1. Steward Machine Co. v. Davis, (1937)
2. Facts: Title IX of the Social Security Act imposed a payroll tax on employers, but granted a credit of up to 90% of the tax for contributions to a state unemployment fund if such fund was certified by the federal government as meeting the requirements of the Act. One of the provisions of the Act required the states to immediately pay over the funds to the federal government who would hold them in trust.
3. Procedural Posture: Steward sought a refund of the taxes they had paid under this Act.
4. Issue: Whether Congress has the power to encourage the states to accept federally approved unemployment programs by providing tax credits to employers in that state if the programs are adopted.
5. Holding: yes.
6. ∏ Argument: The aim of the law is to conscript the state legilatures by the use of economic pressure. Thus, it is unconstitutional as infringing upon the soveriegnty of the states.
7. ∆ Argument: The statute was designed to enable the states to cooperate with the federal government in the solving of a national problem. It does not coerce state governments because it is optional.
8. Majority Reasoning: Cardozo explained that the unemployment problem was nationwide and was not relieved by the action (or inaction) of the states. Thus, the action of the federal government was clearly for the general welfare. Congress was capable of determining what was in the best interest of the national welfare in this case. There was not coercion, but merely motivation or temptation. To argue that coercion was the same as economic motivation would be to “plunge the law into endless diffifulties” because the distinction between what was coercion and what was not would be impossible. Congress has the power to tax and to condition the tax on the compliance of the states, as long as the subject matter of the tax is related to the scope of national policy and power. The Child Labor Law case is distinguishable because in that case, the pretext was clearly visible. In this case, the tax credit would be lawful on its own. It is not crippled by the fact that it is tied to conditional performance by the states.
