In 1816, Congress chartered The Second Bank of the United States. In 1818, the state of Maryland passed legislation to impose taxes on the bank. James W. McCulloch, the cashier of the Baltimore branch of the bank, refused to pay the tax. The state appeals court held that the Second Bank was unconstitutional because the Constitution did not provide a textual commitment for the federal government to charter a bank.
Later commentators have continued to challenge the logic in Marshall’s opinion, some of them suggesting that it infringes on the Tenth Amendment. However, it remains valid to the current day, and his view that the federal government derives sovereignty from the people rather than the states has been widely accepted. The decision has been influential in nations that have similar legal systems, such as Australia.
The McCulloch v. Maryland Decision The ruling focused on the following central issues: whether state governments have the power to tax federal banks, whether Congress has the authority to establish the Bank of the United States, and whether federal banks are explicitly exempt from taxation by states. The Court cited the Supremacy Clause in noting that federal law is the “supreme law of the land, anything in the laws of any state to the contrary notwithstanding” and went on to say that a tax by state governments of a federal bank would necessarily cause the federal bank, to the extent that it is taxed, to “depend on the discretion of the [said] state governments for its [continued] existence”. That is, once a state government has the discretion to tax the federal bank, it could use that discretion to such an extent as to deplete as much of the resources of the federal bank as it sees fit. The Court said that such discretion violated the Constitution because, under the Supremacy Clause, a federal law has to be allowed to operate without restriction from state laws like the Maryland state tax law. The Court also addressed plaintiff’s argument that Congress was not empowered to establish a federal bank, concluding that such power was “implied” through the “necessary and proper clause” and through the idea that the establishment by the federal government of corporations is a “necessary and proper” means to achieving the federal end of “raising revenue”. To show that Congress’s establishment of a bank was unconstitutional, the Court held that the operations of the Bank of the United States had “no fair connection” with the “powers and duties” of the federal government and that, therefore, its establishment constituted a significant over-extension of the power of Congress. In evaluating the argument that the Bank of the United States was specially exempt from taxation, the Court turned to the standard for a blanket exemption on taxation for an institution, noting that such an exemption requires that either the specific “nature of the property” held by the institution exempts it from tax, that the bank’s status as the “Bank of the United States” exempts it from tax, that the Constitution expressly exempts the bank from tax, or that the exemption is indispensable to the exercise of some Constitutional power. The Court concluded that the bank’s stock—it’s property—does not necessarily subject it to taxation because such property is routinely taxed. It went on to explain that the bank’s status as the Bank of the United States does not exempt it from tax because the property of the United States had recently been held to not be exempt from tax. The Court clarified that there is no express exemption from tax for federal banks in the Constitution. Finally, the Court explained how there is no need to exempt the bank from tax in order to have it achieve the purpose for which it was established.
The people of all the states have created the general government, and have conferred upon it the general power of taxation. The people of all the states, and the states themselves, are represented in Congress, and, by their representatives, exercise this power. When they tax the chartered institutions of the states, they tax their constituents ,and these taxes must be uniform. But, when a state taxes the operations of the government of the United States, it acts upon institutions created, not by their own constituents, but by people over whom they claim no control.