485 U. S. 505
April 20, 1988
Because unregistered bonds were often used for tax evasion, Congress imposed a heavy tax on income from unregistered bonds. This made unregistered bonds so unattractive that it no longer seemed reasonable for several states to even issue them. South Carolina said this squelching of unregistered bonds violated the Tenth Amendment, as well as the historic intergovernmental tax immunity given to state-issued bonds.
Nonetheless, the Court upheld the new tax law 7-1 (Kennedy did not participate). Brennan reminded poor South Carolina that, under the Garcia case from 1985, the Tenth Amendment was all but eviscerated. Moving on to a more specific claim of commandeering – that states were being conscripted to pass new laws on bonds – he said that as long as the states passed the new laws out of indirect coercion rather than direct forcing, there was no Tenth Amendment problem. Finally, Brennan faced the bond tax immunity argument from the 1895 case Pollock v. Farmers’ Loan & Trust Co., and simply overruled Pollock. It used to be that every tax on a contract with the government was thought immune, but that doctrine had faded away decades ago, and bonds were the last surviving vestige of it.
Stevens said in a brief concurrence that even without Garcia, the Tenth Amendment argument still would have failed. Scalia joined the majority opinion except for the Tenth Amendment part. He wrote that he agreed with the conclusion, but disagreed with the majority’s almost gleeful minimizing of the Amendment. Rehnquist concurred in judgment. A Special Master had concluded that the bond tax would not be a big burden on states, and that essentially concluded the case for him.
O’Connor dissented sharply. She would not tolerate the continued evisceration of the Tenth Amendment, and also objected to overruling Pollock. The erosion of the doctrine underlying Pollock was based on the non-burdensome nature of the tax on government contracts. Contra Rehnquist, she interpreted the Special Master to conclude that the bond tax would indeed be burdensome to states. Thus, state issued bonds still deserved immunity. This is one of those odd cases where O’Connor was substantially more ‘conservative’ than Scalia and Rehnquist. Whatever else might be said about her, she truly was possibly the best federalist the Court has ever had in the post-Four Horsemen era.