Steward Machine Co. v. Davis

Brief Fact Summary.

The federal unemployment system provided a scheme whereby employers paid a tax to the federal government, but they could deduct the same tax if they made a contribution to a state employment fund.

Synopsis of Rule of Law.

For a federal tax and credit scheme to violate the Tenth Amendment or principles of federalism, there must be a showing that the scheme is coercive.

Facts.

Under the Social Security Act program for unemployment compensation, employers were required to pay a federal tax. But if they made a contribution to a certified state unemployment fund, they received a 90% credit on this tax. Steward Machine Company challenged the validity of the tax system on constitutional grounds.

Issue.

Does the federal unemployment tax system violate the Tenth Amendment or the principles of federalism?

Held.

No. The tax system is constitutional. Lower court decision affirmed.

Discussion.

The tax and credit system in combination are not weapons of coercion that would destroy or impair the autonomy of the states. Every tax is in some way regulatory, in that it interposes an economic impediment to the activity taxed. But it is mere encouragement or pressure to act in a certain way, certainly not equivalent to coercion, or “persuasion equivalent to undue influence.”