Taxation and the Regulation of Trade

Returning to Questions of Commerce

When the delegates met in Philadelphia, not all of them were willing to replace the Articles of Confederation with a revolutionary new form of government. Their purported goal was to revise the Articles in order to correct the most glaring defects of the union. And everyone agreed that the most important of these defects related to the powers of taxation and commerce. Congress was unable to raise money, because its power to requisition funds relied on compliance from the states; and Congress lacked any power to regulate trade between the states or between the United States and foreign countries. The Virginia Plan had surprised some members with its bold prescriptions for upending the established mode of representation and for transforming the balance of power between state and federal governments. It had the effect of placing what had originally seemed like their main order of business on the back burner for most of the first half of the Convention. But eventually, as the outlines of their new government took shape, specific provisions were proposed for granting Congress the powers of taxation and the regulation of trade, and they were adopted with little fanfare. 

Taxation 

The Virginia Plan had offered no specific proposal for raising money in the new government, even though that goal had been one of the main reasons the delegates were meeting in Philadelphia. Nonetheless, the intentions of the Plan’s design were revealed in the resolution that related to the jurisdiction of the proposed judiciary. These new federal courts would be empowered to hear all cases “which respect the collection of the National revenue.” This provision made clear that the new government would be empowered to levy taxes directly, and to enforce those taxes, and it would no longer be held hostage to the willingness of the states to comply with requisitions. 

No one at the Convention seriously questioned the general proposition that the new federal government would need to be supplied with the power to levy some form of taxation in its own right, without relying on the states as intermediaries. All the delegates tacitly acknowledged the problems with the existing system. 

The debates that took place on the subject of taxation were little more than a process of working out the details, and the chief disagreements turned on negotiating the competing interests of the different regions. Everyone understood that taxes on exports would fall more heavily on the Southern States, because this region produced more goods for export. Taxes on imports, at least according to members such as Elbridge Gerry and Gouverneur Morris, would fall more heavily on the Northern States. Even a direct capitation tax (a tax that was proportioned to population) was not immune to regional considerations, since it was decided that for this purpose slaves would be counted at a rate of three-fifths of the free population. Nevertheless, it was generally agreed among the members that a capitation tax would not be the principal means for the new government to raise revenue. 

What Kind of Taxes?

The members of the Convention seemed generally in agreement, even before they tackled the subject of taxation directly, that the revenue for the general government would have to be raised through some combination of export, import, and excise taxes. And over the course of the debates, many members in the Southern States refused to consider the possibility of export taxes. Export taxes were finally abandoned, and prohibitions were laid on both the central and the state governments from levying them.

The first concrete proposal for a scheme of taxation came in the New Jersey Plan, which was offered on June 15. According to this plan, Congress would be empowered to lay import duties on foreign goods and levy a “stamp,” or duty, “on paper, vellum, or parchment.” This clause would have empowered Congress to pass the same sort of “stamp acts” that had enraged the colonists (though they had been enraged not because of the variety of tax, but rather because Great Britain’s Parliament, in which the colonists were not represented, had imposed them).  The New Jersey Plan also provided that Congress could raise money through “postage on all letters or packages passing through the general post-office.” These individual provisions, like the New Jersey Plan as a whole, were never debated. Nonetheless, the next time the Convention was presented with a concrete proposal on taxation, when the Committee of Detail offered its report on August 6, the ideas for raising revenue were remarkably similar. 

Uniformity in Taxation

The four named sources of revenue that the Committee’s report proposed—“taxes, duties, imposts, and excises”—gave the delegates a clearer idea of how the new government would raise money. Although the provision appeared to give to Congress the power to levy an unlimited amount of direct taxes—an appearance that was not lost on the Antifederalists during the ratification debates—most delegates seemed to think that direct taxation would never be a significant source of revenue for the new government. 

The remaining debates over taxation related to the need to impose them uniformly throughout the country. After trying different formulas, the Framers prescribed a rule for uniformity to follow immediately after the clause empowering Congress to lay such taxes: “but all Duties, Imposts and Excises shall be uniform throughout the United States.” From their debates, it is clear that the Framers understood that there would be an unavoidable disparity in the effects that any particular tax would have on the economies of different states and regions. These sorts of disparities would have to be worked out through the ordinary give-and-take of the political process. But the Framers wanted to be assured that Congress would not lay and collect taxes in a way that explicitly favored one region or state over any other.

The Regulation of Trade under the Articles of Confederation 

When the Continental Congress drew up the Articles of Confederation, they had been wary of giving too much power to the central government, so the authority of Congress to regulate trade had been seriously compromised.  Many of the grievances that had sparked the Revolutionary War, after all, related to issues of taxation and trade, and the former colonists were not ready to trust another distant government with the management of these powers. The Confederation Congress had been given the unambiguous power of “regulating the trade and managing all affairs with the Indians, not members of any of the States, provided that the legislative right of any State within its own limits be not infringed or violated.” Yet with regard to trade between the states and between the United States and foreign countries, the Articles had been designed for failure. Congress had been given the exclusive power to make treaties with foreign countries—which would have included commercial treaties—and states were forbidden to “lay any imposts or duties, which may interfere with any stipulations in treaties.” Yet Congress had been given no power to enforce either those treaties or those prohibitions, and there were numerous violations among the states. The Articles had also stipulated that states could not enter into commercial trade agreements with each other without the consent of Congress, and that “the people of each State” would be able to enjoy “all the privileges of trade and commerce” in any other state. Yet, once again, Congress had no authority to enforce these high-minded ideals about free trade and equal treatment among the states, and violations of this principle had been rampant. 

Supplying Deficiencies for Congress

The problem was that the Articles of Confederation had named certain goals for its foreign and domestic trade, but its political design made it impossible for Congress to accomplish these goals. By 1787, the states were still unwilling to relinquish these goals; therefore, one of the main purposes for the meeting in Philadelphia was to rectify the deficiencies in the powers granted to Congress. The Virginia Plan had supplied the deficiency by granting broad, unspecified powers to the new Congress, but this approach was not destined to survive the debates. The New Jersey Plan had attempted to broaden the powers of Congress in very circumspect and circumscribed ways. It had suggested: “That, in addition to the powers vested in the United States in Congress by the present existing Articles of Confederation, they be authorized … to pass acts for the regulation of trade and commerce, as well with foreign nations as with each other.”

The New Jersey Plan was rejected, but the Committee of Detail, which was the first body to attempt an enumeration of Congressional powers, adopted a similar trade provision. Article VII, Section 1 of its report, proposed that: “The legislature of the United States shall have the power … To regulate commerce with foreign nations, and among the several states.” No delegate was opposed to the general principle that Congress should possess this power, and the debates on this clause focused on individual exceptions to this broad grant of power. Certain regions, notably in the South, believed that some exceptions were necessary for their economic wellbeing, and two of the exceptions they wanted were already included within the same article in the report of the Committee of Detail. Section 6 stipulated that: “No navigation act shall be passed without the assent of two thirds of the members present in each House.” This protection was added principally at the behest of the Southern States; they worried that navigation acts would typically be passed for the benefit of the Northern States and might harm their trade with foreign nations. The other exception was added at the insistence of South Carolina and Georgia: Section 4 had stated that “the migration or importation of such persons as the several States shall think proper to admit” could not be prohibited. In other words, Congress, when exercising its general grant of power to regulate foreign trade, could not prohibit the slave trade. Eventually, these two provisions were modified in a bargain struck between the Deep South and the Northeastern States (the details of that bargain are described in the section on the slavery compromises). 

The Interstate Commerce Clause

The clauses which gave to the general government a general power to regulate trade were added to the Constitution with so much harmony and so little debate that it is difficult to know the scope of the power that the Framers intended to be comprehended within its concise wording: “The Congress shall have Power … To regulate Commerce with foreign Nations, and among the several States.” This potential for ambiguity was spotted on September 15, just two days before the Constitution was signed. 

Madison, on the other hand, admitted that trying to determine which powers would remain with the states depended “on the extent of the power ‘to regulate commerce.’ These terms are vague, but seem to exclude this power of the states.” The more Madison thought about it: “He was more and more convinced that the regulation of commerce was in its nature indivisible, and ought to be wholly under one authority.” Sherman agreed that the general government’s power to regulate trade was “supreme,” and therefore Congress could override state regulations whenever they conflicted with federal ones. But the larger question that was raised by this issue—what is the extent of the Congressional power to regulate commerce, especially as it impinges upon the states’ authority to regulate commerce within their own borders?—is a question that became controversial beginning early in the twentieth century.