The opinion of the court was delivered by: BAILEY
On August 29, 1935, the President approved two acts of Congress, one "To establish a retirement system for employees of carriers subject to the Interstate Commerce Act, and for other purposes" (49 Stat. 967 [ 45 U.S.C.A. § 215 et seq.; 42 U.S.C.A. § 410a]), and the other "To levy an excise tax upon carriers and an income tax upon their employees" (49 Stat. 974 [ 45 U.S.C.A. § 241 et seq.]). The latter act provides that there shall be levied upon the income of every employee of these carriers 3 1/2 per centum of the compensation of such employee, not in excess of $300 per month, received by him, and that this tax shall be collected by the employer, by deducting it from the compensation of the employee. It further levies an excise tax upon the carrier of 3 1/2 per centum of the compensation not in excess of $300 per month paid by it to its employees.
The plaintiff carriers and certain employees of the Atlantic Coast Line Company who have intervened contend that this tax upon them is arbitrary, capricious, and whimsical, and deprives them of their property without due process of law. It is not apparent from the act itself what is the basis of its unusual provisions. The tax is in addition to other taxes; it is levied upon railroad companies and their employees, and upon no other class, with the exception of certain officers of labor organizations. The income tax is laid upon the amount of employees' salaries not in excess of $300 per month, and all sums in excess of that amount are exempt. It bears harder upon low salaries than upon those that are higher, and is thus contrary to all principles which have heretofore been followed in the levying of income taxes. Some two months before the passage of this act the President declared in a meassage to Congress: "With the enactment of the income-tax law of 1913 the Federal Government began to apply effectively the widely accepted principle that taxes should be levied in proportion to ability to pay and in proportion to benefits received. Income was wisely chosen as the measure of benefits and of ability to pay. This was and still is a wholesome guide for national policy. It should be retained as the governing principle of Federal taxation." (H.Doc.No.229, 74th Congress.)
The basis of measurement of the amount of the tax upon the carriers does not appear from the act, nor why a tax should be levied upon the carriers and their employees and upon no other class of employers or employees, nor why the amount of the excise tax should be based upon the amount paid to employees not in excess of $300 per month. "That a federal statute passed under the taxing power may be so arbitrary and capricious as to cause it to fall before the due process of law clause of the Fifth Amendment is settled." Heiner v. Donnan, 285 U.S. 312, 326, 52 S. Ct. 358, 361, 76 L. Ed. 772. And such would seem to be the character of this tax, were the court confined in its consideration to the taxing act itself.
When, however, the act to establish a railroad retirement system, approved on the same day as the taxing act, is considered in connection with it, the reasons for the peculiar provisions of the taxing act are apparent. The two taken together so dovetail into one another as to create a complete system, substantially the same as that created by the Railroad Retirement Act of 1934 (48 Stat. 1283), held unconstitutional by the Supreme Court in Railroad Retirement Board v. Alton Railroad Co., 295 U.S. 330, 55 S. Ct. 758, 79 L. Ed. 1468. It is true, as claimed by the defendants, that the tax act is apparently based on the power of Congress to levy taxes to promote the general welfare and for the common defense, and also upon the power to regulate commerce (the latter being the power invoked in the act of 1934).
The provisions of the two acts in question are so interrelated and interdependent that each is a necessary part of one entire scheme. This is not only apparent from the terms of the acts themselves but is shown by their legislative history. It was clearly the intention of Congress that the pension system created by the Retirement Act should be supported by the taxes levied upon the carriers and their employees. Senator Wagner spoke for the Senate committee in reporting its favorable recommendation of the Retirement Act.
He referred to the tax bill, pointing out that it was not at that time before the Senate but was pending in the Finance Committee. This led to the following colloquy:
"Mr. Byrnes. Should such a bill ever be passed, the revenue would go into the general fund of the Treasury?
"Mr. Wagner. Yes; and then, may I say to the Senator, the government will pay no part of the expense of the annuities." (Cong.Rec. vol. 79, 13646; Pamphlet 14114.)
"Mr. Hasting. Does the Senator agree that the Court may take judicial notice of the taxing act when the other is being tested, or vice versa?
"Mr. Wagner. Of course, it would be obvious in the act itself?" (Cong.Rec. vol. 79, 13647; Pamphlet 14116.)
Senator Wagner said: "The calculations are definitely made; they are predictable as to the amount which will be required in order to secure a solvent fund for the payment of these pensions; and a sufficient tax is imposed to secure that fund. So whether it be segregated or put into the general fund of the treasury is really a very minor matter." (Cong.Rec. vol. 79, 13649; Pamphlet 14117, 14118.)
The defendants claim that the court, in determining the constitutionality of the taxing act, cannot take into consideration the provisions of the Retirement Act, that the funds arising from the taxing act are not "ear marked," not kept as a separate fund for the payment of the pensions provided for in the Retirement Act, and, so far as the constitutionality of the taxing act is concerned, its provisions alone can be considered. But, apart from any question whether the tax act is so arbitrary and capricious when taken out of its setting as to be an unconstitutional taking of property without due process of law, the purpose of Congress in passing it is clearly as shown above to provide funds for pensions under the Retirement Act, and not to provide for the expenses of the government. If the effect of the two acts taken together is to take the property of one class for the benefit of another, and the taxing act was not intended to provide for the expense of government, but solely for a purpose which the Supreme Court has held not to be within the domain of the federal government, it would ...