Carmichael v. Southern Coal & Coke Co.
301 U.S. 495 (1937)
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Rule of Law:
A state's tax to fund a general unemployment benefits pool is a valid exercise of the state's taxing power for a public purpose and does not violate the Fourteenth Amendment, even if it exempts certain classes of employers or does not directly correlate an employer's tax burden with their specific contribution to unemployment.
Facts:
- The Alabama legislature enacted the Unemployment Compensation Act, establishing a comprehensive scheme for providing unemployment benefits.
- The Act required employers with eight or more employees for twenty or more weeks a year to pay a tax based on a percentage of their payroll into a state Unemployment Compensation Fund.
- Certain classes of employment were exempted, including agricultural labor, domestic service, and employment by charitable institutions.
- The collected funds were to be deposited into the federal government's 'Unemployment Trust Fund' and used to pay benefits to eligible unemployed workers in Alabama.
- Southern Coal & Coke Co. was a coal mining company in Alabama employing more than eight people.
- Gulf States Paper Corporation was a paper manufacturing company in Alabama also employing more than eight people.
- Both Southern Coal & Coke Co. and Gulf States Paper Corporation were subject to the payroll tax under the terms of the Act.
Procedural Posture:
- Southern Coal & Coke Co. and Gulf States Paper Corporation brought suits in the U.S. District Court for the Middle District of Alabama.
- The companies sued to restrain the Attorney General and the Unemployment Compensation Commission of Alabama from collecting the payroll contributions required by the state's Unemployment Compensation Act.
- A three-judge panel of the district court granted the injunction, ruling in favor of the companies.
- The Alabama state officials, as appellants, appealed the district court's decision directly to the U.S. Supreme Court.
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Issue:
Does Alabama's Unemployment Compensation Act, which imposes a payroll tax on certain employers to fund a statewide unemployment benefits pool, violate the Fourteenth Amendment's Due Process and Equal Protection Clauses or unconstitutionally surrender state sovereignty by operating in conjunction with the federal Social Security Act?
Opinions:
Majority - Justice Stone
No. Alabama's Unemployment Compensation Act is a valid exercise of state taxing power for a public purpose and does not violate the Fourteenth Amendment or unconstitutionally surrender state sovereignty. The tax is a permissible excise on the privilege of employment, and states have wide latitude to select subjects of taxation and grant exemptions. Distinctions based on the number of employees or type of industry are constitutional if they have a rational basis, such as administrative convenience or the desire to foster certain industries. The relief of unemployment is a clear public purpose, justifying the expenditure of public funds. The use of a 'pooled-fund,' where all taxes go into a general fund, is also constitutional; a tax is a means of distributing the cost of government, and there is no requirement that the benefits from its expenditure be apportioned directly to those who pay the tax. Finally, the cooperation with the federal government via the Social Security Act is not unconstitutional coercion or a surrender of sovereignty, but a valid cooperative effort to address a common problem, as the state retains the power to amend or repeal its law.
Dissenting - Justice Sutherland
Yes. The Alabama Unemployment Compensation Act violates the Due Process and Equal Protection clauses of the Fourteenth Amendment because its pooled-fund mechanism is fatally arbitrary. The statute imposes a disproportionately heavy tax burden on employers who provide stable, year-round employment, while lessening the burden on employers in seasonal or fluctuating industries who contribute most to the problem of unemployment. This scheme effectively takes money from a stable employer, who has contributed nothing to unemployment, to pay for the consequences of another employer's layoffs. Citing Railroad Retirement Board v. Alton R. Co., this amounts to an unconstitutional taking of property from one for the benefit of another. A fairer, constitutional alternative exists, as demonstrated by Wisconsin's 'employer-reserve' system, where each employer's contributions are segregated to pay for their own former employees' benefits.
Analysis:
This decision, along with its companion case Chas. C. Steward Machine Co. v. Davis, constitutionally validated the cooperative federal-state unemployment insurance system created by the Social Security Act. It affirmed a broad view of a state's taxing and spending power for the 'general welfare,' firmly establishing unemployment relief as a permissible public purpose. The ruling's acceptance of the 'pooled-fund' model, as opposed to an 'employer-reserve' model, granted states significant flexibility in designing their systems and became the dominant model for unemployment insurance in the United States, cementing the principle that the costs of a societal problem like unemployment could be distributed across the business community rather than being tied to individual employer fault.
