Veazie Bank v. Fenno
19 L. Ed. 482, 75 U.S. 533, 8 Wall. 533 (1869)
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Rule of Law:
Congress may use its power to tax for regulatory purposes, and a tax is not unconstitutional merely because it is intended to have a destructive effect on the subject of the tax, especially when used as a means to effectuate another enumerated power, such as providing a uniform national currency.
Facts:
- In the mid-19th century, the primary circulating currency in the United States consisted of notes issued by numerous independent banks chartered under various state laws.
- To finance the Civil War and establish a more stable monetary system, Congress enacted a series of laws creating a uniform national currency, including United States notes and notes from newly created national banks.
- As part of this effort, Congress passed an act in 1866 that imposed a 10% tax on the amount of notes issued by any state bank that were paid out by any bank, state or national.
- The Veazie Bank, a banking corporation chartered by the State of Maine, paid this tax under protest.
- The practical effect of the 10% tax was to make the issuance of state bank notes financially prohibitive, effectively eliminating them from circulation.
Procedural Posture:
- The Veazie Bank paid the 10% tax on state bank notes to Fenno, the U.S. Collector of Internal Revenue, under protest.
- Veazie Bank filed a lawsuit against Fenno in the United States Circuit Court for the District of Maine, seeking to recover the amount paid on the grounds that the tax was unconstitutional.
- During the proceedings in the Circuit Court, the presiding judges were divided in their opinion on the constitutional questions at issue.
- The Circuit Court certified the questions of law on which its judges disagreed to the Supreme Court of the United States for a final decision.
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Issue:
Does a federal act imposing a ten percent tax on notes issued by state-chartered banks exceed Congress's constitutional taxing power or unconstitutionally impair a function reserved to the States?
Opinions:
Majority - The Chief Justice Chase
No. The tax is a valid exercise of Congress's constitutional powers. First, the tax on state bank notes is not a "direct tax" that must be apportioned among the states according to population. Based on historical interpretation and precedent, direct taxes are limited to capitation taxes and taxes on land. This tax is properly classified as an indirect duty or excise, which only requires uniformity. Second, while the reserved powers of the states are not proper subjects of federal taxation, a franchise granted by a state is not automatically exempt. More fundamentally, Congress has the undisputed constitutional power to provide a uniform currency for the nation. The tax on state bank notes is a necessary and proper means to achieve that constitutional end by suppressing competing currencies and securing the national currency for the benefit of the people. The Court will not inquire into the potentially destructive economic effects or the regulatory motives behind an otherwise valid exercise of Congress's taxing power.
Dissenting - Justice Nelson
Yes. The tax unconstitutionally infringes upon powers reserved to the states. The power to incorporate banks is a sovereign power that the states did not delegate to the federal government and which is protected by the Tenth Amendment. This tax is not a tax on the property of state banks, but rather a prohibitive penalty imposed directly on their core franchise and function—the power to issue notes. Just as states are prohibited from taxing the instrumentalities of the federal government, such as the Bank of the United States, the federal government cannot use its taxing power to destroy the lawful instrumentalities and reserved powers of the states. The clear purpose and effect of this tax is to annihilate state-chartered banks, which is a direct encroachment upon the constitutional authority of the states.
Analysis:
This landmark decision affirmed Congress's power to use taxation as a potent regulatory tool, not merely as a means of raising revenue. It established the principle that a federal tax is not invalid simply because its rate is prohibitively high or its motive is regulatory rather than fiscal. By linking the tax to Congress's enumerated power to control the national currency, the Court significantly expanded federal authority over the nation's monetary system and economy. This ruling was instrumental in ending the era of state-based paper currency and solidifying a uniform national currency, and its 'regulatory tax' doctrine would influence future cases regarding federal power.
