to be prohibited, then It.
has been held by this Court that all roads to it are closed.
Appendix A to the petitioners, brief sets forth all of the acts passed by the States.
It sets them forth in a manner that will readily show the wide variation in those acts.
It sets them forth in a way that will readily show different subject with which the State acts deal.
In the first place it should be observed that in this Federal act there is no compulsion upon the state to adopt any kind of legislation whatever.
This law does not operate upon the States.
This law operates upon the taxpayers; who are citizen of the United States and subject to its taxation, It Operates by giving them a credit provided those taxpayers have paid to the State certain sums of money.
It is purely fiscal and not regulatory in its operation.
While the operation of the tax may depend upon an employer-employee relationship existing, there are no obligations created as between employer and employee, no rights created and some none denied.
The scheme set up no competition with the industry of the State.
No regulation of the industry of the State.
The chart shows the type of fund, and the State is entirely free to take any of the known types of workable compensation funds and still obtain its credit.
The coverage of the law that States, shall pass is to be, determined by itself.
It may tax the employers of one or more or four or more or eight or more.
It may tax the employees or may not tax the employees.
The State may contribute to the fund or it may not contribute to the fund, and then a merit rating may be granted, in which each employer is classified according to his experience, after a 3-year experience is accumulated, so that there will be some rational basis upon which a classification could be made.
The benefits are entirely with in the control of the State, without impairing its credit.
They may pay 50 percent of wages, as many of them are paying, or pay a fixed maximum or minimum per week or they may grant partial unemployment relief.
The waiting period, periods of qualification, the States may fix.
The States could have a policy of granting unemployment compensation to the man who is on strike or they may decline to compensate the man on strike, and the chart, which I will not get to go in to in detail, shows the very wide extent to which the States have exercised their own, discretion in those matters.
Then attached to our own appendix, the last page, is a tabular representation of the main features of State unemployment-compensation laws now in force, which is designed to show each State's law, and by tabulation show the variations and the extent to which the States have exercised their own discretion, the 43 States and the District of Columbia.
MR. JUSTICE SUTHERLAND: The beneficiaries may be different in different States, of course?
MR. JACKSON: Yes.
MR. JUSTICE SUTHERLAND: And the tax in some States would fall upon persons or corporations that are not embraced within the taxing provision of the Federal law, I suppose?
MR. JACKSON: The State could impose additional taxes; yes.
MR. JUSTICE SUTHERLAND: They may help it?
MR. JACKSON: Yes.
MR. JUSTICE SUTHERLAND: At any event, the same amount goes to the State, does it?
MR. JACKSON: The same credit.
MR. JUSTICE SUTHERLAND: The same credit?
MR. JACKSON: That is the same percentage of credit.
MR. JUSTICE SUTHERLAND: The same percentage?
MR. JACKSON: That is right.
MR. JUSTICE SUTHERLAND: And that would apply to all of the taxes of the State, whether they arc extensive or more or less extensive?
MR. JACKSON: That is right.
THE CHIEF JUSTICE: It only applies to the taxpayer who pays the Federal tax?
MR. JACKSON: Oh, yes.
That is all.
THE CHIEF JUSTICE: If the State may tax somebody else who is outside the purview of the Federal tax—
MR. JUSTICE SUTHERLAND: Take this illustration: As I understand, they exclude employers who employ eight or less men.
In another State they exclude those who employ four or less.
Is that correct?
MR. JACKSON: Yes, sir.
MR. JUSTICE SUTHERLAND: In that case the employer of less than four, or of four or less, or of eight or less, pays the Federal tax just the same?
MR. JACKSON: No.
The Federal tax would only apply to the employer of eight or more, but the State could tax below that number, but, of course, they would get no Federal credit.
MR. JUSTICE SUTHERLAND: They must take care of those conditions themselves?
MR. JACKSON: Yes.
MR. JUSTICE SUTHERLAND: Without reference to the national fund?
MR. JACKSON: That is right.
The systems by which different States plan-the "pool plan", the pool plan with merit rating, the unemployment.
Reserve account, and the guaranteed employment accounts, which are different forms of employment compensation-are taken care of through the additional credit provisions contained in 909 and 910 of the act, and I will not attempt to explain those provisions, because I do not think they are involved here.
There is no claim that they are involved in this Alabama situation, and they are fully explained in our appendix.
They embrace the known workable plans, and credit is given in addition 10 the ordinary credit, so that if a man by reason of so handling his business or having a business that is capable of being so handled that he has a low risk, saves something on the payment to the State fund, by a merit rating, it will not be taken away from him by the Federal Government but he will be allowed the benefit of it.
Every one of these plans keys the benefits to work.
Every one of these plans that the Federal act seeks to encourage makes the obtaining of unemployment benefits contingent upon having done some work, so that this is not a scheme for unconditional grants to be used to compensate those who work as well as those who will not work.
These conditions are entirely separable from the taxing provisions.
I shall not go into detail except to point out that the tax and the credit may stand and operate even though these conditions are found to be outside the power of the Government to impose.
Furthermore, anyone of these conditions is separable from all of the others, and it is contended in our brief that the tax and the credit may stand even if some of the conditions be found to step beyond the domain properly occupied by the Federal Government.
The question remains whether, in this distribution of activities between the State and the Federal Governments, even if we are within the technical word of the Constitution, there has been such a plan at tempted as will upset and unbalance our dual form of government.
The problem of unemployment faced locally, as well as by the Federal Government, the distress and commercial demoralization due to it were not confined to anyone of our sovereignties.
These two sovereignties, the State and Nation, have sought under this plan, and in the case before Your Honors, to lay their powers together so that the powers of the two may be equal to the magnitude of this problem.
Our adversaries answer to this unemployment problem is that one day they deny that the State has the power to deal with it, and on the next day they deny that the National Government has the power to deal with it.
In other words, so far as the balance of power between State and Federal Government is concerned, our adversaries would maintain that balance by denying both sovereignties the right to deal with this problem; and we submit that, that is not the answer, and that it is unthinkable, in the face of a problem which threatened the peace and solvency of local government, of the State governments, and of National Government, that there is power nowhere in our system to deal with this problem.
If then there is power somewhere, it must be found in the State or in the Federal Government, and it may be that each has power to contribute something to the solution of this problem.
Our answer is that perhaps State power alone was not adequate; perhaps national power alone was not adequate, to a deal with this new and threatening problem, but that the two had a right so to combine their powers that each would supplement the other and give a solution.
Clearly both sovereignties have an interest in this problem, an overlapping interest perhaps.
The Federal Government surely has as interest in maintaining its national economy and its social order.
It has the right to take measures to protect its Treasury from unusual drains.
It has a right to prepare for the unemployment problem before it occurs, as well as to appropriate money to deal with it afterward.
The Federal Government seeks a solution of the problem of unemployment: and just what the solution shall be is not so material provided the problem is solved.
But the States have separate interest in this problem.
In the “insulated chamber of the States” different experiments may be required, to deal with, different situation.
I need only call your attention to some of the divergencies in conditions.
A State like Michigan, dominated perhaps by a single industry does not have the same problem as a State like Kansas whose problem of labor is the problem of the seed time and the harvest.
Kansas does not have the same problem as California, the picking and preserving of fruits nor does the South with its peculiar labor situation have the same problem that we may face in the herding country.
Pennsylvania with its coal mining, oil, and steel and heavy industry may not reach the same solution that would be very appropriate in the Plains.
Therefore each State has a distinct and separable interest in the solution of this unemployment problem, in such a manner that it will serve the ends of its own local economy.
Therefore the two sovereignties may concur as we see it in reaching a remedy.
But the State and Federal Government each have their powers and disabilities.
The Federal Government is an economic as well as a political unit.
It may control its frontiers and if it burdens an industry it may also protect it against outside competition.
The State on the other hand, has decided limitation upon their competency to deal with this problem.
They are political but not economic unit.
They may not control their market places against competition from outside their own borders, as this Court has held.
They may burden their industries with certain regulation, but they may not protect them against the outside competitor, and the freedom of the State in some of these economic matters is the freedom to commit industrial suicide.
We think that in so doing there is no transgression of the bounds of power.
No provision crosses the lines clearly marked out by the Constitution, nor marked out by any previous decision of this Court.
This Court is now called upon to erect another of those great monuments which tend to mark the line between the State and Federal power.
It seems to us that the Court has for some time been pointing the way to State and Federal cooperation, that it has cautiously upon many occasion, left open the door to State and Federal cooperation.
The Webb-Kenyon Act brought the commerce powers of the Federal Government to the aid of the State in carrying out its temperature policy.
In Massachusetts V. Mellon the grant in aid brought Federal financial support to State power.
In Florida V. Mellon the taxing power was laid over the entire Nation, with credit which would prevent one State from drawing the wealth of the other States into it by a tax exemption.
In Kentucky Whip and Collar Co. V. Illinois Central R. R. Co (No. 138 Oct. Term 1936) this Court has held that the commerce power may be used in aid of the State which desired to control its markets so that prison-made goods will not depress its working conditions.
Such examples of cooperation as the consent that national bank shares be taxed by the State are further examples of State and Federal cooperation.
We think that the policy of State and Federal cooperation has been distinctly sustained by this Court as a general theory, and that the question remaining in these cases is always a question of the reasonableness of the exercise.
But our adversaries adhere to a different philosophy and on page 9 of their brief their philosophy, referred to again in the argument, seems to be started in these terms [reading]: If Congress has the power, no longer may a clash of sovereignties ring out.
MR. JUSTICE BUTLER: What does that mean?
MR. JACKSON: I assume it means that if Congress has this power the States, instead of being in antagonism to the Federal Government will be in cooperation with it.
I know of no reason why there should be a clash of sovereignties.
MR. JUSTICE BUTLER:
MR. JACKSON: I would rather see the clash of sovereignties disappear.
There is nothing in the State and Federal relationship which requires either antagonism to each other's interests or indifference to each other's interests and there is no merit in a clash of sovereignties.
The whole art and practice of federation as a system by which different communities can merge their larger interests in a larger policy forbids any doctrine that we should encourage any clash of sovereignties.
The difficulty with federation has always been its lack of cooperation among the parts, as the difficulty with unitary government has always been the lack of adaptation to the locality.
And there is no reason why, if State and Federal Government may lay their powers side by side and work together, they may not achieve the advantages of both system of government.
The social security law, insofar as it relates to unemployment compensation, has been framed in that spirit.
It has been framed in an effort to avoid the difficulties of concentration in Washington of the administration of these laws, to avoid encroaching upon the rights of States merely because they are financially inadequate to their own task of taking care of their own employment problems.
It has sought to preserve the good that is in our Federal system by which the sovereignty which is most local will take care of this problem in its local aspect, while the Federal Government acts as a sort of enabling agent to prevent the State with the most retarded activity from holding back those States that want to go ahead and take care of their unemployed.
This plan preserves local responsibility at the same time that it brings the solution of the problem national power.
A holding by this Court that this plan of Federal and State cooperation in solving the unemployment problem is It constitutional exercise of the powers of each, and that their cooperation is a constitutional method of making our federation work, would be the most important contribution that our generation can make to the art of dealing with these problems under a federated system of government.
MR. STERNE: May it please the Court; we have not had an opportunity to reply to the brief of the respondent.
MR. JUSTICE SUTHERLAND: I am sorry, but I do not hear you.
MR. STERNE: I was going to ask for additional time to file a brief.
We are in the same position Mr. Burr explained in the previous case.
THE CHIEF JUSTICE: Five days.
MR. STERNE: And will Your Honor tell me how much time I have, please?
THE CHIEF JUSTICE: You have 1 hour.
MR. STERNE: The principle at stake here as we conceive it, is whether there can be any method by which the Federal Government can acquire control over a State function, and whether if there be such a method, how that compulsion is open to the Federal Government.
The power to destroy, of course, includes the power to coerce, and whether this colossal system of tax and credit applies compulsion to the State through coercion or through bribery a phrase I do not use but simply repeat-or through purchase, it seems that, nevertheless; the Federal Government is exceeding the taxing power if that form of leverage is applied to a State, The practical situation Confronting these States is that unless they themselves levy a tax involving large sums of money, and turn those sums over to the unemployed, they see the Federal Government take out of the State the same amount-and I say "the same amount" because I find a compensating equation in the one- tenth.
They must then either accept what the Federal Government has constrained them to take as their portion or lose tremendous sums by seeing the Federal Government take it from the employing class and not permit it to go back to the employing class, as in the case of those State who will yield to the constraint.
In realistic terms, in Alabama it means this: In 1929 the compensable pay rolls under the Federal plan amount to something over $333,000,000, which means close to $10,000,000 of taxes levied by the Federal Government with $9,000,000, which we can get back for the unemployed if certain local functions of the State of Alabama are committed to the Government of the United States.
Now, in 1929—
That year the total revenues of the State of Alabama were something under $40,000,000, so that the degree and the weight of the compulsion may be evaluated when it is seen that an amount equal to one fourth of the total revenue of the State of Alabama is taken out of the State and can be returned to the State not merely for spending, but to the employees if, and only if, certain State function are abandoned or placed within the control of the Federal Government.
And that in the face of repeated adjudication of this Court that there is no way the Federal Government can acquire, by treaty, consent, submission, petition, or what not any function of a State.
The argument that Florida v, Mellon applies has been presented and has been answered, so that I hesitate to deal with it, but I would like to very briefly lay the two theories before Your Honors, which are in my mind as distinguishing characteristics.
In Florida v, Mellon there existed a real evil of double taxation, historically recognized.
As is pointed out, Adam Smith mentioned that death taxes were as old as the Roman law.
As anciently as the Roman law death taxes existed, and in most of the western European civilizations of earlier days, and from the beginning of this Government the problem of double taxation there seemed to be a burdensome one, with the result that eventually it became recognized that estate taxes in the main would be levied by the Federal Government in a period of fiscal stress.
The double incident became so onerous that eventually the 1926 act became the law.
Now, there was nothing in that but abandonment by one sovereign of a recognized field of taxation in which the evil of double taxation existed, was recognized and deplored.
In the present situation there is neither historical nor do I believe realistic double taxation, nor threat nor possibility of double taxation.
So far as my researches have enable me to ascertain and I assert this with the knowledge that one who says, “There is no such things” must have covered all the universe-there has been no recognized field of taxation as to pay rolls, in United States, other than such taxes as are considered adjustment or regulatory matters, in reference to such things as workmen’s compensation, and the situation here presented apparently is that the Federal Government creates the evil in order to cure it, and then claims that it is acting within some constitutional grant of power in curing an evil of duplicity of taxation.
The second distinguishing characteristics as I see it, is that in Florida v, Mellon there was a mere exit of the dominant sovereign- I say "dominant" because it had the dominating power of taxation---that was the end, in itself, its exit.
Here the exit is made the means of a most massive incursion into the State realm.
The compulsion of the tax seems manifest.
It is suggested that there was an eagerness for this tax on the part of the State, and that that is evidence by the fact that many bills had been introduced in other State which failed of passage for fear of economic competitive disadvantage.
I do not know what weight can be attached to the fact that many bills were introduce in the legislature, but it seems to me that a countervailing circumstance of no little significance is this: That when these qualifying statutes were enacted by the various States, in order that they might not on the one hand sustain the heavy weight of a 3 percent pay roll tax, without on the other hand obtaining the compensation of the disbursement of those funds to their unemployed when that was done 35 of the 43 enacting States provided in their statutes an automatic exit.
They did not even leave it to say, “We will repeal this if the Federal statutes fail of operability through declaration of unconstitutionality or repeal”, but 35 of the 43 State enacted provisions that if and when the Federal act failed.
Instantly, eo ipso, the State act should no longer be in operation.
The question of reasonableness certainly.
I take it, cannot enter into a matter of compulsion.
There can be such things, as I see it, as a legitimate compulsion laid upon a State by the Federal Government, and the weight of the contention.
I suppose, is to be evaluated in order to ascertain whether the real congressional intent was to apply the leverage of this compulsion.
But the fact that a reasonable end is sought, that a most admirable plan for reliving unemployment may have been evoked, would seem in no way to derogate from the proposition that the Federal Government must be confirmed to its constitutional bounds and not be permitted to make the taxing power an instrumentality of compulsion again a State.
The question as to whether or not there is power to tax the employer on his employing operations, as some special duty or burden upon him to prevent unemployment, has been much discussed.
I only wish to suggest this one point, as to which there can be a bearing here.
Under the agreement advanced in behalf of the Government it appears to be suggested that the money raised by the 90 percent should really be considered as having their origin in the Federal Government and as being money of the Federal Government.
That is not our conception of the true situation.
But if it be – if that alternative be a correct one – then it would seem that the taxing measure must fail immediately, for the undeniable reason that whatever may be the power of congress to expropriate from class to class in pursuance of a regulatory legislating, the taxing power cannot be so used, as surely it will never be contended by anyone that it was within the purview of congressional power to regulate the relation of employer and employee, and yet only as an incident of regulation, as we see it, can there be a taxation of the employed.
Our theory upon that – and I think it was only grazed in the previous presentation—
That we must not confuse unemployment with indigency that the unemployment man who has means stands in no relationship to Government, State or Federal which entitles him to receive funds from the Government as a public use; that a gift to a merchant who has no customers stands up on no different basis from a gift, to a workman who has no market, for his labor and that being private use; that if a tax be laid and earmarked for that use, the taxpayer, upon whom that tax devolves has a right to challenge, and a further right, to have his challenge maintained, the exercise of the so called taxing power, to take that money from him for the use of a private person-“private” in the sense that it is not a public use to devote the money to the ,unemployed man who has means himself, I say this with full recognition of the fact that the problem of unemployment very largely coincides with the problem of indigency, and that the average workman out of employment long enough to qualify for benefits under any system is probably qualified for indigent relief, but the men employed by others-I speak now not of the heads of great corporations but Simply of the average, thrifty workman-the men who have accumulated a sufficient competency to tide over several period of compensable idleness under any of these plans are not, by any means exceptional.
They are so numerous that it seems to me a distinction must be drawn, if we are to, continue to evaluate upon the basis that need alone Justifies the application of public money as a public duty.
The suggestion that under the power to tax for general welfare there may be levied, taxes in order to install a backlog against drain upon the Treasury in a future depression.
I submit is not able to withstand analysis, for this reason: It is at the most, I should say highly dubious whether the Federal Government at any time anywhere, under any circumstances has the right to make a direct grant from its Treasury, to an individual, no matter how necessitous he may be; that that is a local function of the State that is traditional I doubt if one could imagine an illustration that would receive more universal acceptance, as to a domestic concern of a State, than the relation between the State and the indigent.
Now, the Federal Government, it is asserted, has such power during times of great stress and depression.
I respectfully submit that if that power exists-and, in frankness I believe it does-it exists only as a necessary implication, in, any constitution, that the Government has the right to see that it and its people do not perish.
When confronted with a break-down of State means with a situation where our citizens die of starvation or the Federal Government it must open its Treasury, there is a reserve power of self-preservation.
I should think that would authorize the grant directly from the Federal Government to individuals, but that would be a power the occasion for whose use would be absolutely limited to the direst or in any event the most immediate, the most obvious confronting of ascertained necessary.
It would not authorize the Federal Government to say that "perchance such a situation may arise in the future and we will take over such domestic functions a the State as appear well Suited to that end, in order that, we or the States may accumulate a fund which will save as from being confronted with a similar request or demand in the future.
If under the guise of forestalling a future demand the Federal Government: may take over the local concerns of tile State, I confess I can see no limit to the concerns which they would thus take over.
I confess I can see no activity, hitherto exclusively in the State which the Federal Government might not take over, saying, under the power of the general welfare clause, “We are providing for the evil day, should it ever happen”.
MR. JUSTICE BRANDEIS: You will agree that our purpose here is to determine whether this particular function the Federal Government seemed to think was necessary for it to perform during the recent years of the depression is one for which the Federal Government can prepare.
That is, for such a situation as undoubtedly exists today.
In your statement, as I understood it, you admit there was power in the Government to do what it did, what was essential for it to do for example, in Alabama, as the result of the unemployment in Alabama.
Now, if the Government had the power to do that, is it without power to relieve itself from a continuation and a recurrence of that situation?
That is, by doing either one of two things: Either we must raise by taxation the money to carry on this work, or we must arrange it so that the State will carryon the work it self.
In this instance, if the State carries it on, it not only raises the money, but it will expend the money.
It makes all the detailed arrangements, and selects the individuals to whom it is administered.
If the Federal Government is without doubt obliged to do this it self, if the State refused to do it, the Federal Government presumably would send its own agents and officials into the State to do it, in such a way as the Federal Government acts.
Is it your position that the Federal Government must in invade the State by its own initiative, and must raise the money, and that it may not work out in cooperation with the State a plan by which that work can be done by the State, it self?
MR. STERNE: Your Honor, may I limit two postulates that are assumed in your question?
MR. JUSTICE BRANDEIS: Yes.
I wanted to have your view on that perfectly practical situation.
MR. STERNE: I think I realize Your Honor's question.
MR. JUSTICE BRANDEIS: That it seems to me has to be dealt with, if we are to deal intelligently with au important governmental problem.
MR. STERNE: I wish to avoid the concession of two matters, which a yes-or-no answer would misleadingly imply.
In the first place, it is our position I say “our” position, it is my individual view -- that the government voluntarily and not of necessity assumed a vast part-- I do not say all, but a vast part of the burden of the last depression.
I say that with full recognition of the fact that in our own State of Alabama large sums of Government money were expended.
I am not clear whether the $43,000,000 was only for direct relief or whether it included public works, and so forth.
MR. WYZANSKI: It was used just for emergency relief, from 1933 to 1935.
MR. JUSTICE BRANDEIS: It has been stated that 94 percent of all the expenditure came from the Federal Government.
MR. STERNE: Your Honor, I draw a great distinction between checks turned over to workmen, in order that they may buy food and clothing, and various projects.
And I am not clear whether projects were included in that or not.
MR. WYZANSKI: No.
MR. STERNE: They were not?
It is the idea of many of us at home- we may be utterly mistaken-that the State Government took considerable advantage of the Federal Government, that they could have managed their own problems.
We had what was considered a wasteful and an extravagant administration, who seemed to find it easier to prevail upon the authorities at Washington to relieve suffering in Alabama than to economize, conserve, and, under our own resources, discharge that obligation which was ours.
Now, answering Your Honor's question, I do not believe that under our form of government the Federal Government is empowered ever to take cure of direct relief, except in the face of an immediately existing imperious necessity, that it is only as the result of a breakdown of all else and a threat to the existence of the Government itself and its people that that power comes into existence, ex necessitate rci, and that therefore it cannot be anticipated or provided against further, of course, than for the Federal Government, if it sees fit to accumulate a Treasurer’s reserve for that purpose.
MR. JUSTICE BRANDEIS: And, in spite of the experience that we just passed through, that the Government must hold its hands and hope that the situations, when they come up upon, if they do come lip again, may be met in the same way, we know not how?
That is, there is no such thing as preparedness, legally?
MR. STERNE: There is no such thing: as a preparedness that in any way extends the power of the Federal Government, which it did not possess otherwise.
MR. JUSTICE BRANDEIS: But the Federal Government of course, had the power to lay taxes.
I do not suppose there could be any question but what the, Federal Government could levy a tax, and could accumulate a large reserve in its Treasury, so that it had just as well accumulate, so far as the power goes, billions as well as it does hundreds of millions, had it not ?
MR. STERNE: I should think so, Your Honor.
Theoretically it could.
MR. JUSTICE BRANDEIS: I mean legally it could.
MR. STERNE: I will concede that at once.
MR. JUSTICE BRANDEIS: Good.
Now, suppose instead of doing that it undertakes to provide, us here, for a gradual accumulation, I mean instead of using the State in taxing its people.
I really wanted to see, recognizing an experience that we have all passed through if it had been brought home to us, in so many words, whether from that experience anything can be done under our system of government to avoid that terrible situation in which we found ourselves.
MR. STERNE: I should say that so long as our Constitution remains as it is everything can be done by the States legally-nothing by the Federal Government, until it is confronted with the necessity which alone furnishes the occasion for the exercise of that power .
MR. JUSTICE BRANDEIS: And the Federal Government can do nothing to induce the States to adopt, that view?
MR. STERNE: Your Honor, I ,would have to know just what is comprehended within the word "induced" there-induced, I should say, by argumentation, by cooperation, but certainly not induced by constraint, by coercion, or by purchase.
MR. JUSTICE BRANDEIS: Of course, what is "coercion" is a question.
I mean whether this is coercion, or this is inducement.
It certainly is an attempt to induce the State governments to adopt a measure which will relieve the Federal Government from a burden to which it found it self subjected.
MR. JUSTICE MCREYNOLDS: What would be the result in your State if you did not comply?
MR. STERNE: An amount, Your Honor, equal to one- fourth.
MR. JUSTICE MCREYNOLDS: How much is it in money?
MR. STERNE: Oh, say $9,000,000 per annum.
MR. JUSTICE MCREYNOLDS: In other words, the Federal Government would take away from you $9,000 ,000 and do whatever it pleased with it if you did not comply with this request?
MR. JUSTICE MCREYNOLDS: If you did comply, you might use your own money.
Is that right?
MR. STERNE: That is my theory, although the Government Seem to think it is their money.
MR. JUSTICE MCREYNOLDS: If you do not comply, the United States takes $9,000,000 away from you and keeps it?
Is that right?
MR. JUSTICE MCREYNOLDS: Is that right?
MR. JUSTICE MCREYNOLDS: Does that not occur to von as being some compulsion?
MR. STERNE: Your Honor, it occurs to me as being so much compulsion that I am here asking Your Honors to relieve us of it.
MR. JUSTICE BUTLER: What is the population of Alabama?
MR. JUSTICE BUTLER: And how many electors or voters have you?
MR. STERNE: Qualified, I should say 400,000 to 500. 000.
I shall have to amend that drastically to 750,000, qualified, but we usually vote about, half of that number.
On the subject of the welfare element being involved by reason of the depression experience, I think that a properly balanced view must take this into consideration, that, terrible as were the conditions under which we lived for several years--and I would not have Your Honors think that I am indifferent to that in the least- it happens to be my constitutional philosophy that that problem was confined by the founders to the States and kept from the General Government, but in the 160 years of existence, this is the first time the Federal Government, has ever so done and according to the statistics of the Government's brief, we have passed through approximately 30 depressions.
The figures sound high to me but “thus said the statistician.
” That is my own rough and ready mathematical deduction from the fact that we are told in the brief that, the workman, in his life time, working an average of 45 years, will go through 8 to 10 depressions.
So that we have weathered so far 32 depressions without the Federal Government having to make drafts from its Treasury, and have lived 150 years of national life without doing so.
Then one terrible depression has made severe drains upon the Treasury, either willingly or as a proper response to obligations .
which the States could not discharge.
And that I do not think Justifies the concept that the general-welfare clause authorized the Federal Government to do anything it would not have the power to do had this last experience never arisen.
Very briefly, on the subject of the general welfare clause, which I mention in Your Honors' presence with the most abasing modesty, but, in order that I may reply here, it is not my understanding that the general welfare for which fiscal provision may be made through the taxing power is the general we fare of the inhabitants of the United States.
I shall not in the time that I have lay before Your Honor's the theory, which is probably more familial to each of you than it will ever be to me.
I will only state that it is provided with greater power than we could possibly summon from the address of George Tichnor Curtis to the students of Georgetown in 1885 which is set out in the brief in the Southern Coal & Coke Company Case.
But, one thing I wish to add, lest, it sound a technical position to say that it is the general welfare of the Government and not of the people, that we are playing upon words or giving a narrow meaning to words, and that is that it was my understanding that no document in human history ever had the words chosen with more meticulous care or more exact knowledge of just what they meant, and it would seem to me unthinkable that, meaning the inhabitants of the United States, they spoke of the welfare of the United States in the self same words in which they spoke of paying the debts of the United States.
Passing on to some of the other matters which have been claimed, it is contended that this creates revenue therefore Your Honor’s inquiry is at an end.
I should think that does not stand the test of this analysis, for instance, rough and ready-that if some of the manufacturers, in Bailey v, Drexel (259 U. S. 20), had seen fit to pay the taxes, wanting to work child labor, the Federal Government would have had some revenue, but I do not think the eyes of this Court would have been closed to the fact, that it was simply an attempt to regulate by taxing departures from a scheme which the Federal Government had no right to prescribe.
We do challenge the position in much detail in our brief that there was ever any intention or thought that this statute would produce revenue.
Now, mind you I make that statement in the light of the long pull -- I mean in its normal functioning as a permanent policy of this Government, I realize that during the time required for unanimous Submission, for realization on the part of the recalcitrant, now five in number, of just the compulsion and pressure which faces them, that during that period there will be some accumulation of Federal funds by reason of a frustration of the purpose of the statute.
But I quote as my authority for the assertion that it was never intended nor devised to raise any revenue for the Federal Government whatever, Secretary Perkins, who as chairman of the President’s Committee on Economic Security, gave this answer to Senator Harrison, the chairman of the Committee on Finance of the Senate.
I do not read the prefatory part.
I think it is as it is disclosed here up to 90 percent. [Reading:] Secretary Perkins. It may be up to 90 percent.
The reason for not offsetting 100 percent is to have a 10-percent or a 3-pcrcent fund—
Not for the Treasury—
For administration, and the experience of other countries indicated it cost about 10 percent for a proper and suitable administration for the expense of administration of any such system.
That is the thought.
That is the reason I said Alabama would get back all of the money if it yielded that 90 percent, to go to the employees, 10 percent to go to the administration of that office.
Now, my time is so limited that I shall have to simply state our position.
Unfortunately, due to a mix-up between myself and associates, they asked for less time than I thought would have been asked for.
The position has been taken that, so for as title III is concerned, it is not open to Your Honors inquiry, that it simply levies a tax, does not earmark the avails of the tax, and, therefore on this familiar principle (Massachusetts V. Mellon) the Court cannot inquire into it.
We submit that title IX is unworkable without title III, and title III is unworkable without title IX.
I base that upon this proposition: That without title III, title IX is impossible of operation from a realistic standpoint.
The reason I add the qualifying words is that theoretically it is still possible that they may operate.
Practically, the requirement of the Federal charter to the States is this: That they must abdicate any power or right to use any moneys accumulated by them in the unemployment fund, for purpose of administration.
'Theoretically then if title III no longer exists-if the Federal Government no longer furnishes us the administering funds, we could by general taxation raise the necessary funds, Practically, however, realistically, since we are forbidden to use for the purpose of administration any part of the fund which is raised for the relief, IX cannot operate without III, and certainly it was never intended to operate without III, if the statute and the plan are used as a whole and not merely its severed parts.
The Federal law is designed only to collect this tax, In order to get the States to enact certain laws—
inconsistent, as we take it, with the contention that it is a Treasury measure and I believe inconsistent with the contention that Congress was not intending to impose any compulsion on us that they afforded us a certain range of freedom, which we could accept or not.
And Mr. Witte, who was the executive director of the committee for Economic Security, testified with reference to title III, the 10 percent retained by the Federal Government [reading]: If there should be State laws that are utterly unfair, we have a club here.
We won't give them the administration fund, and they won’t be able to administer the law at all unless they dig down into their own pockets to pay the administration costs.
They cannot use the unemployment compensation fund for that.
And I say Mr. Justice Butler is perhaps the genesis of my associate's expression about the clash of authority.
I assume he indulged the hope that, when the bludgeon fe1l upon the sovereign head of Alabama, Alabama would withstand it.
We found, however, that in common with all the other States, except the five tardy ones, whom we would predict would be safely within the fold in a very few months, no one was willing to clash on it.
MR. JUSTICE BUTLER: Mr. Jackson quoted the combination of words, to the effect that “a clash would ring out”, which struck me as slightly ornamental.
MR. STERNE: Yes; and, Your Honor, perhaps even inflammatory, but perhaps not very enlightening to these issues.
Now, this suggestion I wanted to make upon the subject of employment, employer, and employee.
In line with suggestions early in colloquies from the bench by Mr. Justice Sutherland, the Assistant Attorney General used prohibition as an argument as to who should bear the burden of employment, which suggested to my mind this perhaps illuminating figure, that certainly.
If you were attempting to lay the burden of unemployment of bartenders upon that person who was responsible for the creation of the unemployment, you would tax the teetotaler and not the man who indulged in potations, and did his level best-or worst-to keep the bartender employed.
It seems to me there is absolutely reverse logic in the concept that the employer is responsible either juridically or from the sociological point of view for unemployment.
He is doing his level best to decrease it, and is decreasing it as long as he qualifies himself for the imposition of this tax.
Now, there is one question of construction of this statute, wherein we differ with opposing counsel, and that is as to whether under the statute as drawn the State has the right to withdraw the funds and use them for other purposes, for defraying the expenses of an earthquake, or the putting of it in to our common schools, as has been suggested.
It is required as a condition of our receiving administrative expenses and as a condition of our qualifying for the credit that we stipulate in our law that we will withdraw funds only for benefit payments, and while there is a provision that the Federal Government will honor the requisition of the State, it is qualified by saying that it must be duly requisitioned.
MR. JUSTICE MCREYNOLDS: Does that make any difference to your argument, whether we construe it one way or another?
MR. STERNE: I think it does, Your Honor, as to the reality, the substance, as expressed in the Canadian case, as showing that “In pith and in substance yon have here a regulation.
” However, I will dwell no further on that.
Mr. Chief Justice, how much time have I remaining?
THE CHIEF JUSTICE: Twenty minutes.
MR. STERNE: The suggestion is made I think in the oral argument, and certainly in the brief, that one of the provisions with reference to the vexed subject of labor relations was put in for the purpose of seeing to it that this measure was not used as a disguised labor measure.
I submit that there can be no distinction from the standpoint of on intrusion into the affairs of a State between laying a regulation upon the State or precluding it from it self making a regulation or making use of its own money and its compensation funds for such labor policy as it may consider the most appropriate.
The suggestion is made in the brief, and perhaps in the argument also, that as long as they are not regulating anything in Alabama and in the other States, they must not be held to have intruded themselves into State affairs, that the Butler case is not applicable, because there the Federal Government regulated the sowing of crops.
Here they say there is no regulation-they are just conditioning the grant; but the vice of that and the alternative which confronts them, as we see it, is this: If this is a grant of Federal funds, it is an expropriative taxation, and, there being no power of regulation is void.
If it is their own funds then they have no power to require us to do anything with them.
It goes so far in this instance as to provide that- taking a practical situation in Alabama-that a 1 percent per annum, contributed by Alabama workmen, Alabama funds, due in no sense whatever to any generosity of the Federal Government, cannot be controlled by the State of Alabama, must be sent to Washington and in vested by the Secretary of the Treasury and, as we contend, held until we requisition them out for relief and no other purposes.
Questions were asked as to illustrating where this implement of tax and credit would stop.
I venture, in the language of the Butler case, to attempt to test the principle by some of its applications.
I would have assumed that workmen's compensation-and by “workmen's compensation” we all mean compensation for injuries—
But if this is valid legislation, then I see no inhibition against Congress enacting a 3-, 6-, 9-, or 10- percent pay-roll tax, or whatever amount it may consider necessary, and Confronting us with the compulsive alternate choice that we either see those huge sums drained out of Alabama, or install a system of workmen's compensation devised in Washington, hedged around with such limitations as the authors here may consider necessary to make It what they would call a bona-fide, genuine workmen's compensation system.
I visualize this in the field of minimum wages for women that the Federal Government need not leave it to the States to solve that, problem, but, by heavy tax and credit provisions, perchance it may required that we in Alabama, as a condition that that money remain in Alabama shall provide a minimum-wage fund to be administered under such limitations of liberty as the minimum-wage board of the Federal Government may see fit to leave to us.
MR. JUSTICE BUTLER: Would that be true for men and women both?
MR. STERNE: I confined my illustration to women, in view of the fact that as I understand West Coast Hotel Co. V. Parrish (No. 293, Oct. Term, 1936)—
MR. JUSTICE BUTLER: I thought you did, but I wondered if what was true as to women might not also be true as to men.
MR. STERNE: Your Honor, I fail to see any bearing that it has here, but.
I feel immensely flattered that you would want to know what I think.
MR. JUSTICE BUTLER: What was that you answered?
MR. STERNE: I say I fail to see that it has any bearing here.
MR. JUSTICE BUTLER: What has any bearing?
MR. STERNE: The question as to whether men could be included or not.
MR. JUSTICE BUTLER: What bearing has the question of whether the State has the power to fix minimum wages for women upon the issue here?
What bearing has that?
MR. STERNE: This bearing-that I think it illustrates the absolutely absurd lengths to which the principle contended for would take us on the practical road.
MR. JUSTICE BUTLER: It would be quite as absurd, would it, to require the States to fix minimum wages for men?
MR. STERNE: Yes, Your Honor.
The reason that I spoke only of women was that I thought the illustration had best not be encumbered with constitutional doubts as to men.
The doubts have been solved, so far as concerns women.
MR. JUSTICE BUTLER: Do you agree with your adversaries that there is no limit to which this tax or “tax and credit”, or whatever it is called, may be extended?
MR. STERNE: I believe that if this act be constitutional there is no limit, short of this-let me be fair-short of a transgression of one of the specific provisions of the Federal Constitution, as, for instance, the guaranty of personal liberty.
MR. JUSTICE BUTLER: And freedom of the press, habeas corpus, and so forth?
MR. STERNE: And how much time have I left now, Your Honor.
THE CHIEF JUSTICE: Two minutes.
MR. STERNE: To do desire to call attention to this, that if it be of importance whether this is a regulation or not, that in the Canadian case, which has been laid before Your Honor, the Supreme Court held that their statute was a regulation.
Incidentally, their statute reads exactly as these statutes, except that they use the word “insurance” where we use “employment”, and they use a stamp method, and the Supreme Court held that to be a regulation.
The Privy Council said, in language that seemed to indicate that they concurred in the holding, that it would be very difficult to discern any difference between requiring the employer as a condition to continued employment, that he afford as insurance policy, and the government insurance which was there involved.
THE CHIEF JUSTICE: Yes; your time has expired.
MR. STERNE: Mr. Chief Justice, may I ask permission to file in this cause our briefs in the Southern Coal & Coke Company case?
THE CHIEF JUSTICE: You have the privilege.