South Carolina v. Regan, 465 U.S. 367 (1984)

JUSTICE STEVENS, concurring in part and dissenting in part.

While I join Parts I and II of the Court’s opinion, I disagree with Part III. The Solicitor General has persuaded me that the Court should exercise its discretion to deny leave to file this complaint. We should do so not only because the proceeding can be conducted more expeditiously in another forum,{1} but also because it is so plain that, even if we read the complaint liberally in favor of the State of South Carolina, there is simply no merit to the claim the State has advanced. I do not believe the Court does a sovereign State a favor by giving it an opportunity to expend resources in litigation that has no chance of success. I would therefore deny leave to file.

South Carolina claims that § 103(j)(1) of the Internal Revenue Code of 1954, 26 U.S.C. § 103(j)(1) (1982 ed.), as added by § 310(b)(1) of the Tax Equity and Fiscal Responsibility Act of 1982, 96 Stat. 596, is unconstitutional because it abridges the State’s power to borrow money. Under the federal statute, the income that private citizens receive from state bonds is taxed unless the bonds are issued in registered form. As a practical matter, this requirement will force South Carolina to issue its bonds in registered form. Its complaint alleges that registered bonds are more costly to issue than bearer bonds, and therefore that its future bond issues will generate smaller net revenues for the State.

Although the State’s constitutional arguments are not stated in precisely this form, in essence it claims that the statute is invalid because it violates: (1) the doctrine of intergovernmental tax immunity; (2) the Tenth Amendment; and (3) the doctrine of National League of Cities v. Usery, 426 U.S. 833 (1976). A long line of cases plainly forecloses the first claim; the other two are frivolous.

I

The origins of intergovernmental taxation immunity are found in McCulloch v. Maryland, 4 Wheat. 316 (1819). Of course, McCulloch dealt not with the immunity of the States, but rather with that of the United States. The Court held that the State of Maryland could not constitutionally tax the Bank of the United States, because the power to tax the bank could be used to destroy it, thereby undermining the constitutionally guaranteed supremacy of the Federal Government. See id. at 425-437. The Court’s argument was premised explicitly upon the Supremacy Clause of the Constitution, and thus its holding did not require that any immunity from taxation be accorded the States.{2}

Therefore, the case upon which South Carolina relies is not McCulloch, but Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429 (1895). There, the Court specifically held that a provision of the federal income tax statute taxing income derived from municipal bonds was unconstitutional. It noted that the Court had previously held that the United States lacks the authority to tax the property or revenues of States or municipalities, since their independence from federal control is secured by the Tenth Amendment. Of the cases cited by the Court, most dealt with whether the Federal Government could lay a tax directly upon the property of States or localities, paid by them. In only one, Collector v. Day, 11 Wall. 113 (1871), did the Court address whether the United States could tax the income of an individual derived from his dealings with a State. There, the Court had held that the United States could not tax the salaries of judicial officers of a State. After reciting this case law, the Court continued:

It is contended that, although the property or revenues of the States or their instrumentalities cannot be taxed, nevertheless the income derived from state, county, and municipal securities can be taxed. But we think the same want of power to tax the property or revenues of the States or their instrumentalities exists in relation to a tax on the income from their securities, and for the same reason, and that reason is given by Chief Justice Marshall in Weston v. Charleston, 2 Pet. 449, 468, where he said:

The right to tax the contract to any extent, when made, must operate upon the power to borrow before it is exercised, and have a sensible influence on the contract. The extent of this influence, depends on the will of a distinct government. To any extent, however inconsiderable, it is a burthen on the operations of government. It may be carried to an extent which shall arrest them entirely. . . . The tax on government stock is thought by this court to be a tax on the contract, a tax on the power to borrow money on the credit of the United States, and consequently to be repugnant to the Constitution.

Applying this language to these municipal securities, it is obvious that taxation on the interest therefrom would operate on the power to borrow before it is exercised, and would have a sensible influence on the contract, and that the tax in question is a tax on the power of the States and their instrumentalities to borrow money, and consequently repugnant to the Constitution.

157 U.S. at 585-586 (ellipsis in original).

The theory employed in Pollock is what I shall refer to as the "intergovernmental burden" theory: even though a tax is not laid directly upon another government, if it has a "sensible influence" on the costs incurred by that government, it must fall. This theory is the only rationale offered by the Pollock Court for its decision, and it is on this theory that Pollock must stand or fall.

The precedential weight of Pollock was doubtful almost from the start. Within a generation, Pollock was seemingly overruled by constitutional amendment. The Sixteenth Amendment, ratified in 1913, states:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

(Emphasis supplied.) This clear language makes the fact that income is derived from interest on state or local obligations constitutionally irrelevant.

Any doubt about the vitality of Pollock is dispelled by our subsequent cases. At every opportunity, this Court has rejected the intergovernmental burden theory.

In Metcalf & Eddy v. Mitchell, 269 U.S. 514 (1926), the Court first rejected the theory. It held that the United States could tax the income derived by an independent contractor from its contracts with a State. The Court recognized that the federal tax increased costs incurred by the State,{3} but nevertheless upheld the tax:

[H]ere the tax is imposed on the income of one who is neither an officer nor an employee of government and whose only relation to it is that of contract, under which there is an obligation to furnish service, for practical purposes not unlike a contract to sell and deliver a commodity. The tax is imposed without discrimination upon income whether derived from services rendered to the state or services rendered to private individuals. In such a situation, it cannot be said that the tax is imposed upon an agency of government in any technical sense, and the tax cannot be deemed to be an interference with government, or an impairment of the efficiency of its agencies in any substantial way.

Id. at 524-525.{4}

Thus, the conceptual basis for Pollock had been undermined. A burden on the State imposed by taxing those who contract with it was no longer sufficient to invalidate a tax; the theory that a State’s contracts could not be taxed which the Court had relied upon in Pollock was no longer good law.{5}

In Helvering v. Gerhardt, 304 U.S. 405 (1938), the repudiation of Pollock was unmistakable. The Court there held that the United States could tax the salaries of state employees. The Court began its analysis by pointing out that the scope of McCulloch was limited to state taxation of federal instrumentalities.{6} The Court read Weston v. Charleston, 2 Pet. 449 (1829), on which the Pollock Court had relied, as also limited in its application to state taxes, involving as it did an attempt whereby through state taxation "an impediment was laid upon the exercise of a power with respect to which the national government was supreme." 304 U.S. at 413, n. 3. It concluded that state immunity against federal taxation must be narrowly construed, since

the people of all the states have created the national government and are represented in Congress. Through that representation, they exercise the national taxing power. The very fact that, when they are exercising it, they are taxing themselves, serves to guard against its abuse. . . .

Id. at 416. Moreover,

any allowance of a tax immunity for the protection of state sovereignty is at the expense of the sovereign power of the nation to tax. Enlargement of the one involves diminution of the other. When enlargement proceeds beyond the necessity of protecting the state, the burden of the immunity is thrown upon the national government, with benefit only to a privileged class of taxpayers. . . . [I]f every federal tax which is laid on some new form of state activity, or whose economic burden reaches in some measure the state or those who serve it, were to be set aside as an infringement of state sovereignty, it is evident that a restriction on the national power, devised only as a shield to protect the states from curtailment of the essential operations of government which they have exercised from the beginning, would become a ready means for striking down the taxing power of the nation.

Id. at 416-417. The Court concluded by explicitly rejecting the intergovernmental burden theory:

The state and national governments must coexist. Each must be supported by taxation of those who are citizens of both. The mere fact that the economic burden of such taxes may be passed on to a state government, and thus increase to some extent, here wholly conjectural, the expense of its operation infringes no constitutional immunity. Such burdens are but normal incidents of the organization within the same territory of two governments, each possessed of the taxing power.

Id. at 422.

In Graves v. New York ex rel. O’Keefe, 306 U.S. 466 (1939), the Court held that a State could tax the salary of a federal employee.{7} After again observing that state taxation immunity is narrower than that of the United States, see id. at 477-478, and should be narrowly construed, see id. at 483-484, the Court followed Gerhardt in upholding the state tax, overruled Collector v. Day, which had been relied upon in Pollock, and noted, in a passage pertinent to the claim made here by South Carolina, that "we perceive no basis for a difference in result whether the taxed income be salary or some other form of compensation. . . ." 306 U.S. at 486. The Court concluded by again repudiating the intergovernmental burden theory.

So much of the burden of a nondiscriminatory general tax upon the incomes of employees of a government, state or national, as may be passed on economically to that government, through the effect of the tax on the price level of labor or materials, is but the normal incident of the organization within the same territory of two governments, each possessing the taxing power. The burden, so far as it can be said to exist or to affect the government in any indirect or incidental way, is one which the Constitution presupposes, and hence it cannot rightly be deemed to be within an implied restriction upon the taxing power of the national and state governments which the Constitution has expressly granted to one and has confirmed to the other.

Id. at 487.{8}

The intergovernmental burden theory was rejected about as clearly as possible in Alabama v. King & Boozer, 314 U.S. 1 (1941), in which the Court upheld a state sales tax levied on the cost of material used by a federal contractor in performing a cost-plus contract, despite the fact that under the contract the economic burden of the tax fell exclusively on the United States.{9} Subsequently, the Court has consistently adhered to its repudiation of the intergovernmental burden theory. See Washito v. United States, 460 U.S. 536, 540 (1983); Memphis Bank & Trust Co. v. Garner, 459 U.S. 392, 397 (1983); United States v. New Mexico, 455 U.S. 720, 734 (1982); United States v. County of Fresno, 429 U.S. 452, 460-462 (1977); Gurley v. Rhoden, 421 U.S. 200, 205 (1975). As the Court recently wrote, "an economic burden on traditional state functions without more is not a sufficient basis for sustaining a claim of immunity." Massachusetts v. United States, 435 U.S. 444, 461 (1978).{10}

Perhaps the plainest explication of this Court’s position on state tax immunity is found in New York v. United States, 326 U.S. 572 (1946), a case holding that the United States could tax New York’s income from its sale of state-owned mineral waters. Justice Frankfurter, joined by Justice Rutledge, wrote that in his view any nondiscriminatory tax on state activities was constitutional. See id. at 581-584 (opinion of Frankfurter, J.); see also id. at 584-585 (Rutledge, J., concurring). Four additional Justices agreed that the tax was valid, stating:

Only when and because the subject of taxation is State property or a State activity must we consider whether such a nondiscriminatory tax unduly interferes with the performance of the State’s functions of government.

Id. at 588 (Stone, C.J., joined by Reed, Murphy, and Burton, JJ., concurring in result).{11}

S. R. A. Inc. v. Minnesota, 327 U.S. 558 (1946), was decided during the same Term. There, land owned by the United States was occupied by S. R. A., which had bought the land under a conditional sales contract that left title in the United States pending full payment of the purchase price. Nevertheless, the Court held that state property taxes could be assessed against the land, since, in reality, the private party, and not the United States, was being taxed.{12} Thus, the Court recognized that, where the property inures to the benefit of a private party, it has no immunity from taxation despite the fact that the taxation may increase the costs imposed on the governmental entity.{13} The same approach was taken in United States v. City of Detroit, 355 U.S. 466 (1958), when the Court upheld a municipal tax on property owned by the United States but leased to a private party, observing that

it is well settled that the Government’s constitutional immunity does not shield private parties with whom it does business from state taxes imposed on them merely because part or all of the financial burden of the tax eventually falls on the Government.

Id. at 469.{14} See also United States v. Township of Muskegon, 355 U.S. 484 (1958); City of Detroit v. Murray Corp., 355 U.S. 489 (1958); Wilmette Park Dist. v. Campbell, 338 U.S. 411, 419-420 (1949)

Our cases thus demonstrate the insubstantiality of South Carolina’s claim. Under § 103(j)(1), South Carolina is not required to pay any federal tax at all. The tax is imposed not upon state property or revenues, but only upon persons with whom it contracts. Under the test adopted by a majority of the Court in New York v. United States, and followed since, this alone defeats its claim. South Carolina is trying to shield private parties with whom it does business from taxation because part of the financial burden of the tax falls upon it. This Court has repeatedly rejected exactly that sort of claim.{15} Moreover, the rationale on which Pollock is based -- the intergovernmental burden theory -- has been repudiated over and over again by this Court. There is simply nothing left of Pollock on which South Carolina can base a claim.

Even if there were enough left of Pollock to invalidate a federal tax that might cripple traditional state functions, the burden imposed on the State here is far from crushing. South Carolina estimates that, if it must issue its bonds in registered form, it will have to pay an additional one quarter of one percent interest on its bonds.{16} It identifies in its offer of proof no disruption in its operation except for this slight increase in interest costs.{17} Surely this cost is infinitesimal compared to the costs imposed on States and localities because their employees’ salaries are federally taxed -- a burden that the Federal Government unquestionably has the constitutional power to impose. Moreover, the challenged statute still provides States and localities with the ability to offer debt instruments at substantially less than the market rates which must be paid by private enterprise -- three to five points lower according to South Carolina’s estimate. It is hard to see how marginal increases in the interest they must pay can destroy the integrity of governmental entities when private entities are able not only to survive but generally to make a profit while obtaining financing at significantly higher rates of interest. As Professor Thomas Reed Powell observed:

Public bonds will not be put in an unfavorable position relatively by being subjected to taxes on the income. They will merely be deprived of an artificial advantage heretofore enjoyed, which however is not strictly necessary, in all probability, in order to give them a practical success on the financial markets of the country when offered at the same rates of interest that have usually been offered in the past.

Powell, Intergovernmental Tax Immunities, 8 Geo.Wash.L.Rev. 1213, 1214-1215 (1940).

In contrast to the slight burden alleged by South Carolina, the Federal Government’s interest in encouraging bearer bonds to be issued in registered form is substantial, as the Senate Report on this provision makes clear.

The Committee believes that a fair and efficient system of information reporting and withholding cannot be achieved with respect to interest-bearing obligations as long as a significant volume of long-term bearer instruments is issued. A system of book-entry registration will preserve the liquidity of obligations while requiring the creation of ownership records that can produce useful information reports with respect to both the payment of interest and the sale of obligations prior to maturity through brokers. Furthermore, registration will reduce the ability of noncompliant taxpayers to conceal income and property from the reach of the income, estate, and gift taxes. Finally, the registration requirement may reduce the volume of readily negotiable substitutes for cash available to persons engaged in illegal activities.

S.Rep. No. 97-494, pt. 1, p. 242 (1982).

As this Court has previously held, the Constitution does not invalidate every burden on a State or locality created by federal taxation because such burdens are the "normal incident" of a system of dual sovereigns with dual taxing powers, which the Constitution envisions will coexist. Surely it follows that the Constitution intended that the taxing power it gave the Federal Government not be undermined through the abuse engendered by bearer instruments. The burden imposed upon States and localities by efforts to eliminate such abuse is one necessary in a system committed to the efficacy of dual taxing authorities.

The fairness of this requirement is highlighted by the fact that § 103(j)(1) requires that federally issued bonds also be in registered form to be tax exempt. Even in the heyday of Pollock, the Court never held that the Federal Government impermissibly infringed state sovereignty by imposing a burden on the States that it also imposed on itself. If Congress has destroyed some protected concept of state sovereignty through § 103(j)(1), then it has destroyed the sovereignty of the United States as well.

II

South Carolina’s complaint alleges that § 103(j)(1) violates the Tenth Amendment. That Amendment provides:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

In order to bring its challenge within the terms of that Amendment, South Carolina alleges:

The Congress of the United States has no power whatsoever to impose an income tax upon the interest paid by South Carolina to its lenders.

Complaint ¶ 9. This allegation is inconsistent with the plain language of the Constitution itself. Article I, § 8, specifically delegates to Congress the "Power To lay and collect Taxes," and the Sixteenth Amendment removes any possible ambiguity concerning the scope of the power exercised by Congress in this case. The cases I have discussed above confirm this point.

Because the power to tax private income has been expressly delegated to Congress, the Tenth Amendment has no application to this case.

III

Finally, South Carolina relies on National League of Cities v. Usery, 426 U.S. 833 (1976). In that case, the Court held that a federal statute extending the provisions of the Fair Labor Standards Act to certain public employees was "not within the authority granted Congress by Art. I, § 8, cl. 3." Id. at 852 (footnote omitted). The conclusion that the case merely involved an interpretation of the outer limits of the congressional power to regulate interstate commerce was then confirmed by the following footnote:

We express no view as to whether different results might obtain if Congress seeks to affect integral operations of state governments by exercising authority granted it under other sections of the Constitution such as the spending power, Art. I, § 8, cl. 1, or § 5 of the Fourteenth Amendment.

Id. at 852, n. 17. By its express terms, therefore, the National League of Cities case has no application to South Carolina’s challenge to an exercise of the federal taxing power.{18}

In sum, I can see no basis on which South Carolina could prevail in this case, even accepting its allegations and offers of proof for all they are worth. We do South Carolina no favor by permitting it to file and litigate a claim on which it has no chance of prevailing. At the same time, the Court’s decision to permit South Carolina to file this claim is an unwise use of its scarce resources. Accordingly, I respectfully dissent from the Court’s decision to grant South Carolina’s motion for leave to file its complaint.

1. As the Solicitor General points out:

[T]his case is particularly inappropriate for the exercise of this Court’s discretionary original jurisdiction. First, given the demands on this Court’s original and appellate docket, it seems plain that a district court could hear the case more promptly. This is especially true in light of the fact that to support its claim, South Carolina would undoubtedly seek to introduce evidence of the actual burden imposed upon it by the federal tax statute. Such a proceeding could be more expeditiously conducted at the usual trial court level by a federal district court.

Brief in Opposition 12. See United States v. Nevada, 412 U.S. 534, 538 (1973); Washington v. General Motors Corp., 406 U.S. 109 (1972); Illinois v. City of Milwaukee, 406 U.S. 91 (1972); Ohio v. Wyandotte Chemicals Corp., 401 U.S. 493 (1971).

2. Moreover, McCulloch dealt with a tax imposed directly upon a governmental body, rather than a tax imposed upon an individual’s income derived from his dealings with a governmental body.

3. The Court easily dismissed the conceptual basis for the intergovernmental burden theory, correctly observing that every exercise of taxing power necessarily creates such a burden.

In a broad sense, the taxing power of either [the state or federal] government, even when exercised in a manner admittedly necessary and proper, unavoidably has some effect upon the other. The burden of federal taxation necessarily sets an economic limit to the practical operation of the taxing power of the states, and vice versa. Taxation by either the state or the federal government affects in some measure the cost of operation of the other.

269 U.S. at 523.

4. In James v. Dravo Contracting Co., 302 U.S. 134 (1937), the Court followed Metcalf & Eddy in holding that a State could tax the income of an independent contractor of the United States. See also Atkinson v. Tax Comm’n, 303 U.S. 20, 21 (1938) (per curiam); Silas Mason Co. v. Tax Comm’n, 302 U.S. 186 (1937). Similarly, in Willcuts v. Bunn, 282 U.S. 216 (1931), the Court held that capital gains derived from sales of municipal bonds could be taxed by the United States, despite the fact that this tax would reduce the value of the bonds. See also Greiner v. Lewellyn, 258 U.S. 384 (1922) (federal estate tax may be levied upon the value of state bonds transferred upon death).

5. This was made even clearer in Helvering v. Mountain Producers Corp., 303 U.S. 376 (1938), where the Court upheld the power of the United States to tax income derived from property leased from a State.

[I]mmunity from nondiscriminatory taxation sought by a private person for his property or gains because he is engaged in operations under a government contract or lease cannot be supported by merely theoretical conceptions of interference with the functions of government. Regard must be had to substance and direct effects. And where it merely appears that one operating under a government contract or lease is subjected to a tax with respect to his profits on the same basis as others who are engaged in similar businesses, there is no sufficient ground for holding that the effect upon the Government is other than indirect and remote.

Id. at 386-387. See also Helvering v. Bankline Oil Co., 303 U.S. 362, 369-370 (1938).

6.

In sustaining the immunity from state taxation, the opinion of the Court, by Chief Justice Marshall, recognized a clear distinction between the extent of the power of a state to tax national banks and that of the national government to tax state instrumentalities. He was careful to point out not only that the taxing power of the national government is supreme, by reason of the constitutional grant, but that, in laying a federal tax on state instrumentalities, the people of the states, acting through their representatives, are laying a tax on their own institutions, and consequently are subject to political restraints which can be counted on to prevent abuse. State taxation of national instrumentalities is subject to no such restraint, for the people outside the state have no representatives who participate in the legislation; and in a real sense, as to them, the taxation is without representation. The exercise of the national taxing power is thus subject to a safeguard which does not operate when a state undertakes to tax a national instrumentality.

304 U.S. at 412 (footnote omitted).

7. Justice Frankfurter, in his separate opinion, explained how state immunity from taxation had been derived incorrectly from dicta in McCulloch.

Partly as a flourish of rhetoric and partly because the intellectual fashion of the times indulged a free use of absolutes, Chief Justice Marshall gave currency to the phrase that "the power to tax involves the power to destroy." This dictum was treated as though it were a constitutional mandate. . . . The seductive cliche that the power to tax involves the power to destroy was fused with another assumption, likewise not to be found in the Constitution itself, namely the doctrine that the immunities are correlative -- because the existence of the national government implies immunities from state taxation, the existence of state governments implies equivalent immunities from federal taxation. . . .

All these doctrines of intergovernmental immunity have, until recently, been moving in the realm of what Lincoln called "pernicious abstractions." The web of unreality spun from Marshall’s famous dictum was brushed away by one stroke of Mr. Justice Holmes’s pen: "The power to tax is not the power to destroy while this Court sits." Panhandle Oil Co. v. Mississippi, 277 U.S. 218, 223 (dissent). Failure to exempt public functionaries from the universal duties of citizenship to pay for the costs of government was hypothetically transmuted into hostile action of one government against the other. A succession of decisions thereby withdrew from the taxing power of the States and Nation a very considerable range of wealth without regard to the actual workings of our federalism, and this, too, when the financial needs of all governments began steadily to mount.

306 U.S. at 489-490 (concurring opinion) (citation and footnote omitted).

Justice Frankfurter later added:

Chief Justice Marshall spoke at a time when social complexities did not so clearly reveal as now the practical limitations of a rhetorical absolute. . . . To press a juristic principle designed for the practical affairs of government to abstract extremes is neither sound logic nor good sense. And this Court is under no duty to make law less than sound logic and good sense.

New York v. United States, 326 U.S. 572, 576-577 (1946) (opinion of Frankfurter, J.).

8. See also Sims v. United States, 359 U.S. 108, 110-111 (1959); State Tax Comm’n v. Van Cott, 306 U.S. 511 (1939).

9.

So far as such a nondiscriminatory state tax upon the contractor enters into the cost of the materials to the Government, that is but a normal incident of the organization within the same territory of two independent taxing sovereignties. The asserted right of the one to be free of taxation by the other does not spell immunity from paying the added costs, attributable to the taxation of those who furnish supplies to the Government and who have been granted no tax immunity.

314 U.S. at 8-9.

10. While the Court, for a time, did continue to cite Pollock either in dicta, see Indian Motorcycle Co. v. United States, 283 U.S. 570, 577 (1931); Gillespie v. Oklahoma, 257 U.S. 501, 505 (1922); Farmers & Mechanics Savings Bank of Minneapolis v. Minnesota, 232 U.S. 516, 526-527 (1914); or only to distinguish it in the course of upholding federal taxes on state instrumentalities, see Helvering v. Gerhardt, 304 U.S. 405, 417 (1938); Helvering v. Mountain Producers Corp., 303 U.S. at 386; Choteau v. Burnet, 283 U.S. 691, 696 (1931); Willcuts v. Bunn, 282 U.S. at 225; Metcalf & Eddy v. Mitchell, 269 U.S. 514, 521 (1926), Greiner v. Lewellyn, 258 U.S. at 386; South Carolina v. United States, 199 U.S. 437, 453 (1905); see also New York ex rel. Cohn v. Graves, 300 U.S. 308, 315-316 (1937); it has long since stopped treating Pollock with even that much respect; the Court has not cited the holding of Pollock since Gerhardt, almost half a century ago. As I have suggested above, however, the rationale of Pollock had been repudiated at least as early as Metcalf & Eddy. Moreover, it appears that the Court has never relied on Pollock for a holding since the passage of the Sixteenth Amendment. Chief Justice Hughes once referred to Pollock, along with Scott v. Sandford, 19 How. 393 (1857), overruled by U.S.Const., Amdt. 14, and Hepburn v. Griswold, 8 Wall. 603 (1870), overruled by Legal Tender Cases, 12 Wall. 457 (1872), as one of the "three notable instances [in which] the Court has suffered severely from self-inflicted wounds." C. Hughes, The Supreme Court of the United States 50 (1928).

11. These Justices made it clear that the immunity doctrine applies only when the State itself is the taxpayer.

If the phrase "nondiscriminatory tax" is to be taken in its long accepted meaning as referring to a tax laid on a like subject matter, without regard to the personality of the taxpayer, whether a State, a corporation or a private individual, it is plain that there may be nondiscriminatory taxes which, when laid on a State, would nevertheless impair the sovereign status of the State quite as much as a like tax imposed by a State on property or activities of the national government. This is not because the tax can be regarded as discriminatory, but because a sovereign government is the taxpayer, and the tax, even though nondiscriminatory, may be regarded as infringing its sovereignty.

326 U.S. at 587 (emphasis supplied) (citation omitted).

In more recent cases, we have found immunity only where the governmental entity itself is legally obligated to bear the costs of the tax. See United States v. New Mexico, 455 U.S. 720 (1982); United States v. County of Fresno, 429 U.S. 452 (1977); United States v. Mississippi Tax Comm’n, 421 U.S. 599 (1975); Gurley v. Rhoden, 421 U.S. 200 (1975); First Agricultural National Bank of Berkshire County v. Tax Comm’n, 392 U.S. 339, 346-348 (1968); Rohr Aircraft Corp. v. County of San Diego, 362 U.S. 628 (1960); Kern-Limerick, Inc. v. Scurlock, 347 U.S. 110 (1954).

12.

To say that the payment of the purchase price is a necessary condition precedent to the loss of federal immunity is to make the rule too mechanical. It should be sufficiently flexible to subject real private rights, disentangled from federal policies, to state taxation.

327 U.S. at 569.

13. The Court briefly disposed of the intergovernmental burden theory:

There is a suggestion that to hold United States property subject to state taxation pending the completion of payment will injuriously affect its salability, and therefore interfere with the Government’s handling of its affairs. Our recent cases have disposed of this economic argument in a way which is contrary to petitioner’s contention.

Id. at 570.

14.

It is undoubtedly true, as the Government points out, that it will not be able to secure as high rentals if lessees are taxed for using its property. But . . . the imposition of an increased financial burden on the Government does not, by itself, vitiate a state tax.

355 U.S. at 472.

15. A host of commentators agree. See, e.g., Kirby, State and Local Bond Interest, in 1 House Committee on Ways and Means, Tax Revision Compendium 679 (Comm. Print 1959); Senate Special Committee on Taxation of Governmental Securities and Salaries, Taxation of Governmental Securities and Salaries, S.Rep. No. 2140, 76th Cong., 3d Sess., pt. 1, pp. 8-16, 25-28 (1940); U.S. Dept. of Justice, Taxation of Government Bondholders and Employees: The Immunity Rule and the Sixteenth Amendment (1938); Boudin, The Taxation of Governmental Instrumentalities, Part Two, 22 Geo.L.J. 254 (1934); Brown, Intergovernmental Tax Immunity: Do We Need a Constitutional Amendment?, 25 Wash.U.L.Q. 153 (1940); Gardner, Tax Immune Bonds, 8 Geo.Wash.L.Rev. 1200 (1940); Philipsborn & Cantrill, Immunity from Taxation of Governmental Instrumentalities, 26 Geo.L.J. 543 (1938); Rakestraw, The Reciprocal Rule of Governmental Tax Immunity -- A Legal Myth, 11 Federal B.J. 3 (1950); Ratchford, Intergovernmental Tax Immunities in the United States, 6 National Tax J. 305 (1953); Watkins, The Power of the State and Federal Governments to Tax One Another, 24 Va.L.Rev. 475 (1938); Federal Legislation, Taxability of Government-Bond Interest, 27 Geo.L.J. 768 (1939); Note, The Passing of Intergovernmental Tax Immunity, 33 Ill.L.Rev. 962 (1939); Note, Constitutional and Legislative Bases of Intergovernmental Tax Immunities, 51 Yale L.J. 482 (1942).

16. As an example, South Carolina states that, on November 9, 1982, it sold $115 million in general obligation bonds. Over the life of these bonds, South Carolina will pay $97,247,668 in interest. If the bonds were issued in registered form, its interest costs would be increased only about $2,800,000 -- approximately three percent.

17. Amici Texas et al. have submitted affidavits which also indicate only that they will pay slightly higher interest charges if they must issue bonds in registered form. No allegations are made that serious disruptions in the ability of States and localities to provide essential services will result.

18. To come within that case, an exercise of Commerce Clause power must (1) regulate the States as States, (2) address indisputable attributes of state sovereignty, and (3) directly impair the traditional functions of the States. EEOC v. Wyoming, 460 U.S. 226, 236-237 (1983); FERC v. Mississippi, 456 U.S. 742, 764, n. 28 (1982); Hodel v. Virginia Surface Mining & Recl. Assn., 452 U.S. 264, 287-288 (1981). Even then, the claim fails if the federal interest outweighs those of the States. See EEOC v. Wyoming, supra, at 237; Hodel, supra, at 288, n. 29. Assuming National League of Cities were applicable here, South Carolina’s claim would fail on all counts. First, § 103(j)(1) does not regulate the States at all; they are free to issue any type of bonds they like, only the tax consequences for purchasers are affected. Second, the right to issue unregistered bearer bonds has never been considered an indisputable aspect of sovereignty. Third, the offers of proof detail no impairment of its ability to function; only marginal increases in interest costs are demonstrated. The kind of impact on state and local budgets detailed in National League of Cities, 426 U.S. at 846-847, 849-851, is not present here. Finally, the federal interest in eliminating a practice which undermines the enforceability of the federal tax system and laws surely is sufficient to outweigh the modest fiscal burdens imposed upon the States by this measure.