South Carolina v. Baker: Background
In 1982, the United States Congress passed the Tax Equity and Fiscal Responsibility Act. This legislation removed the federal income tax exemption for interested earned on publicly issued long-term bonds presented by local and state governments. The state of South Carolina, in response to this provision, declared that both registered and bearer bonds issued by municipalities and state governments are exempt from taxation because of the ruling in a previous court case. The United States Federal Government, as a result of this contest, claimed that the Act did not terminate the state’s power to issue bonds free from taxation, but instead regulated the types of bonds that are exempt from taxation.
South Carolina v. Baker was a landmark case heard by the United States Supreme Court in which the Court ruled that certain provisions of the Tax Equity and Fiscal Responsibility act of 1982 did not violate the Tenth Amendment to the United States Constitution.
The United States Supreme court ruled that a nondiscriminatory federal tax on the interest procured from state bonds does not violate the intergovernmental tax immunity provision. The case of South Carolina v. Baker ultimately permitted the federal taxation of interest earned from bonds issued by state governments in the country. In South Carolina v. Baker, the United States Supreme Court rendered that the contrary decision offered in the aforementioned case (Pollock v. Farmers’ Loan and Trust Company) had been effectively overruled by further case law.
South Carolina v. Baker: The Decision
In South Carolina v. Baker, the United States Supreme Court found that its decisions ultimately overruled the Pollock case so that interest procured from state bonds is not immune from a nondiscriminatory federal taxation model. As a result of this ruling, South Carolina v. Baker found that the owners of state bonds possess no constitutional authority to exempt taxes on earned income. The provision of the law in question imposes no direct taxes on the individual states; it is instead collected from bondholders. The Act, as determined by South Carolina v. Baker, is nondiscriminatory because the regulations attached are imposed on the federal government and participating state governments.
The decision of South Carolina v. Baker ultimately adjusted the Internal Revenue Code’s model for taxing long-term investments. The decision rendered in South Carolina v. Baker was unanimous: seven votes were given to Baker while only one was made against Baker. The decision in South Carolina v. Baker ultimately answered the attached fundamental question of: Did the Tax Equity and Fiscal Responsibility Act violate the Tenth Amendment and intergovernmental tax immunity?