The commerce clause is the small part of the Constitution that provides that "The Congress shall have power … to regulate commerce with foreign nations, and among the several states, and with the Indian tribes."
The phrase relating to the Indians was derived from the provision in the 1781 articles of confederation which gave the federal congress "the sole and exclusive right and power of … regulating the trade and managing all affairs with the Indians." Despite the elimination of the sweeping second phrase, there never has been any question that the Indian part of the commerce clause (plus the treaty and war powers) gave Congress power over all relations with the Indians, and no more need be said about it.
Nor has there been much question as to the scope of the federal power to regulate foreign commerce. Combined with the tax and war powers and the provisions prohibiting the states from entering treaties and agreements with foreign powers and from imposing duties on imports and exports, this power clearly gave the federal government complete authority over relations with foreign nations.
The short clause relating to "commerce among the several states," however, has become one of the most significant provisions in the Constitution. It has been in large part responsible for the development of the United States as a single integrated economic unit, with no impediments to the movement of goods or people at state lines.
The draftsmen of the commerce clause could not have envisaged the eventual magnitude of the national commercial structure or the breadth of the constitutional interpretation which that structure would produce. Nevertheless the need for a national power over commerce led to the calling of the constitutional convention of 1787, and the seed for the growth of the power was planted in the early years.
In 1786 the Virginia General Assembly, and then a commission representing five states meeting at Annapolis, called for the appointment of commissioners to consider "the trade of the United States" and "how far a uniform system in their commercial regulation may be necessary to their common interest and their permanent harmony." The Congress created under the Articles of Confederation thereupon approved the calling of a convention to meet in Philadelphia in May 1787 for the purpose of revising the Articles and reporting its recommendations to the Congress and the States.
The Convention, after considerable debate, adopted a resolution generally describing the powers to be given the National Legislature, in the form proposed by the Virginia delegation led by george washington, Governor edmund randolph, and james madison. It was resolved that "the national legislature ought … to legislate in all cases for the general interests of the Union, and also in those to which the states are separately incompetent, or in which the harmony of the United States may be interrupted by the exercise of individual legislation." This and other resolutions were sent to a drafting committee, which reported out the commerce clause and other powers to be conferred on Congress in substantially the form finally adopted.
Although the needs of commerce had been principally responsible for the calling of the Convention, the clause was accepted with hardly any debate. The same was true in the state ratifying conventions. All reflected the view that in general the new Constitution gave the federal government power over matters of national but not of local concern.
The same view was expressed in the first commerce clause case in 1824 (gibbons v. ogden), written for a unanimous Supreme Court by Chief Justice john marshall, who had been a member of the Virginia ratifying convention. The Court declared that the commerce power did not extend to commerce that is completely internal, and "which does not extend to or affect other states." It "may very properly be restricted to that commerce which concerns more states than one.… The genius and character of the whole government seems to be, that its action is to be applied to all the concerns of the nation, and to these internal concerns which affect the States generally."
Of course, neither in 1787 nor in 1824 did those who wrote or ratified or interpreted the Constitution contemplate the tremendous and close-knit economic structure that exists today and the accompanying inability of the states, or of any agency but the nation, to meet the governmental problems that structure presents. Indeed, in the 1820s and into the 1850s many persons regarded even the construction of the principal highways within each state as purely internal matters not subject to federal power, as appeared from President james monroe's veto on constitutional grounds of an appropriation to construct what is now Interstate 70 from Maryland to the Western states. Although the marshall court would not have agreed, some of the more states ' rights -minded Supreme Court Justices of the 1840s and 1850s did.
In general, during the century from 1787 to 1887, the only national commercial problems concerned foreign trade and navigation and the removal of state-imposed barriers to interstate trade. Affirmative federal regulation applied almost entirely to matters of navigation on the oceans, lakes, and rivers. An early statute required vessels engaged in coastal traffic to obtain federal licenses. Reasonably enough, none of these were challenged as falling outside the commerce power.
All of the commerce clause cases during the first 100 years, and a great many of them thereafter, were concerned with the negative effect of the clause upon state legislation—even though the clause did not mention the states. The Constitution merely said that Congress should have the power to regulate commerce. Other clauses imposed specific prohibitions upon the states, but the commerce clause did not. On the other hand, it was well known during the early period that the principal evil at which the commerce clause was directed was state restrictions upon the free flow of commerce.
The issue first came before the Supreme Court in Gibbons v. Ogden (1824). New York had granted Robert Fulton and robert livingston the exclusive right for thirty years to operate vessels propelled by steam in New York waters, thereby excluding steamboats coming from neighboring states. New Jersey, Connecticut, and Ohio had promptly passed retaliatory legislation forbidding the New York monopoly from operating in their waters. The case presented an example (though unforeseeable in 1787) of the type of interstate commercial rivalry which the commerce clause had been designed to prevent.
A unanimous Supreme Court held that Congress's commerce power extended to all commercial intercourse among the states, rejecting arguments that it did not apply to navigation and passenger traffic. The Court, speaking through Marshall, further concluded that Congress had exercised its power in the Coastal Licensing Act, that Gibbons's vessels were operating in compliance with that statute, and that New York's attempt to prohibit them from operating in New York waters was inconsistent with the federal statute and therefore unconstitutional under the supremacy clause of the Constitution. The Court did not find it necessary to decide whether the power of Congress to regulate interstate commerce was exclusive or whether the states had concurrent power in the absence of a conflicting federal law, although Marshall seemed to favor the former view. But Marshall recognized that, although the states had no power to regulate interstate or foreign commerce as such, they could exercise their preexisting powers to enact laws on such subjects as health, quarantine, turnpikes and ferries, and other internal commerce, even though that might overlap the subjects that Congress could reach under the commerce clause. Thus, as a practical matter, the Court recognized that the states had concurrent powers over many aspects of commerce, or of internal matters that might affect external commerce.
After roger b. taney became Chief Justice in 1835, a number of the Justices, including Taney, took the flat position that only state laws inconsistent with acts of Congress were preempted, and that the commerce clause itself had no preemptive effect. But in none of the cases could a majority of the Court agree on any theory.
This unhappy and unhealthy state of the law was formally resolved in 1852, when, speaking through newly appointed Justice benjamin r. curtis, the Court sustained a Pennsylvania law governing the use of pilots in the port of Philadelphia in cooley v. board of wardens of philadelphia (1852). Six Justices agreed that whatever subjects of this power are in their nature national, or admit only of one uniform system, or plan of regulation, may justly be said to be of such a nature as to require exclusive legislation by Congress. Where there was no need for regulation on a national scale, only state laws inconsistent with federal would fall.
The Court still cites the Cooley principle with approval, although the Cooley formula has been largely superseded by an interest-balancing approach to state regulation of commerce. (See selective exclusiveness; state police power; state taxation of commerce.) But in a number of cases during the years following Cooley, the Court adopted a more simplistic approach. If the subject of the state regulation was interstate commerce, only Congress could regulate it; if it was not, only the states could. In these cases the Court held—or at least said—that the United States could not tax or regulate manufacturing or production because they were beyond the scope of the federal commerce power, a pronouncement that later caused substantial difficulty but was not explicitly disavowed until Commonwealth Edison Co. v. Montana (1981).
During the twenty years after the civil war, the Court held that states could not directly tax or regulate interstate commerce, but that they could, for example, fix railroad rates between points in the same state. (See granger cases.) When, however, Illinois attempted to apply its prohibition against charging more for a shorter rail haul than a longer one to freight between Illinois cities and New York, the Court, applying the Cooley formula, held in wabash, st. louis & pacific railway v. illinois (1886) that the state had no such power. The opinion made it clear that interstate rates, even for the part of a journey within a state, were not subject to state regulation. Such transportation was "of that national character" that can be "only appropriately" regulated by Congress rather than by the individual states.
Because leaving shippers subject to unregulated rail rates was unthinkable at that time, Congress reacted in 1887 by adopting the interstate commerce act, the first affirmative federal regulation of land transportation.
Three years later, in response to a similar public reaction against uncontrolled monopolies, Congress enacted the sherman antitrust act, which prohibited combinations that restrained or monopolized interstate and foreign trade or commerce. The Court easily upheld the applicability of the statute to interstate railroads, but, amazingly, by a vote of 8–1, held the act inapplicable to the Sugar Trust which combined all the sugar refiners in the United States. united states v. e. c. knight co. (1895) held that such a combination concerned only manufacture and production, and not "commerce," as the act (and, presumably, the Constitution) used the word. This ruling left the country remediless against national monopolies of manufacturers. Since interstate manufacturers are of course engaged in interstate trade—selling, buying, and shipping—as well as manufacture, this was a strange decision. It was soon devitalized, though not expressly overruled, in swift & company v. united states (1905), standard oil company v. united states (1911), and united states v. american tobacco company (1911), which similarly involved combinations of manufacturers.
In a number of cases the Court upheld congressional regulation of interstate transportation for noncommercial reasons. Federal statutes forbidding the interstate sale of lottery tickets, the interstate transportation of women for immoral purposes, stolen motor vehicles, diseased cattle which might range across state lines, misbranded food and drugs, and firearms were all held valid, usually without much question. The effect was to establish that the commerce clause applied to things or persons moving across state lines, whether or not they had anything to do with trade or commerce in the usual sense. (See national police power.) This conclusion was consistent with Marshall's original definition of commerce as intercourse in Gibbons v. Ogden.
The Court's narrow approach to the commerce power in the early twentieth century was demonstrated by its invalidation in 1908 of a law creating a worker ' scompensation system for all railroad employees, because it included those doing intrastate shop and clerical work, and a law prohibiting railroads from discharging employees because of membership in a labor organization. (See employers ' liability cases; adair v. united states.) In hammer v. dagenhart (1918) the Court even held that Congress could not prohibit the interstate transportation of child-made goods because the prohibition's purpose was to prevent child labor in manufacturing plants within the states.
Decisions other than the monopoly cases during the same period recognized that the congressional commerce power could apply to intrastate transactions that had an effect upon or relation to interstate commerce. Although strikes blocking interstate shipments from manufacturing plants were found to affect interstate commerce only indirectly, the result was different when an intent to restrain interstate commerce was found, or when a secondary boycott extended to other states. (See loewe v. lawlor.) Intrastate trains were held subject to federal safety regulations because of the danger to interstate trains on the same tracks. Intrastate freight rates were held subject to federal control when a competitive relationship to interstate rates or a general effect on all rail rates could be shown. (See shreveport doctrine.) In 1930 the Court sustained the application of the Railway Labor Act to clerks performing intrastate work so as to protect the right to collective bargaining and thereby avert strikes disrupting interstate commerce, contrary to the Adair decision in 1908.
Perhaps of greatest significance were cases sustaining federal regulation of the stockyards and the Chicago Board of Trade which, even though located in a single city, were found to control interstate prices for agricultural products. (See stafford v. wallace.) The Court was not disturbed by the fact that the sales of grain futures which had such an effect were often completely local, since most of them were not followed by any shipments of physical products.
Thus by 1930 there were lines of cases saying that the federal power did not extend to business activity occurring in a single state, and other cases holding the contrary where some kinds of relationship to interstate commerce were shown.
The Great Depression running from 1929 through the 1930s brought the nation its severest economic crisis. Inaction during herbert hoover's administration proved ineffective and left thirteen million persons unemployed, prices and wages dropping in a self-perpetuating spiral, and banks, railroads, and many other businesses insolvent. The amount of revenue freight carried by railroad, a fair measure of the quantity of interstate commerce, had fallen by fifty-one percent. The public expected franklin d. roosevelt, who took office in March 1933, to do something about the Depression. Although no one was sure what would work—and no one is yet quite sure what, if anything, did work—the President and Congress tried. Obviously the economy could not be restored by states acting separately. Only measures taken on a national scale could possibly be effective.
To stop the downward spiral in wages and prices, and to increase employment by limiting the number of hours a person could work, maximum hours and minimum wages were prescribed for industry generally, not merely for employees in interstate commerce. Collective bargaining was made mandatory, and protected against employer interference. The object was to increase national employment, national purchasing power, and the demand for and consumption of all products, which would benefit employers, employees, and the flow of commodities in interstate commerce. All this was originally sought to be accomplished by the national industrial recovery act (NIRA), which authorized every industry to prepare a code of competition designed to accomplish the above purposes; the code would become effective and enforceable when approved by the President.
The same statute and the agricultural adjustment act of 1933 (AAA) attempted to cope with the overproduction of petroleum and agricultural products, which had forced prices down to absurd levels, such as five cents per barrel of crude oil and thirty-seven cents per bushel of wheat. The petroleum code under the NIRA and programs adopted under the AAA provided for the fixing of production quotas for oil producers and farmers.
The two lines of authorities summarized above supported opposing arguments as to the constitutionality of these measures under the commerce clause. For Congress to prescribe wages, hours, and production quotas for factories, farms, and oil wells undoubtedly would regulate intrastate activities, which prior opinions had frequently said were regulable only by the states.
On the other hand, the reasoning of opinions sustaining federal regulation of intrastate features of railroading and the intrastate marketing practices of stockyards and grain exchanges also supported the use of the commerce power to regulate intrastate acts that had an effect upon interstate commerce. The same was true of many of the antitrust cases referred to above. None of the relationships previously found insufficient to support federal regulation had involved general economic effects that halved the flow of interstate trade. But Congress had never sought to regulate the main body of manufacturing, mining, and agricultural production.
In the mid-1930s the Supreme Court included four Justices—willis van devanter, james mcreynolds, george sutherland, and pierce butler—who looked askance at any enlargement of the scope of governmental power over business and who steadily voted against extension of the congressional commerce power, and also voted to invalidate both federal and state regulation under the due process clauses. Chief Justice charles evans hughes and Justice owen j. roberts sometimes voted with these four, while Justices louis d. brandeis, harlan fiske stone, and benjamin n. cardozo usually voted to sustain the legislative judgments as to how to deal with economic problems.
In a series of cases in 1935 and 1936, passing upon the validity of the NIRA, the AAA, and the Guffey Snyder (bituminous coal conservation) act regulating the bituminous coal industry, Hughes and Roberts joined the conservative four to hold these acts unconstitutional.
The government had hoped and planned to test the constitutionality of the NIRA in a case involving the nationally integrated petroleum industry, panama refining co. v. ryan (January 1935). But the Court found it unnecessary to decide the commerce issue in the Panama case. Instead, that question came before the Court in schechter poultry corp. v. united states (May 1935), in which the defendant had violated the provisions of the Live Poultry Code with respect to wages and hours and marketing practices of seemingly little consequence. The poultry slaughtered and sold by the defendant had come to New York City from other states, but there was nothing in the record to show that this interstate movement was greatly affected by the practices in question.
The only persuasive argument supporting the constitutionality of the Poultry Code was that the depressed state of the entire economy and of interstate commerce in general could be remedied only by increasing national purchasing power, and that prescribing minimum wages and maximum hours for all employees, whether or not in interstate industries, was a reasonable method of accomplishing that purpose. None of the Justices was willing to go that far. Indeed, the opinion of Chief Justice Hughes for the Court and the concurring opinion of Justice Cardozo emphasized as a principal defect in the argument that it would extend federal power to all business, interstate or intrastate. The fact that little would be left to exclusive state control, rather than the magnitude of the effect on interstate commerce from a national perspective, was treated as decisive. On the same day, in railroad retirement board v. alton, an act establishing a retirement program for railroad employees was held, by a vote of 5–4, not to be within the federal commerce power.
In theory, the Schechter decision left open the power of Congress to regulate production in major interstate industries such as petroleum or coal. But that opening, if it existed, seemed to be closed by two decisions in 1936. Because of the foreseeable risks from reliance on the commerce power, Congress had utilized the taxing power to "persuade" farmers to limit the production of crops in order to halt the collapse of farm prices. In united states v. butler (1936), over Justice Stone's vigorous dissent, six Justices, speaking through Justice Roberts and including Chief Justice Hughes, thought it unnecessary to determine whether this legislative scheme came within the enumerated powers of Congress. The majority avoided this inquiry by concluding that the law intruded upon the area of production reserved to the states by the tenth amendment, which reserves to the states or the people "the powers not delegated to the United States." The Court invoked the same theory a few months later in carter v. carter coal company (1936) to invalidate the Guffey Act's regulation of wages, hours, and collective bargaining in the coal industry. Although the evidence submitted in a long trial proved indisputably the obvious fact that coal strikes could and did halt substantially all interstate commerce moving by rail, as most commerce then did, five Justices, speaking through Justice Sutherland, found decisive not the magnitude of an effect on interstate commerce but whether the effect was immediate, without an intervening causal factor. Even Chief Justice Hughes concurred to this extent, although not in other parts of the majority opinion. Only Justices Brandeis, Stone, and Cardozo challenged the reasoning of the majority.
The Butler and Carter cases made it plain—or so it seemed—that the Constitution as construed by the Court completely barred the federal government from endeavoring to resolve the national economic problems which called for control of intrastate transactions at the production or manufacturing stage. As an economic matter, individual states were unable to set standards for their own industries that were in competition with producers in other states. The result was that in the United States no government could take action deemed necessary to deal with such matters no matter how crippling their effect upon the national economy might be.
In early 1937 the same type of collective bargaining regulation which the Carter case had stricken for the coal industry was on its way to the Supreme Court in the first cases under the wagner (national labor relations) act of 1935. That statute by its terms applied to unfair labor practices that burdened or obstructed interstate commerce or tended to lead to a labor dispute that had such an effect. The courts of appeals, following the Carter case, had held that the act could not constitutionally reach a steel manufacturing company, a trailer manufacturer, and a small clothing manufacturer.
Three days before the arguments in these cases in the Supreme Court were to commence, President Roosevelt, who had recently been reelected by a tremendous majority, announced a plan to add up to six new Justices to the Supreme Court, one for each Justice over seventy years of age, purportedly for the purpose of providing younger judges who could enable the Court to keep up with its workload. The Court and many others vigorously opposed the plan. Two months later, in the wagner act cases (1937), Chief Justice Hughes and Justice Roberts joined Justices Brandeis, Stone, and Cardozo to sustain the applicability of the National Labor Relations Act to the three manufacturers. The evidence as to the effect of their labor disputes upon interstate commerce was obviously much weaker than that presented in the Carter case as to the entire bituminous coal industry. Within the next few months, Justices Van Devanter and Sutherland retired, to be succeeded by Senator hugo l. black and Solicitor General stanley f. reed, and the court-packing plan gradually withered away, even though for a long time President Roosevelt refused to abandon it. No one can be certain whether the plan influenced the Chief Justice and Justice Roberts, but many persons thought the facts spoke for themselves.
Chief Justice Hughes's opinion for the Court in National Labor Relations Board v. Jones & Laughlin Steel Corp. (1937) flatly declared that practices in productive industry could have a sufficient effect upon interstate commerce to justify federal regulation under the commerce clause. The test was to be "practical," based on "actual experience." The reasoning of the Carter and Butler cases was repudiated, although the majority opinion did not say so.
In 1938 a revised agricultural adjustment act and a new fair labor standards act were enacted. Under the former, the secretary of agriculture, after obtaining the necessary approval of two-thirds of the tobacco growers in a referendum, prescribed marketing quotas determining the maximum quantity of tobacco each grower could sell. Although the practical effect was to limit what would be produced, the object was to stabilize prices by keeping an excessive supply off the market. In Mulford v. Smith (1939), the Court, speaking through Justice Roberts, found that because interstate and intrastate sales of tobacco were commingled at the auction warehouses where tobacco was sold, Congress clearly had power to limit the amount marketed by each farmer. hammer v. dagenhart, united states v. butler, and the Tenth Amendment were mentioned only in the dissenting opinion of Justice McReynolds and Butler.
The Fair Labor Standards Act of 1938 in substance reenacted the minimum wage and maximum hour provision of the NIRA for employees engaged in interstate commerce or the production of goods for such commerce, and also forbade the shipment in interstate commerce of goods produced under the proscribed labor conditions. The minimum wage then prescribed was twenty-five cents per hour. The prevailing wage in the lumber industry in the South ranged from ten cents to twenty-seven and a half cents per hour, which made it difficult for employers paying more than the lowest amount to compete. A case involving a Georgia sawmill (united states v. darby lumber company) came to the Supreme Court late in 1940, and was decided in early 1941 after Justice Butler had died and Justice McReynolds had retired. By that time Justices felix frankfurter and william o. douglas had replaced Cardozo and Brandeis, and Justice frank murphy had succeeded Butler.
The Supreme Court, speaking unanimously through Justice Stone, upheld the statute. The Court held that Congress had the power to exclude from interstate commerce goods that were not produced in accordance with prescribed standards, and to prescribe minimum wages and maximum hours for employees producing goods which would move in interstate commerce. Overruling hammer v. dagenhart, the Court declared that the power of Congress to determine what restrictions should be imposed upon interstate commerce did not exclude regulations whose object was to control aspects of industrial production. The Court invoked the interpretation of the necessary and proper clause in mcculloch v. maryland (1819): the commerce power extended not merely to the regulation of interstate commerce but also "to those activities intrastate which so affect interstate commerce or the exercise of the power of Congress over it as to make regulation of them appropriate means to the attainment of a legitimate end, the exercise of the granted power of Congress to regulate interstate commerce." The emphasis was not on direct or indirect effects, a judge-made concept not tied to constitutional language, or even to the substantiality of an effect. The Court found it sufficient that the establishment of federal minimum labor standards was a reasonable means of suppressing interstate competition based on substandard labor conditions. In kirschbaum v. walling (1942) the Court broadly construed the commerce clause to make the Fair Labor Standards Act apply to service and maintenance employees who were not directly engaged in the production of goods for commerce but in the performance of services ancillary to such production.
A year and a half after Darby, in wickard v. filburn (1942), a unanimous Court, speaking through Justice robert h. jackson, upheld marketing quotas under the amended Agricultural Adjustment Act, even though they limited the amount of wheat allowed to be consumed on the farm as well as the amount sold. The object was to reduce the supply of wheat in order to increase the price—and the total supply of wheat, including the twenty percent of the crop consumed on the farm for feed or seed, not only was in at least potential competition with wheat in commerce but had a substantial influence on prices and market conditions for the wheat crop throughout the nation. Reviewing the prior law, and explicitly noting the cases that were being disapproved—E. C. Knight, Employers' Liability, Hammer v. Dagenhart, Railroad Retirement Board, Schechter, and Carter—Justice Jackson's opinion laid to rest the prior controlling effect attributed to nomenclature such as "production" and "indirect," as distinct from the actual economic effect of an activity upon interstate commerce. Even if an "activity be local" and not itself commerce, "it may still, whatever its nature, be reached by Congress if it exerts a substantial economic effect on interstate commerce." The proper point of reference was "what was necessary and proper to the exercise by Congress of the granted power." The Court further declared, as it had in Darby, that the magnitude of the contribution of each individual to the effect on commerce was not the criterion but the total contribution of persons similarly situated, which meant that the insignificant effect of the amount consumed on any particular farm was not decisive.
In 1944 and 1946, in cases holding that Congress could regulate the insurance industry and public utility holding companies (united states v. southeastern underwriters association, 1944; North American Co. v. Securities and Exchange Commisssion, 1946), the Court broadly summarized the teachings of its prior cases beginning with the words of Chief Justice Marshall in Gibbons v. Ogden :
Commerce is interstate … when it "concerns more States than one." … The power granted is the power to legislate concerning transactions which, reaching across State boundaries, affect the people of more states than one;—to govern affairs which the individual states, with their limited territorial jurisdictions, are not fully capable of governing. This federal power to determine the rules of intercourse across state lines was essential to weld a loose confederacy into a single, indivisible Nation; its continued existence is equally essential to the welfare of that Nation.
Since these decisions there has been no doubt that Congress possesses full power to regulate all aspects of the integrated national economy. The few commerce clause cases of importance since that time concerned the use of the commerce power for noncommercial purposes: to combat racial segregation, crime, and environmental problems.
In Katzenbach v. McClung (1964) the Court sustained the provisions of the civil rights act of 1964 prohibiting racial discrimination by restaurants serving interstate travelers or obtaining a substantial portion of their food from outside the state, both because discrimination had a highly restrictive effect upon interstate travel by Negroes and because it reduced the amount of food moving in interstate commerce (which seems quite doubtful). (See also heart of atlanta motel v. united states.)
perez v. united states (1971) upheld the application of the federal loanshark statute to purely intrastate extortion on the ground that Congress had rationally found that organized crime was interstate in character, obtaining a substantial part of its income from loansharking which to a substantial extent was carried on in interstate and foreign commerce or through instrumentalities of such commerce. Unmentioned rationales might have been the difficulty of proving that loansharking in a particular case had an interstate connection and the belief that it was necessary to prohibit all loansharking as an appropriate means of prohibiting those acts that did affect interstate commerce.
In Hodel v. Virginia Surface Mining and Reclamation Association (1981) the Court unanimously upheld federal regulation of surface or strip coal mining operations, rejecting the contention that this was merely a regulation of land use not committed to the federal government. There had been legislative findings that surface coal mining causes water pollution and flooding of navigable streams and that it harms productive farm land and hardwood forests in many parts of the country. The Court found, following Darby, that this was a means of preventing destructive interstate competition favoring the producers with the lowest mining and reclamation standards, that Congress can regulate the conditions under which goods shipped in interstate commerce are produced when that in itself affects interstate commerce, and that the commerce power permits federal regulation of activities causing air or water pollution, or other environmental hazards that may have effects in more than one state.
The more recent decisions, which in some respects went far beyond the classical statements as to the modern scope of the commerce power in Darby and Wickard v. Filburn, were expected and accepted with little comment or concern. The country now appears to recognize that the national government should have and does have power under the commerce clause to deal with problems that do not limit themselves to individual states—as Chief Justice Marshall had declared in 1824, though doubtless with no idea of how far that principle would eventually be carried.
The enlargement of the commerce power since 1789 is attributable not to the predilections of judges but to such inventions as steamboats, railroads, motor vehicles, airplanes, the telegraph, telephone, radio, and television. When the nation was young, composed mainly of farms and small towns, there was little interstate trade, except by water or near state lines. Now persons and goods can cross the continent in less time than a traveler in 1789 would have taken to reach a town thirty miles away. Business and the economy have adjusted to these changes. Somewhat more slowly than the people and Congress, the Supreme Court has recognized that an integrated national economy is predominantly interstate or related to interstate commerce, and must be subject to governmental control on a national basis.
The expansion of the concept of interstate commerce and of the subjects which Congress can regulate under the commerce power was not accompanied by a contraction of the powers of the states. Only those state laws that discriminate against or unduly burden interstate commerce are forbidden.
Robert L. Stern
(see also: Dormant Commerce Clause.)
Corwin, Edward S. 1959 The Commerce Power versus States Rights. Princeton, N.J.: Princeton University Press.
Frankfurter, Felix 1937 The Commerce Clause under Marshall, Taney and Waite. Chapel Hill: University of North Carolina Press.
Gavit, Bernard C. 1932 Commerce Clause of the United States Constitution. Bloomington, Ind.: Principia Press.
Stern, Robert L. 1934 That Commerce Which Concerns More States Than One. Harvard Law Review 47:1335–1366.
——1946 The Commerce Clause and the National Economy, 1933–1946. Harvard Law Review 59:645–693, 883–947.
——1951 The Problems of Yesteryear—Commerce and Due Process. Vanderbilt Law Review 4:446–468.
——1955 The 1955 Ross Prize Essay: The Scope of the Phrase "Interstate Commerce." American Bar Association Journal 41:823–826, 871–874.
——1973 The Commerce Clause Revisited—The Federalization of Interstate Crime. Arizona Law Review 15:271–285.
The provision of the U.S. Constitution that gives Congress exclusive power over trade activities among the states and with foreign countries and Indian tribes.
Article 1, Section 8, Clause 3, of the Constitution empowers Congress "to regulate Commerce with foreign Nations, and among several States, and with the Indian Tribes." The term commerce as used in the Constitution means business or commercial exchanges in any and all of its forms between citizens of different states, including purely social communications between citizens of different states by telegraph, telephone, or radio, and the mere passage of persons from one state to another for either business or pleasure.
Intrastate, or domestic, commerce is trade that occurs solely within the geographic borders of one state. As it does not move across state lines, intrastate commerce is subject to the exclusive control of the state.
Interstate commerce, or commerce among the several states, is the free exchange of commodities between citizens of different states across state lines. Commerce with foreign nations occurs between citizens of the United States and citizens or subjects of foreign governments and, either immediately or at some stage of its progress, is extraterritorial. Commerce with Indian tribes refers to traffic or commercial exchanges involving both the United States and American Indians.
The Commerce Clause was designed to eliminate an intense rivalry between the groups of those states that had tremendous commercial advantage as a result of their proximity to a major harbor, and those states that were not near a harbor. That disparity was the source of constant economic battles among the states. The exercise by Congress of its regulatory power has increased steadily with the growth and expansion of industry and means of transportation.
Power to Regulate
The Commerce Clause authorizes Congress to regulate commerce in order to ensure that the flow of interstate commerce is free from local restraints imposed by various states. When Congress deems an aspect of interstate commerce to be in need of supervision, it will enact legislation that must have some real and rational relation to the subject of regulation. Congress may constitutionally provide for the point at which subjects of interstate commerce become subjects of state law and, therefore, state regulation.
Although the U.S. Constitution places some limits on state power, the states enjoy guaranteed rights by virtue of their reserved powers pursuant to the tenth amendment. A state has the inherent and reserved right to regulate its domestic commerce. However, that right must be exercised in a manner that does not interfere with, or place a burden on, interstate commerce, or else Congress may regulate that area of domestic commerce in order to protect interstate commerce from the unreasonable burden. Although a state may not directly regulate, prohibit, or burden interstate or foreign commerce, it may incidentally and indirectly affect it by a bona fide, legitimate, and reasonable exercise of its police powers. States are powerless to regulate commerce with Indian tribes.
Although Congress has the exclusive power to regulate foreign and interstate commerce, the presence or absence of congressional action determines whether a state may act in a particular field. The nature of the subject of commerce must be examined in order to decide whether Congress has exclusive control over it. If the subject is national in character and importance, thereby requiring uniform regulation, the power of Congress to regulate it is plenary, or exclusive.
It is for the courts to decide the national or local character of the subject of regulation, by balancing the national interest against the state interest in the subject. If the state interest is slight compared with the national interest, the courts will declare the state statute unconstitutional as an unreasonable burden on interstate commerce.
The U.S. Supreme Court, in the case of Southern Pacific Co. v. Arizona, 325 U.S. 761, 65 S. Ct. 1515, 89 L. Ed. 1915 (1945), held that an Arizona statute that prohibited railroads within the state from having more than 70 cars in a freight train, or 14 cars in a passenger train, was unconstitutional. The purpose of the legislation, deemed a safety measure, was to minimize accidents by reducing the lengths of trains passing through the state. Practically speaking, however, the statute created an unreasonable burden on interstate commerce, as trains entering and leaving the state had to stop at the borders to break up a 100-car freight train into two trains and to put on additional crews, thus increasing their operating costs. The Court held that the means used to achieve safety was unrealistic and that the increase in the number of trains and train operators actually enhanced the likelihood of accidents. It balanced the national interest in the free flow of interstate commerce by a national railway system, against the state interest of a dubious safety measure. It decided that the value of the operation of a uniform, efficient railway system significantly outweighed that of a state law that has minimal effect.
However, where there is an obvious compelling state interest to protect, state regulations are constitutional. Restrictions on the width and weight of trucks passing through a state on its highways are valid, because the state, pursuant to its police power, has a legitimate interest in protecting its roads.
Where the subject is one in which Congress or the state may act, a state may legislate unless Congress does so. Thereafter, a valid federal regulation of the subject supersedes conflicting state legislative enactments and decisions and actions of state judicial or administrative bodies.
If Congress has clearly demonstrated its intent to regulate the entire field, then the state is powerless to enact subsequent legislation even if no conflict exists between state and federal law. This type of congressional action is known as federal preemption of the field. Extensive federal regulation in a particular area does not necessarily result in federal preemption of the field. In determining whether a state may regulate a given field, a court evaluates the purpose of the federal regulations and the obligations imposed, the history of state regulation in the field, and the legislative history of the state statute. If Congress has not preempted the field, then state law is valid, provided that it is consistent with, or supplements, the federal law.
State health, sanitary, and quarantine laws that interfere with foreign and interstate commerce no more than is necessary in the proper exercise of the state's police power are also valid as long as they do not conflict with federal regulations on the subject. Such laws must have some real relation to the objects named in them, in order to be upheld as valid exercises of the police power of the state. A state may not go beyond what is essential for self-protection by interfering with interstate transportation into or through its territory.
A state may not burden interstate commerce by discriminating against it or persons engaged in it or the citizens or property originating in another state. However, the regulation of interstate commerce need not be uniform throughout the United States. Congress may devise a national policy with due regard for varying and fluctuating interests of different regions.
Acts Constituting Commerce
Whether any transaction constitutes interstate or intrastate commerce depends on the essential character of what is done and the surrounding circumstances. The courts take a commonsense approach in examining the established course of business in order to distinguish where interstate commerce ends and local commerce begins. If activities that are intrastate in character have such a substantial effect on interstate commerce that their control is essential to protect commerce from being burdened, Congress may not be denied the power to exercise that control.
In 1995, for the first time in nearly 60 years, the U.S. Supreme Court held that Congress had exceeded its power to regulate interstate commerce. In United States v. Lopez, 514 U.S. 549, 115 S. Ct. 1624, 131 L. Ed. 2d 626 (1995), the Court ruled 5–4 that Congress had exceeded its Commerce Clause power in enacting the Gun-Free School Zones Act of 1990 (18 U.S.C.A. § 921), which prohibited the possession of firearms within 1,000 feet of a school.
In reaching its decision, the Court took the various tests used throughout the history of the Commerce Clause to determine whether a federal statute is constitutional, and incorporated them into a new standard that specifies three categories of activity that Congress may regulate under the clause: (1) the channels of interstate commerce, (2) persons or things in interstate commerce or instrumentalities of interstate commerce, and (3) activities that have "a substantial relation to interstate commerce … i.e., those activities that substantially affect interstate commerce." The Court then applied this new standard to the 1990 Gun-Free School Zones Act and found that the statute could be evaluated under the third category of legislation allowed by the Commerce Clause. But the Court noted that the act was a criminal statute that had nothing to do with commerce and that it did not establish any jurisdictional authority to distinguish it from similar state regulations. Because the statute did not "substantially affect interstate commerce," according to the Court, it went beyond the scope of the Commerce Clause and was an unconstitutional exercise of Congress's legislative power.
The Court stressed that federal authority to regulate interstate commerce cannot be extended to the point that it obliterates the distinction between what is national and what is local and creates a completely centralized government. Although recognizing the great breadth of congressional regulatory authority, the Court in Lopez attempted to create a special protection for the states by providing for heightened scrutiny of federal legislation that regulates areas of traditional concern to the states.
In a novel application of the Commerce Clause, a federal court decided in United States v. Bishop Processing Co., 287 F. Supp. 624 (D.C. Md. 1968), that the movement of air pollution across state lines from Maryland to Delaware constituted interstate commerce that is subject to congressional regulation. The plaintiff, the United States, sought an injunction under the federal Clean Air Act (42 U.S.C.A. §§ 7401 et seq. ) to prevent the operation of the Maryland Bishop Processing Company, a fat-rendering plant, until it installed devices to eliminate its emission of noxious odors. The defendant plant owners argued, among other contentions, that Congress was powerless to regulate their business because it was clearly an intrastate activity. The court disagreed. Foul-smelling air pollution adversely affects business conditions, depresses property values, and impedes industrial development. These factors interfere with interstate commerce, thereby bringing the plant within the scope of the provisions of the federal air-pollution law.
The power of Congress to regulate commerce also extends to contracts that substantially relate to interstate commerce. For example, Congress may regulate the rights and liabilities of employers and employees, as labor disputes adversely affect the free flow of commerce. Otherwise, contracts that do not involve any property or activities that move in interstate commerce are not ordinarily part of interstate commerce.
Congress acts within its power when it regulates transportation across state lines. The essential nature of the transportation determines its character. Transportation that begins and ends within a single state is intrastate commerce and is generally not within the scope of the Commerce Clause. If part of the journey passes through an adjoining state, then the transportation is interstate commerce, as long as the travel across state lines is not done solely to avoid state regulation. Commerce begins with the physical transport of the product or person and ends when either reaches the destination. Every aspect of a continuous passage from a point in one state to a point in another state is a transaction of interstate commerce. A temporary pause in transportation does not automatically deprive a shipment of its interstate character. For a sale of goods to constitute interstate commerce, interstate transportation must be involved. Once goods have arrived in one state from another state, their local sale is not interstate commerce.
Interstate commerce also includes the transmission of intelligence and information—whether by telephone, telegraph, radio, television, or mail—across state lines. The transmission of a message between points within the same state is subject to state regulation.
Agencies and Instrumentalities of Commerce
Congress, acting pursuant to the Commerce Clause, has the exclusive power to regulate the agencies and instrumentalities of interstate and foreign commerce, such as private and common carriers. A bridge is an instrumentality of interstate commerce when it spans navigable waters or is used by travelers and merchandise passing across state lines. Navigable waters are instrumentalities of commerce that are subject to the control of federal and state legislation. A bridge over a navigable stream located in a single state is also subject to concurrent control by the state.
An office used in an interstate business is an instrumentality of interstate commerce. Railroads and tracks, terminals, switches, cars, engines, appliances, equipment used as components of a system engaged in interstate traffic, and vessels (including ferries and tugs) are also subject to federal regulation. Warehouses, grain elevators, and other storage facilities also might be considered instrumentalities of interstate commerce. Although local in nature, wharves are related to commerce and are subject to control by Congress, or by the state if Congress has not acted.
The interstate commerce act of 1887, which Congress enacted to promote and facilitate commerce by ensuring equitable interaction between carriers and the public, provided for the creation of the interstate commerce commission. As designated by statute, the commission had jurisdiction and supervision of such carriers and modes of transportation as railroads, express-delivery companies, and sleepingcar companies. Concerning the transportation of persons and property, the commission had the power to enforce the statutory requirement that a certificate of public convenience and necessity be obtained before commencing or terminating a particular transportation service. The commission adopted reasonable and lawful rules and regulations to implement the policies of the law that it administered. The ICC was abolished by Congress in 1995 after Congress deregulated the trucking industry.
Business Affecting Commerce
Not every private enterprise that is carried on chiefly or in part by means of interstate shipments is necessarily so related to the interstate commerce as to come within the regulating power of Congress. The original construction of a factory building does not constitute interstate commerce, even though the factory is used after its construction for the manufacture of goods that are to be shipped in interstate commerce and even though a substantial part of the material used in the building was purchased in different states and transported in interstate commerce to the location of the plant.
Under some circumstances, however, businesses—such as advertising firms, hotels, restaurants, companies that engage in the leasing of personal property, and companies in the entertainment and sports industries—may be regulated by the federal government. A business that operates primarily intrastate activities, such as local sporting or theatrical exhibits, but makes a substantial use of the channels of interstate trade, develops an interstate character, thereby bringing itself within the ambit of the Commerce Clause.
Discrimination as a Burden on Commerce
A state has the power to regulate intrastate commerce in a field where Congress has not chosen to legislate, as long as there is no injustice or unreasonable discrimination in favor of intrastate commerce as against interstate commerce. In a Colorado case, out-of-state students at the University of Colorado sued the state board of regents to recover the higher costs of the tuition paid by them as compared to tuition paid by in-state residents. They contended that their classification as out-of-state students—which violated, among other things, the Commerce Clause—constituted unreasonable discrimination in favor of in-state students. The court held that the statutes that classified students who apply for admission to the state university into in-state and out-of-state students did not violate the Commerce Clause because the classification was reasonable. A state statute affecting interstate commerce is not upheld merely because it applies equally to, and does not discriminate between, residents and nonresidents of the state, as it can otherwise unduly burden interstate commerce.
Discrimination must be more than merely burdensome; it must be unduly or unreasonably burdensome. One state required a licensed foreign corporation with retail stores in the state to collect a state sales tax on the sales it made from its mail-order houses located outside the state to customers within the state. The corporation contended that this statute discriminated against its operations in interstate commerce. Other out-of-state mail-order houses that were not licensed as foreign corporations in the state did not have to collect tax on their sales within the state. The court decided that the state could impose this burden of tax collection on the corporation because the corporation was licensed to do business in the state and it enjoyed the benefits flowing from its state business. Such a measure was not an unreasonable burden on interstate commerce.
A state may not prohibit the entry of a foreign corporation into its territory for the purpose of engaging in foreign or interstate commerce, nor can it impose conditions or restrictions on the conduct of foreign or interstate business by such corporations. When intrastate business is involved, it may do so.
Similarly, a private person who conducts a business that has a significant effect on interstate commerce in a discriminatory manner is not beyond the reach of lawful congressional regulation.
racial discrimination in the operation of public accommodations, such as restaurants and lodgings, affects interstate commerce by impeding interstate travel and is prohibited by the civil rights act of 1964 (codified in scattered sections of 42 U.S.C.A.). In Heart of Atlanta Motel v. United States, 379 U.S. 241, 85 S. Ct. 348, 13 L. Ed. 2d 258 (1964), a local motel owner had refused to accept black guests. He argued that since his motel was a purely local operation, Congress exceeded its authority in legislating as to whom he should accept as guests. The U.S. Supreme Court held that the authority of Congress to promote interstate commerce encompasses the power to regulate local activities of interstate commerce, in both the state of origin and the state of destination, when those activities would otherwise have a substantial and harmful effect upon the interstate commerce. The Court concluded that in this case, the federal prohibition of racial discrimination by motels serving travelers was valid, as interstate travel by blacks was unduly burdened by the established discriminatory conduct.
State Taxation of Nondomiciliary Corporations
In February 2000, the U.S. Supreme Court added another layer to its sometimes complicated Commerce Clause jurisprudence when it held that the Commerce Clause forbids states from taxing income received by nondomiciliary corporations for unrelated business activities that constitute a discrete business enterprise. Hunt-Wesson, Inc. v. Franchise Tax Bd. of Cal., 528 U.S. 458, 120 S.Ct. 1022, 145 L. Ed. 2d 974 (2000)
Hunt-Wesson Inc., a California-based corporation, was the successor in interest to the Beatrice Companies Inc., the original taxpayer in the case. During the years in question, Beatrice was domiciled in Illinois but was engaged in the food business in California and throughout the world. For the purposes of this lawsuit, Beatrice's unitary operations consisted only of those corporate family business units engaged in its global food business. From 1980 to 1982, Beatrice also owned foreign subsidiaries that were not part of its food operations, but that formed a discrete business enterprise. For the purposes of this lawsuit, the parties stipulated that these foreign subsidiaries were part of the company's non-unitary business operations.
These non-unitary foreign subsidiaries paid dividends to Beatrice of $27 million for 1980, $29 million for 1981, and $19 million for 1982, income that both parties agree was not subject to California tax under the Commerce Clause. In the operation of its unitary business, Beatrice took out loans and incurred interest expenses of $80 million for 1980, $55 million for 1981, and $137 million for 1982. None of those loans was related to borrowings of Beatrice's non-unitary subsidiaries that made the dividend payments to Beatrice.
On its franchise tax returns, Beatrice claimed deductions for its non-unitary interest expenses in calculating its net income apportioned to California. Following an audit, the California Franchise Tax Board applied the "interest offset" provision in California Revenue and Taxation Code Section 24344. Under that section, multistate corporations may take a deduction for interest expenses, but only to the extent that the expenses exceed their out-of-state income arising from the unrelated business activity of a discrete business enterprise; that is, the non-unitary income that the parties agree that California could not otherwise tax. The Section 24344 interest offset resulted in the tax board reducing Beatrice's interest-expenses deduction on a dollar-for-dollar basis by the amount of the constitutionally exempt dividend income that Beatrice received from its non-unitary subsidiaries.
Beatrice responded by filing suit in California state court to challenge the constitutionality of the law. The trial court struck down Section 24344 on the ground that it allowed the state to indirectly tax non-unitary business income that the Commerce Clause prohibits from being taxed directly. The California Court of Appeals reversed, and Hunt-Wesson, having intervened in the lawsuit as Beatrice's successor-in-interest, appealed.
In a unanimous opinion written by Justice stephen breyer, the U.S. Supreme Court struck down California Revenue and Taxation Code Section 24344. In reducing an out-of-state company's tax deduction for interest expenses by an amount that is equal to the interest and dividends that the company receives from the unrelated business activities of its foreign subsidiaries, Breyer wrote, Section 24344 enables California to circumvent the federal Constitution.
States may tax a proportionate share of the income of a nondomiciliary corporation that carries out a particular business both inside and outside the state, Breyer observed. But states may not, without violating the Commerce Clause, tax nondomiciliary corporations for income earned from unrelated business activities that constitute a discrete business enterprise. Thus, what California called a deduction limitation would amount to an impermissible tax under the Commerce Clause.
License and Privilege Tax
A state may not impose a tax for the privilege of engaging in, and carrying on, interstate commerce, but it might be permitted to require a license if doing so does not impose a burden on interstate commerce. A state tax on the use of an instrumentality of commerce is invalid, but a tax may be imposed on the use of goods that have traveled in interstate commerce, such as cigarettes. A state may not levy a direct tax on the gross receipts and earnings derived from interstate or foreign commerce, but it may tax receipts from intrastate business or use the gross receipts as the measurement of a legitimate tax that is within the state's authority to levy.
A state may tax the sale of gasoline or other motor fuels that were originally shipped from another state, after the interstate transaction has ceased. As long as the sale is made within the state, it is immaterial that the gasoline to fulfill the contract is subsequently acquired by the seller outside the state and shipped to the buyer. The state may tax the sale of this fuel to one who uses it in interstate commerce, as well as the storage or withdrawal from storage of imported motor fuel, even though it is to be used in interstate commerce.
Although radio and television broadcasting may not be burdened by state-privilege taxes as far as they involve interstate commerce, broadcasting involving intrastate activity may be subject to local taxation.
A state may impose a nondiscriminatory tax for the use of its highways by motor vehicles in interstate commerce if the charge bears a fair relation to the cost of the construction, maintenance, and regulation of its highways.
The Commerce Clause does not prohibit a state from imposing a tax on a natural resource that is produced within its borders and that is sold primarily to residents of other states. In Commonwealth Edison Co. v. Montana, 453 U.S. 609, 101 S. Ct. 2946, 69 L. Ed. 2d 884 (1981), the U.S. Supreme Court upheld a 30 percent severance tax levied by Montana on the production of coal, the bulk of which was exported for sale to other states. The amount of the tax was challenged as an unconstitutional burden on interstate commerce. The Court reasoned that the Commerce Clause does not give the residents of one state the right to obtain resources from another state at what they consider a reasonable price, for that right would enable one state to control the development and depletion of natural resources in another state. If that right were recognized, state and federal courts would be forced to formulate and to apply a test for determining what is a reasonable rate of taxation on legitimate subjects of taxation, tasks that rightfully belong to the legislature.
Crimes Involving Commerce
Congress may punish any conduct that interferes with, obstructs, or prevents interstate and foreign commerce, whether it occurs within one state or involves a number of states. The mann act—which outlaws the transportation any woman or girl in interstate or foreign commerce for the purpose of prostitution, debauchery, or other immoral acts—is a constitutional exercise of the power of Congress to regulate commerce (18 U.S.C.A. §§ 2421–2424 ). The counterfeiting of notes of foreign corporations and bills of lading is a crime against interstate commerce. Under federal statutes, the knowing use of a common carrier for the transportation of obscene matter in interstate or foreign commerce for the purpose of its sale or distribution is illegal. This prohibition applies to the importation of obscene matter even though it is for the importer's private, personal use and possession and not for commercial purposes.
The Anti-Racketeering Act (18 U.S.C.A. § 1951 ) makes racketeering by robbery or personal violence that interferes with interstate commerce a federal offense. The provisions of the consumer credit protection act (15 U.S.C.A. § 1601 et seq. ) prohibiting extortion have been upheld, as extortion is deemed to impose an undue burden on interstate commerce. Anyone who transports stolen goods of the value of $5,000 or more in interstate or foreign commerce is subject to criminal prosecution pursuant to the National Stolen Property Act (18 U.S.C.A. § 2311 et seq. ).
Cauthorn, Kim. 1995. "Supreme Court Interprets Scope of Congressional Authority under Interstate Commerce Clause." Houston Lawyer 33 (July–August).
McJohn, Stephen M. 1995. "The Impact of United States v. Lopez: The New Hybrid Commerce Clause." Duquesne Law Review 34.
Prentice, E. Parmalee and John G. Egan. 1981. The Commerce Clause of the Federal Constitution. Littleton, Colo.: F.B. Rothman.
COMMERCE CLAUSE. The judicial history of the commerce clause of the U.S. Constitution (Article I, section 8, paragraph 3) can be divided into three eras: the first 150 years after the Constitution went into effect in 1789; the 1937–1995 period; and 1995 and beyond. Gibbons v. Ogden (1824) defined the first era. In that case, Chief Justice John Marshall wrote for the Supreme Court that commerce encompassed "every species of commercial intercourse" and that if Congress had legislated in the area, federal power was plenary. Such breadth did not make the unimplemented power exclusive, however, and it was ultimately the Court, under Chief Justice Roger B. Taney, that resolved the issue of the extent of state power in the absence of federal legislation. After several indecisive attempts, Justice Benjamin R. Curtis (Cooley v. Board of Wardens of Port of Philadelphia ) set forth a "selective exclusiveness" formula, holding that when Congress was silent, the states might act, unless the specific subject required "uniform national control." The ruling left the clause itself the most important basis for judicial review in limitation of state power prior to ratification of the Fourteenth Amendment (1868). Of the approximately 1,400 cases that reached the Supreme Court under the clause before 1900, the overwhelming proportion found the Court curbing state legislation for invading an area proper to federal commerce concern. A classic example was the case of Wabash, St. Louis, and Pacific Railway Company v. Illinois (1886), denying the right of a state to regulate that part of an interstate railroad journey that was entirely within its borders on the ground that Congress's power was exclusive. Congress responded with the Interstate Commerce Act of 1887, granting the federal government positive supervisory power over the railroads. Congressional extension of such authority limited the ability of the courts to negate it by interpretation (until after 1900), and commerce power in the transportation field was mostly nominal.
Positive federal use of the clause grew rapidly from the 1890s on. The Sherman Antitrust Act (1890) found constitutional justification in the clause, as it seemed to afford broad federal authority to prohibit combinations in restraint of trade and general market monopolization. The Court, however, relying on a distinction between production and distribution, held the statute inapplicable to a sugar monopoly that had acquired nearly complete control over the manufacture of refined sugar (United States v. E. C. Knight Company ). "Commerce succeeds to manufacture, and is not part of it," stated Chief Justice Melville W. Fuller: "Commerce among the states does not begin until goods commence their final movement from the state of their origin to that of their destination." Over the next forty years, the Court applied the same restrictive principle to the control of mining, fishing, farming, oil production, and the generation of hydroelectric power. Similarly, the Court, in E. C. Knight, evolved another restrictive formula, the "direct effect" doctrine, which again ensured legal limits on federal use of the clause: only if a local activity directly affected interstate commerce was federal control valid.
Regulation-minded progressive leaders of the early twentieth century sought to evoke judicial rulings that would expand the sweep of the clause. In Swift v. United States (1905), Justice Oliver Wendell Holmes Jr. responded. "Commerce among the States is not a technical legal conception, but a practical one, drawn from the course of business," he argued, setting forth a "stream of commerce" concept according to which the purchase of cattle, while a local process, became a federally regulatable one when it was part of an interstate commercial transaction. In the Minnesota Rate Cases (1913) and the Shreveport Rate Case (1914), the Court went further. In the former, Justice Charles Evans Hughes made clear that "direct" regulation of foreign or interstate commerce by the states was out of the question. In the latter, he took the next step, stating that "wherever interstate and intra-state activities are so related that the government of the one involves the control of the other, it is Congress, and not the States that is entitled to prescribe the final and dominant rule." But the social reform climate of the Progressive Era also intervened to affect expansion of the commerce power. When the Court sought to extend application of the Sherman Antitrust Act to labor organizations (Loewe v. Lawlor ), Congress acted to retract such coverage in the Clayton Antitrust Act (1914).
The Progressives sought to use the clause in another novel way. In the effort to evolve a national police power, the clause was made the basis for legislation prohibiting lottery tickets, impure food and drugs, adulterated meat, transportation of women across state lines for immoral purposes, and, ultimately, child labor. The Court generally sustained such use, holding that Congress could validly close the channels of interstate commerce to items that were dangerous or otherwise objectionable. The Court made an exception with regard to child labor and returned to limiting federal power. In this case, the Court drew a much-criticized distinction between prohibiting the use of the facilities of interstate commerce to harmful goods, on the one hand, and using the commerce clause to get at the conditions under which goods entering that commerce were produced, on the other (Hammer v. Dagenhart ).
The 1920s found similar interpretive strands continued. The movement of stolen cars (and ultimately inter-state shipment of stolen goods in general) was prohibited (Brooks v. United States ). And whereas child-labor restrictions were again overthrown, federal authority was further extended in other areas through the widening of the "stream of commerce" concept to the regulation of the business of commission men and of livestock in the nation's stockyards. It became possible to regulate not only the "stream" but the "throat" through which commerce flowed (Stafford v. Wallace ). In Railroad Commission of Wisconsin v. Chicago, Burlington and Quincy Railroad Company (1922), federal altering of intrastate rail rates was affirmed, the Court holding that the nation could not exercise complete effective control over inter-state commerce without incidental regulation of intrastate commerce.
On this broad judicial view of the clause, New Dealers of the early 1930s based the National Industrial Recovery Act (1933) and other broad measures, such as the Bituminous Coal Act (1935). Judicial response to these acts was not only hostile but entailed a sharp return to older formulas—especially the "production-distribution" and "direct effect" distinctions of the 1895 E. C. Knight case (Schechter Poultry Corporation v. United States ). Charging that the Court had returned the country to a "horse-and-buggy" definition of interstate commerce, Franklin D. Roosevelt—especially after that body persisted in its narrow views on commerce (Carter v. Carter Coal Company )—tried to "pack" the Court in hopes of inducing it to embrace broad commerce precedents. The success he achieved was notable. Starting with National Labor Relations Board v. Jones and Laughlin Steel Corporation in 1937, the Court not only rejected the whole battery of narrow commerce formulas (a process it extended in United States v. Darby Lumber Company ) but also validated the clause as the principal constitutional base for later New Deal programs, authorizing broad federal control of labor relations, wages and hours, agriculture, business, and navigable streams. In 1946, Justice Frank Murphy stated: "The federal commerce power is as broad as the economic needs of the nation" (North American Company v. Securities and Exchange Commission). The 1960s demonstrated that it was also as broad as the social needs of the nation. In the Civil Rights Act of 1964, Congress banned racial discrimination in all public accommodations. The constitutional foundations for the statute were the commerce clause and the equal protection clause of the Fourteenth Amendment. In Heart of Atlanta Motel, Inc. v. United States (1964), the Supreme Court found the commerce clause alone fully adequate to support the statute.
United States v. Lopez (1995) signaled that a more conservative Supreme Court may be ready to usher in a new era of commerce clause jurisprudence. In Lopez, the Court, in an opinion written by Chief Justice William H. Rehnquist, declared unconstitutional a 1990 congressional statute that had made it a federal crime to possess a gun on school property. The chief justice emphasized "first principles" and federalism and concluded that the possession of a gun in a local school zone was not an economic activity that might, through repetition elsewhere, "substantially affect" interstate commerce. Rather, he argued, the statute in question was an attempt by Congress to exercise a nonexistent national police power over a subject—criminal law—that was primarily of state and local concern. Significantly, Lopez marked only the second occasion since 1937 that the Court had held that Congress had exceeded its authority under the commerce clause, and the other occasion—National League of Cities v. Usery (1976)—had been overruled less than a decade after it had been decided (Garcia v. San Antonio Metro Transit Authority ).
The conservative Court's reluctance to permit Congress to exercise broad legislative authority under the commerce clause was again in evidence at the dawn of the twenty-first century. In United States v. Morrison (2000), the Court, in another opinion by Chief Justice Rehnquist, struck down the federal Violence Against Women Act on the ground that Congress lacked authority under the commerce clause to enact it because it did not involve economic or interstate activity. Importantly, though, both Lopez and Morrison were five-to-four decisions, so the final chapter on Congress's authority under the commerce clause has yet to be written.
Benson, Paul R., Jr. The Supreme Court and the Commerce Clause, 1937–1970. New York: Dunellen, 1970.
Epstein, Richard. "Constitutional Faith and the Commerce Clause." Notre Dame Law Review 71 no. 2 (January 1996): 167–193.
Frankfurter, Felix. The Commerce Clause under Marshall, Taney, and Waite. Chapel Hill: University of North Carolina Press, 1937.
See alsoCarter v. Carter Coal Company ; Constitution of the United States ; Cooley v. Board of Wardens of Port of Philadelphia ; Gibbons v. Ogden ; Interstate Commerce Laws ; National Labor Relations Board v. Jones and Laughlin Steel Corporation ; Schechter Poultry Corporation v. United States ; Sherman Antitrust Act ; Shreveport Rate Case ; Stafford v. Wallace ; United States v. E. C. Knight Company .
The provision of the U.S. Constitution that gives Congress exclusive power over trade activities between the states and with foreign countries and Indian tribes.
United Haulers Ass'n v. Oneida-Herkimer Solid Waste Management Authority
During its 2006 term, the U.S. Supreme Court agreed to consider a case involving the application of the so-called "dormant Commerce Clause." The case concerned the constitutionality of a county ordinance that regulated the hauling of waste. The ordinance in question required waste haulers to direct their trash to a publicly-owned waste facility. A sharply divided Court decided that the ordinance did not violate the Commerce Clause.
Article I, §8 of the U.S. Constitution provides that "Congress shall have the power … [t]o regulate Commerce with foreign nations, and among the several States." Throughout most of its history, the Court has interpreted this clause to establish an implicit restraint on the authority of the individual states to regulate interstate commerce, even where Congress has not acted. This restraint is referred to as the "dormant" Commerce Clause. Under this doctrine, the Court first considers whether the state law in question discriminates on its face against interstate commerce. This type of discrimination occurs when a state treats in-state economic interests differently than out-of-state interests in a manner that benefits the in-state interests and burdens the out-of-state interests.
In C&A Carbone, Inc. v. Clarkstown, 511 U.S. 383, 114 S. Ct. 1677, 128 L. Ed. 2d 399 (1994), the Court considered a waste flow control ordinance enacted by a New York town. Prior to enacting the ordinance, the town had hired a private contractor to construct a waste transfer station. The ordinance required all of the town's nonhazardous waste to be deposited at the station. In a 6-3 decision, the Court struck down the ordinance as a violation of the dormant Commerce Clause because it required haulers to deposit the waste at a preferred processing facility for the benefit of that facility. Since the time that the Court decided Carbone, commentators have generally agreed that local authorities are restricted in their ability to enact flow control ordinances.
During the 1980s, Oneida and Herkimer Counties in New York faced a crisis. Many of the local landfills, which were owned by private companies, operated without permits and in violation of state regulations. State officials required several of these landfills to close, and the federal government later brought an action to require the cleanup of an Oneida landfill. Both counties also experienced problems with local waste management companies, some of which were engaged in price fixing and overcharging.
At the request of these counties, the New York Legislature addressed these problems by creating the Oneida-Herkimer Solid Waste Management Authority as a public benefit corporation. The statute that created this authority empowered the corporation to collect, process, and dispose of solid waste in the counties, and also permitted the counties to impose "appropriate and reasonable limitations on competition," including the enactment of local laws that require solid waste to sent to a solid waste management facility.
The Authority and the two counties in 1989 entered into an agreement that allowed the Authority to manage all solid waste within the counties. Under the agreement, the Authority was required to purchase and develop facilities to process and dispose of solid waste and recyclables. To generate revenues, the Authority charged a "tipping fee," which was levied against trash collectors who dropped off their waste at a processing facility ("tipping" refers to the act of a garbage truck tipping its back end to dump the trash at the facility). The Authority charged higher tipping fees than those charged on the open market. However, these greater fees allowed the Authority to offer additional services that a private waste disposer might be able to provide.
In 1995, United Haulers Association, Inc., which is a trade association made up of several solid waste management companies, and six trash haulers brought suit against the counties and the Authority. According to the plaintiffs, the flow control laws passed by the counties violated the Commerce Clause because the laws favored the local entity. United Haulers argued that Carbone governed this type of case.
The U.S. District Court for the Northern District of New York agreed with the plaintiffs, holding that Carbone categorically rejected these types of flow control laws. On appeal, the Second Circuit Court of Appeals reversed. According to the appellate court, the Supreme Court's precedent had established a distinction between laws that benefit public entities as compared with laws that benefit private entities. The Second Circuit thus reversed the district court's decision. United Haulers Ass'n v. Oneida-Herkimer Solid Waste Mgmt. Auth., 261 F.3d 245 (2d Cir. 2001). The case was remanded to the district court, which determined that the ordinances did not impose any relevant burden on interstate commerce. On appeal for the second time, the Second Circuit affirmed the district court's decision. United Haulers Ass'n v. Oneida-Herkimer Solid Waste Mgmt. Auth., 438 F.3d 150 (2d Cir. 2006).
The Supreme Court granted certiorari to resolve a conflict between the Second Circuit's decision and a conflicting holding rendered by the Sixth Circuit Court of Appeals. Chief Justice Roberts delivered the opinion of the Court, though only three other justices joined his opinion. Roberts acknowledged that the only significant difference between the New York law and the one invalidated in Carbone is that the New York law required the haulers to take their waste to a public benefit corporation. According to Roberts' opinion, this difference was enough to reach a different conclusion than the one in Carbone. Roberts noted that a publicly-owned facility benefits the community and allows the local governmental entity to fulfill its responsibilities of protecting "the health, safety, and welfare of its citizens." For these reasons, the distinction between the public facility and a private facility was enough to lead the Court to uphold the ordinance.
Justice Clarence Thomas wrote a concurrence in which he argued that the dormant Commerce Clause has proven to be "unworkable in practice." Justice Antonin Scalia also criticized the doctrine and argued that he would limit the application of the rule "beyond its existing domain." Samuel Alito, who was joined by two other justices, dissented, saying that the case should have been controlled by Carbone.
The provision of the U.S. Constitution that gives Congress exclusive power over trade activities between the states and with foreign countries and Indian tribes.
Mid-Con Freight Systems, Inc. v. Michigan Public Service Commission
On January 14, 2005, the U.S. Supreme Court agreed to review two separate cases involving the imposition of fees on motor vehicles in the state of Michigan. The cases raised some important questions regarding the application of the Commerce Clause and federal preemption in the area of state tax on motor carriers . In two decisions issued on June 20, 2005, the Court determined that the fee neither violated the Commerce Clause nor was preempted by federal statute .
The state of Michigan imposes certain fees on motor carriers under the state's Motor Carrier Act (MCA), Mich. Comp. Laws §§475.1 et seq. Under the MCA, motor carriers must pay a flat fee of $100 for a permit to transport property within the state. This fee applies both to motor carriers that limit their operations in the state and to those that engage in both interstate and intrastate operations. The fee does not depend upon the number of miles traveled within the state, the number of trips taken within the state, or the portion of the time that a carrier spends traveling between states or within states other than Michigan.
The MCA requires payment of other fees as well. The statute requires all carriers that are registered in Michigan and that operate exclusively in interstate commerce to pay a $100 fee. Additionally, all motor carriers that are registered outside of the state must pay a registration fee of $10.
Several motor carriers challenged the act on a variety of grounds. On January 3, 1995, one group of carriers, including Westlake Transportation, Inc., filed a complaint with a Michigan court of claims , maintaining that the state laws imposing the fees were preempted by federal laws. One month later, another group of carriers intervened in the case and alleged that the intrastate fee violated the Commerce Clause. Each group of plaintiffs later amended its complaint to adopt the other group's arguments. The court consolidated all of the plaintiffs' cases in April 1995. The defendants in the case included the Michigan Public Service Commission, which is responsible for enforcing the act, along with the state of Michigan itself and the state's Department of Treasury.
The court of claims found the plaintiffs' arguments to be without merit. The court rejected both the preemption claim and the Commerce Clause claim and granted the defendants' motion for summary disposition . The plaintiffs appealed the case to the Michigan Court of Appeals.
The court of claims determined that the fee did not implicate Commerce Clause concerns because it only applies to intrastate commerce. The Michigan Court of Appeals, however, rejected this reasoning. The appellate court noted that "any tax or regulation that affects interstate travel, even if imposed solely on intrastate commerce, is subject to Commerce Clause analysis." Instead, the court stated that the issue in the case was whether the fee discriminated against interstate interests. Westlake Transp., Inc. v. Mich. Pub. Serv. Comm'n, 662 N.W.2d 784, 802 (Mich. App. 2003).
The plaintiffs argued that the fee should be apportioned to take into account the activities that carriers conduct in other states. Without such apportionment , according to the plaintiffs, the fee discriminates against interstate carriers that make minimal intrastate trips. The plaintiffs also noted that the fee could have the effect of discouraging a carrier from engaging in interstate commerce so that the carrier could "receive the greatest benefit for the fee." Westlake Transp., Inc. v. Mich. Pub. Serv. Comm'n, 662 N.W.2d 784, 803 (Mich. App. 2003).
The court rejected these arguments. It noted that the plaintiffs' assertions about the fee's potential effect on interstate commerce amounted to "pure speculation." According to the court, the "plaintiffs present[ed] no evidence that any trucking firm's route choices are affected by the imposition of the fee, only surmising that this could ever occur in the hypothetical." The court further found that the alleged burden on interstate commerce was merely incidental. Moreover, it determined that the fee did not impose a burden on interstate commerce that was "clearly excessive in relation to the putative local benefits," including the funding of safety and related regulations. Accordingly, the court affirmed the court of claims's decision on the Commerce Clause issue. Westlake Transp., Inc. v. Mich. Pub. Serv. Comm'n, 662 N.W.2d 784, 802-04 (Mich. App. 2003).
The plaintiffs challenged the $100 fee on carriers that operate exclusively in interstate commerce on the grounds that a federal statute preempts the fee. Under 49 U.S.C. §14504 (2000), Congress created a cap of $10 on certain identification and registration fees on interstate motor carriers as part of the Single State Registration System (SSRS). The Michigan court accepted the defendants' argument that the Michigan fee was a regulatory fee rather than a registration fee. Accordingly, the court held that the federal statute did not apply. Westlake Transp., Inc. v. Mich. Pub. Serv. Comm'n, 662 N.W.2d 784, 796 (Mich. App. 2003).
The plaintiffs sought to appeal the appellate court's decision to the Michigan Supreme Court, but that court denied the appeal on December 3, 2003. The plaintiffs then filed a petition for writ of certiorari with the U.S. Supreme Court. On January 14, 2004, the Court granted the petitions of two sets of plaintiffs. It limited the issues to those regarding the Commerce Clause and federal preemption. In two opinions issued on June 20, 2005, the Court affirmed the Michigan appellate court's decisions.
In the first opinion, written by Justice Stephen G. Breyer, the Court reviewed the precedents that govern the Commerce Clause analysis. According to Breyer's opinion, nothing in the Michigan statute offended the Commerce Clause because the fee only affects activities taking place within the borders of the state of Michigan. Moreover, the Court rejected arguments that the state imposed the fee in a manner that burdened interstate commerce. Accordingly, the Court affirmed the lower court's opinion regarding this issue. American Trucking Ass'ns v. Michigan Public Serv. Commission, __ U.S. __, __ S. Ct. __, __ L. Ed. 2d __, 2005 WL 1421164 (2005).
The second opinion, also written by Breyer, determined that the federal statute did not preempt Michigan's fee. According to Breyer, the reference in a federal statute to a "State registration requirement" only pertained to state requirements regarding SSRS registration. Thus, the statute only applies to determine whether a trucker has complied with SSRS obligations. Nothing in the text, historical context, or purpose of the statute indicated that Congress intended to preempt all state registration requirements such that the Michigan fee would contradict federal standards. Accordingly, the Court affirmed the lower court's ruling. Mid-Con Freight Systems, Inc. v. Michigan Public Service Commission, __ U.S. __, __ S. Ct. __, __ L. Ed. 2d __, 2005 WL 1421291 (2005).
The provision of the U.S. Constitution that gives Congress exclusive power over trade activities between the states and with foreign countries and Indian tribes.
DaimlerChrysler Corp. v. Cuno
The U.S. Supreme Court on May 15, 2006 ruled that a group of taxpayers did not have standing to challenge local property tax abatements and state franchise tax credit that was extended to automobile manufacturer Daimler-Chrysler Corporation by the city of Toledo and the state of Ohio. The Court vacated a decision of the Sixth Circuit Court of Appeals, which had ruled that the state franchise tax credit violated the Commerce Clause of the U.S. Constitution.
In 1998, both Toledo and the state of Ohio wanted to encourage DaimlerChrysler to expand its facility in Toledo. The manufacturer agreed to construct the expansion, expecting the project to cost $1.2 billion. In exchange, the city of Toledo and two local school districts agreed to a 10-year personal property tax exemption as well as credit that could be applied to the state corporate franchise tax. The franchise tax credit and property tax exemption were both authorized by state statutes in Ohio.
Under the Constitution, Congress has the power to "regulate Commerce with foreign Nations, and among the several States." The courts have interpreted this provision to include a "negative" or "dormant" aspect, which restricts a state from imposing a tax on interstate commerce. A tax is constitutional under the Commerce Clause if it satisfies four requirements, including the following: (1) the activity that is taxed has a substantial nexus with the taxing state; (2) the tax is fairly apportioned to the activity that occurs in the state; (3) the tax does not discriminate against interstate commerce; and (4) the tax is fairly related to benefits offered by the state. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S. Ct. 1076, 51 L. Ed. 2d 326 (1977).
A group of residents in Toledo sued the state, the city of Toledo, and DaimlerChrysler in state court in Ohio. These taxpayers claimed that the tax breaks extended to the manufacturer placed a "disproportionate burden" on the plaintiffs because these tax breaks diminished the funds that were available to the city and the state. The plaintiffs claimed that due to this burden, the tax benefits violated the Commerce Clause.
The case was removed to the U.S. District Court for the Northern District Court in Ohio because it involved a federal question. The plaintiffs argued that the case should be remanded to state court because they had "substantial doubts about their ability to satisfy either the constitutional or the prudential limitations on standing in the federal court." U.S. District Judge David A. Katz declined to remand the case and later dismissed the claim, finding that neither of the tax benefits violated the Commerce Clause. Cuno v. DaimlerChrysler, Inc. 154 F. Supp. 2d 1196 (N.D. Ohio 2001).
The plaintiffs appealed the decision to the U.S. Court of Appeals for the Sixth Circuit. The court reviewed the constitutionality of both the investment tax credit and the personal property tax exemption under Commerce Clause jurisprudence. With respect to the personal property tax exemption, the plaintiffs argued that it was unconstitutional because it subjected similarly situated business owners in the state to differential tax rates. In other words, those businesses that met eligibility requirements, including a specified level of employment and investment in the state, were exempt, while businesses that were not eligible paid higher tax rates.
The appellate court, per an opinion by Judge Martha Craig Daughtrey, rejected the plaintiff's arguments with respect to the property tax exemption. According to the court, the conditions that the manufacturer had to meet in order to qualify for the exemption were "minor collateral requirements" and were "directly linked to the use of the exempted personal property." Because of this, the court concluded that the exemption does not independently burden interstate commerce such that the exemption violated the Commerce Clause. Cuno v. DaimlerChrysler, 386 F.3d 738 (6th Cir. 2004).
The plaintiffs also argued that the investment tax credit was unconstitutional. The plaintiffs relied on Supreme Court decisions that invalidated tax schemes that encouraged the development of local industry by imposing burdens on economic activities that take place outside of the state. According to the plaintiffs, allowing a tax credit for in-state business operations hindered free trade among the states be-cause the operations must take place in the home state in order for the credit to apply.
The Sixth Circuit agreed with the plaintiffs, holding that the investment tax credit indeed violated the Commerce Clause. The court reviewed a number of holdings from prior Supreme Court cases and determined that the Ohio tax credit did not differ materially from other tax schemes that the Supreme Court had ruled unconstitutional. The Sixth Circuit noted that though it was "sympathetic to efforts by the City of Toledo to attract industry into its economically depressed areas," it could not uphold the credit under the Commerce Clause.
The defendants appealed the Sixth Circuit's decision to the U.S. Supreme Court, which rendered a decision on May 15, 2006. Chief Justice John Roberts, writing for the majority, avoided the Commerce Clause arguments and instead focused on whether the plaintiffs had standing to bring the suit. The plaintiffs argued that as taxpayers, they should be proper parties because the franchise tax credit depletes money from Ohio to which the plaintiffs contribute through their tax payments.
The Court reiterated a long-standing principle that in order for a plaintiff to have standing, the plaintiff must allege an injury that is concrete and particularized. In the case of a taxpayer who does not allege a particular injury other than a burden on taxpayers in general, the alleged injury is merely hypothetical. Since the plaintiffs in this case had not established a particular injury, the Court ruled that the lower courts had erred in considering their Commerce Clause arguments in the first place. DaimlerChrysler v. Cuno, ____ U.S.____, ____ S. Ct. ____, ____ L. Ed. 2d ____ (May 15, 2006).
Even though the Court did not address the argument on the merits, officials in Ohio expressed their approval of the decision. According to Ohio Lieutenant Governor Bruce Johnson, "With its ruling, the Supreme Court has enabled states to pursue economic development projects by offering incentives to companies without the lingering concern that they may be found to be unconstitutional."
Department of Revenue of Kentucky v. Davis
The Constitution's Commerce Clause gives the federal government the right to regulate interstate commerce but the Supreme Court has all read into that provision what it has labeled a “dormant” Commerce Clause. The dormant Commerce Clause is the negative of the actual clause—it bars states from passing laws that improperly favor in-state economic interests by burdening out-of-state competitors. The Supreme Court has wrestled with how far this negative implication should be recognized, as it has balanced concerns about state economic protectionism against the system of federalism that gives states great independence. These concerns were again addressed in a case involving the taxation of municipal bonds, Department of Revenue of Kentucky v. Davis,—U.S.—, 128 S. Ct. 1801, 170 L. Ed. 2d 685 (2008). The Court ruled that the commonwealth of Kentucky could exempt its residents from paying tax on the interest of municipal bonds issued by the commonwealth and its cities, counties, and other political subdivisions, while taxing them for interest on municipal bonds issued by other states. This long-standing practice was justified in ways that did not implicate the dormant Commerce Clause.
George and Catherine Davis, Kentucky residents, paid state income tax on interest from out-of-state municipal bonds. They sued the state's department of revenue, asking for a refund of the bond interest, claiming that the differential taxation of municipal bonds violated the Commerce Clause, as it discriminated against the issuers and purchasers of out-of-state bonds. A Kentucky trial court rejected the Davis' claim, but the Court of Appeals of Kentucky reversed. The Supreme Court of Kentucky denied review of this decision but the U.S. Supreme Court agreed to hear the case because there was a conflict on this issue among the states and because “the result reached casts constitutional doubt on a tax regime adopted by a majority of the states.”
The Court, in a 7–2 decision, reversed the Kentucky appellate court . Justice David Souter, writing for the majority, reviewed the history and Court precedents involving the interpretation of the Commerce Clause, noting several doctrines that have shaped the Court's analysis. As to municipal bonds, he pointed out that the Kentucky taxation scheme was designed so the in-state bonds paid lower rates of interest than out-of-state bonds. The tax exemption for state residents made the lower interest rates acceptable and raised in-state demand for Kentucky bonds without subsidizing other issuers. The amount of money raised by bonds was significant: between 1996 and 2002, Kentucky and its subdivisions issue $7.7 billion in long-term bonds to pay for spending on transportation, public safety, education, utilities, and environmental protection. During that same time period all 50 states issued over $750 billion in long-term bonds, with 41 states employing differential tax taxation laws similar to Kentucky's.
Justice Souter concluded that Kentucky's law did not violate the dormant Commerce Clause because state and local governments have a responsibility to protect the health, safety, and welfare of its citizens. Laws that favor state and local government and which are “directed toward any number of legitimate goals unrelated to protectionism” do not violate the Commerce Clause. The issuance of bonds to pay for public projects “is a quintessentially public function, with the venerable history” reaching back to the Seventeenth Century. Bonds, much like home mortgages, spread the costs over time. Moreover, a fundamental element of the dormant Commerce Clause states that “any notion of discrimination assumes a comparison of substantially similar entities.” In this case the Kentucky tax scheme benefits Kentucky while treating all private issuers exactly the same. There was no forbidden discrimination because “Kentucky, as a public entity , does not have to treat itself as being ‘substantially similar’ to the other bond issuers in the market.”
Finally, the effects of ending the preferential tax scheme would be devastating to states and their subdivisions. Many single-state funds that issued bonds would disappear, replaced by national mutual funds, because the loss of the tax preference would make the state fund less financially viable. Single-state markets serving smaller municipal borrowers would suffer, thereby reinforcing the conclusion that the state's objectives did not lie in “forbidden protectionism for local business.”
Justice Anthony Kennedy, in a dissenting opinion joined by Justice SAMUEL ALITO, objected to the “explicit, local discrimination” that the majority ratified. Though this decision would not have any great impact on the national economy or national unity, the protectionist trade laws and policies that the Framers sought to bar when writing the Commerce Clause were given new life. Laws with either “the purpose or the effect of discriminating against interstate commerce to protect local trade are void.”