Steward Machine Company v. Davis, 301 U.S. 548 (1937), was a case in which the U.S. Supreme Court upheld the unemployment compensation provisions of the Social Security Act of 1935, which established the federal taxing structure that was designed to induce states to adopt laws for funding and payment of unemployment compensation. The decision signaled the Court's acceptance of a broad interpretation of Congressional power to influence state laws.
The primary challenges to the Act were based on the argument that it went beyond the powers granted to the federal government in the U.S. Constitution and that it involved coercion of the states that called for a surrender by the states of powers essential to their quasi-sovereign existence, in contravention of the Constitution's Tenth Amendment.
Background
In the first months of 1937, the Court handed down decisions that affirmed both federal and state prerogative to legislate regarding social welfare. The decisions were the first wave of what has become known as the constitutional revolution of 1937.
There were three additional issues that set the stage in early 1937:
Use of federal government's spending power to regulate commercial economic activity By 1937, it had been well established that regulatory taxes controlling commercial economic actions were within the power of the U.S. Congress. In Hampton & Co. v. United States, the U.S. Supreme Court had held that a regulatory tax is valid even if the revenue purpose of the tax may be secondary. The Court had also held that a tax statute does not necessarily fail because it touches on activities that Congress might not otherwise regulate. In Magnano Co. v. Hamilton, the Court had stated:
From the beginning of our government, the courts have sustained taxes although imposed with the collateral intent of effecting ulterior ends which, considered apart, were beyond the constitutional power of the lawmakers to realize by legislation directly addressed to their accomplishment.
Further emphasizing the broad power of taxation, the Court in Sonzinsky v. United States concluded that a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. In that case, the Court held regarding a tax on dealers in firearms:
We are not free to speculate as to the motives which moved Congress to impose it, or as to the extent to which it may operate to restrict the activities taxed. As it is not attended by an offensive regulation, and since it operates as a tax, it is within the national taxing power.
Expansive view of general welfare
The Supreme Court had recently decided United States v. Butler. The main issue presented in that case was whether certain provisions of the Agricultural Adjustment Act of 1933 conflicted with the Constitution. In the Act, a tax was imposed on processors of farm products, with proceeds to be paid to farmers who would reduce their area and crops. The intent of the Act was to increase the prices of certain farm products by decreasing the quantities produced.
The Court held that the so-called tax was not a true tax because the payments to farmers were coupled with unlawful and oppressive coercive contracts, and the proceeds were earmarked for the benefit of farmers complying with the prescribed conditions. Making the payment of a government subsidy to a farmer conditional on the reduction of his planned crops went beyond the powers of the federal government. Specifically, the Court said:
The act invades the reserved rights of the states. It is a statutory plan to regulate and control agricultural production, a matter beyond the powers delegated to the federal government. The tax, the appropriation of the funds raised, and the direction for their disbursement, are but parts of the plan. They are but means to an unconstitutional end.
Although it struck down the Act, the Court dealt positively with expenditure of funds to advance the general welfare as specified in Section 8 of Article I of the Constitution]]. The Court stated that the issue "presents the great and the controlling question in the case." After it compared opposing expansive and restrictive interpretations of the Spending Clause, the Court decided: