Article I, Section 8, Clause 1:
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States; . . .
Congress has broad discretion in methods of taxation, and may, under the Necessary and Proper Clause, regulate business within a state in order to tax it more effectively. For instance, the Court has sustained regulations regarding the packaging of taxed articles such as tobacco 1 and oleomargarine, 2 which were ostensibly designed to prevent fraud in the collection of the tax. It has also upheld measures taxing drugs 3 and firearms, 4 which prescribed rigorous restrictions under which such articles could be sold or transferred, and imposed heavy penalties upon persons dealing with them in any other way. These regulations were sustained as conducive to the efficient collection of the tax though they clearly transcended in some respects this ground of justification. 5
Even where a tax is coupled with regulations that have no possible relation to the efficient collection of the tax, and no other purpose appears on the face of the statute, the Court has refused to inquire into the motives of the lawmakers and has sustained the tax despite its prohibitive proportions. 6
It is beyond serious question that a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. . . . The principle applies even though the revenue obtained is obviously negligible . . . or the revenue purpose of the tax may be secondary. . . . Nor does a tax statute necessarily fall because it touches on activities which Congress might not otherwise regulate. As was pointed out in Magnano Co. v. Hamilton,  7
In some cases, however, the structure of a taxation scheme is such as to suggest that the Congress actually intends to regulate under a separate constitutional authority. As long as such separate authority is available to Congress, the imposition of a tax as a penalty for such regulation is valid. 8 On the other hand, where Congress had levied a heavy tax upon liquor dealers who operated in violation of state law, the Court held that this tax was unenforceable after the repeal of the Eighteenth Amendment, because the National Government had no power to impose an additional penalty for infractions of state law. 9
Discerning whether Congress, in passing a regulation that purports to be under the taxing authority, intends to exercise a separate constitutional authority, requires evaluation of a number of factors. 10 Under the Child Labor Tax Case, 11 decided in 1922, the Court, which had previously rejected a federal prohibition of child labor laws as being outside of the Commerce Clause, 12 also rejected a tax on companies using such labor. First, the Court noted that the law in question set forth a specific and detailed regulatory scheme — including the ages, industry, and number of hours allowed — establishing when employment of underage youth would incur taxation. Second, the taxation in question functioned as a penalty, in that it was set at one-tenth of net income per year, regardless of the nature or degree of the infraction. Third, the tax had a scienter requirement, so that the employer had to know that the child was below a specified age in order to incur taxation. Fourth, the statute made the businesses subject to inspection by officers of the Secretary of Labor, positions not traditionally charged with the enforcement and collection of taxes.
More recently, in National Federation of Independent Business (NFIB) v. Sebelius, 13 the Court upheld as an exercise of the taxing authority a requirement under the Patient Protection and Affordable Care Act (ACA) 14 that mandates certain individuals to maintain a minimum level of health insurance. Failure to purchase health insurance may subject a person to a monetary penalty, administered through the tax code. Chief Justice Roberts, in a majority holding, 15 used a functional approach in evaluating the authority for the requirement, so that the use of the term
penalty in the ACA 16 to describe the enforcement mechanism for the individual mandate was found not to be determinative. The Court also found that the latter three factors identified in the Child Labor Tax Case (penal intent, scienter, enforcement by regulatory agency) were not present with respect to the individual mandate. Unlike the child labor taxation scheme, the tax level under the ACA is established based on traditional tax variables such as taxable income, number of dependents and joint filing status; there is no requirement of a knowing violation; and the tax is collected by the Internal Revenue Service.
The majority, however, did not appear to have addressed the first Child Labor Case factor: whether the ACA set forth a specific and detailed course of conduct and imposed an exaction on those who transgress its standard. The Court did note that the law did not bear characteristics of a regulatory penalty, as the cost of the tax was far outweighed by the cost of obtaining health insurance, making the payment of the tax a reasonable financial decision. 17 Still, the majority’s discussion suggests that, for constitutional purposes, the prominence of regulatory motivations for tax provisions may become less important than the nature of the exactions imposed and the manner in which they are administered.
In those areas where activities are subject to both taxation and regulation, the taxing authority is not limited from reaching activities otherwise prohibited. For instance, Congress may tax an activity, such as the business of accepting wagers, 18 regardless of whether it is permitted or prohibited by the laws of the United States 19 or by those of a state. 20 However, Congress's authority to regulate using the taxing power
reaches only existing subjects. 21 Thus, so-called federal
licenses, so far as they relate to topics outside Congress's constitutional authority, merely express,
the purpose of the government not to interfere . . . with the trade nominally licensed, if the required taxes are paid. In those instance, whether the
licensed trade shall be permitted at all is a question that remains a decision by the state. 22