## Facts

- Congress enacted Title IX of the Social Security Act of 1935, imposing a federal excise tax on employers, measured by a percentage of wages paid for having individuals in their employ.
- The tax generally applied to employers with eight or more employees and excluded certain categories of work (including agricultural labor and domestic service in private homes).
- Employers could receive a credit of up to 90% against the federal tax for contributions paid into a state unemployment compensation fund, if the state’s law was certified as meeting federal conditions, including federal custody of funds in an unemployment trust and use of withdrawals solely for benefit payments.
- Steward Machine Company, an Alabama employer, paid the federal tax under protest and sued to prevent the Collector of Internal Revenue from enforcing the statute, arguing the scheme was unconstitutional.
- The Court of Appeals for the Fifth Circuit upheld the tax, and the Supreme Court granted review.

## Issues

1. Whether Title IX’s federal unemployment tax was a valid exercise of Congress’s Article I power to tax and spend for the general welfare.
2. Whether the Act’s classifications and exemptions violated the Fifth Amendment’s Due Process Clause as arbitrary or discriminatory.
3. Whether the tax-and-credit structure unconstitutionally coerced states to enact unemployment compensation laws, contrary to the Tenth Amendment and principles of state sovereignty.

## Decision

- The Supreme Court affirmed, upholding the unemployment tax and the credit mechanism.
- The Court held the levy was a valid federal tax (an excise/duty/impost) satisfying constitutional uniformity requirements.
- The Court rejected the Fifth Amendment challenge, concluding the exemptions and classifications were permissible legislative line-drawing.
- The Court held the credit system encouraged state participation but did not amount to unconstitutional compulsion of the states.
- Multiple dissents argued the scheme effectively forced state legislative action and exceeded federal power.

## Legal Principles

- Congress may impose an excise tax on the employer-employee relationship and may enact taxes that influence behavior without becoming invalid solely because they have regulatory effects.
- Under the Taxing and Spending Clause, Congress may pursue the general welfare through national programs addressing problems of nationwide scope, including coordinated federal-state measures.
- Fifth Amendment due process permits federal economic classifications and exemptions that rest on rational policy and administrative considerations; Congress is afforded broad discretion in tax classifications.
- A federal tax credit conditioned on state action is not unconstitutional merely because it creates strong incentives; the constitutional line is crossed only if the arrangement is coercive such that the state lacks a real choice.
- Cooperative federalism arrangements may be sustained when states retain authority to participate or not, even if nonparticipation is financially disadvantageous.

## Conclusion

The Court sustained Title IX of the Social Security Act as a valid exercise of Congress’s taxing and spending power, held the employer tax’s exemptions and classifications consistent with the Fifth Amendment, and concluded that conditioning substantial tax credits on state unemployment laws was permissible inducement rather than unconstitutional coercion of the states.


Steward Machine Co. v. Davis, 301 U.S. 548 (1937)