Article I, Section 8, Clause 2: Congressional Spending and Borrowing Power

Article I of the Constitution enumerates the powers of the legislative branch. The Constitution vests Congress, comprised of the House of Representatives and the Senate, with the legislative power of the United States.

However, making laws isn't the only thing Congress does. One of its most important powers is deciding how the federal government will spend its money.

Article I, Section 8, Clause 1 of the U.S. Constitution is known as the "taxing and spending clause." Clause 2 is known as the "borrowing clause." Together, they grant Congress the broad power to borrow and spend money for the general welfare of the United States.

The spending clause is among Congress's most important powers. Through the Supreme Court's interpretation of it, Congress has created programs such as Social Security, Medicaid, and other federal programs.

This article summarizes the spending clause. It begins with its text and a brief explanation of its meaning. It then provides a historical background of spending clause jurisprudence. It concludes by describing several modern cases involving it.

What Does the Constitution Say About Spending and Borrowing By Congress?

Article I, Section 8 enumerates the powers of Congress. It states the following:

"The Congress shall have Power . . .

[1] 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; . . .

[2] To borrow Money on the credit of the United States; . . .

[18] To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof."

Congress's Spending Power Explained

As the Court wrote in NFIB v. Sebelius (2012) (discussed below), the spending power allows Congress to offer federal funds to states. It may also condition the offers such that states must meet specific conditions to receive the funds. This encourages states to pass certain regulations to advance federal policies.

The spending power allows Congress to induce states to adopt policies that the federal government cannot impose directly via its enumerated powers. For example, in South Dakota v. Dole (1987), Congress conditioned federal highway funds on states raising their drinking age to 21.

The conditions Congress places on receipt of federal funds ensure that states use the funds to provide for the general welfare. Another way to think of the general welfare clause is that Congress must use its spending power for the good of everyone. Congress shapes the concept of "general welfare." (Helvering v. Davis (1937)).

The reach of the spending power also increases, given Congress's powers under the necessary and proper clause, which the Supreme Court has broadly interpreted.

As the Court wrote in McCulloch v. Maryland (1819):

"Let the end be legitimate, let it be within the scope of the constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consist with the letter and spirit of the constitution, are constitutional."

Limits on Spending Power

Congress's spending power is not unlimited. Instead, several general restrictions limit the power, including the following:

• Congress must exercise its spending power in the pursuit of the general welfare. (Article I, Section 8, Clause 1).

• If Congress places conditions on the receipt of federal funds, it must do so unambiguously. This allows states to "exercise their choice knowingly, cognizant of the consequences of their participation." (Pennhurst State School and Hospital v. Halderman (1981))

• Conditions placed on the receipt of federal funds must generally relate "to the federal interest in particular national projects or programs." (Massachusetts v. United States (1978))

• Other constitutional provisions can independently bar the conditional grant of federal funds. For more information, see the discussion of Dole below.

As the Court noted in Sebelius, Congress can incentivize states to act according to federal policies. However, "when 'pressure turns into compulsion,'. . . the legislation runs contrary to our system of federalism." The Constitution does not give Congress the power to require states to regulate a certain way. The Tenth Amendment generally allows state governments to enact regulations and laws without federal government interference.

Historical Background of the Federal Spending and Taxing Power

Before the states ratified the Constitution in 1787, the Framers debated and discussed what powers the federal government would have. Under the Articles of Confederation, the precursor to the Constitution, the federal government lacked the power to tax states. Instead, it relied upon state governments taxing their citizens under state law and depositing taxes into a national treasury.

The Framers created the taxing and spending clause to allow the federal government to raise and spend money. However, the Framers debated these powers extensively. Regarding the spending power specifically, two camps emerged, led by authors of the Federalist Papers.

James Madison led one side of the debate. He argued that the spending clause authorized Congress to spend money based on the other enumerated powers listed in Article I, Section 8. In other words, the Madisonian view was that Clause 1's placement within Section 8 limited spending measures to those powers listed within the section.

Alexander Hamilton took a different view. He argued that the general welfare clause allowed Congress to spend money on anything that would advance the general welfare of the people. As the Constitution Annotated notes, Hamilton argued that "general welfare" embraced "subject matter of such wide variety that it defied further specification or definition."

Simply put, Hamilton argued for a broad meaning of the general welfare clause and based his argument on its literal meaning. Conversely, Madison argued that the power was "merely instrumental" to Congress's remaining powers.

Early case law explicitly avoided siding with either perspective. However, in 1936, the Court finally endorsed Hamilton's view on the taxing and spending clause.

United States v. Butler (1936)

In United States v. Butler, the Court determined that when Congress uses its spending power, it faces fewer constitutional limitations than when it relies on its direct authority to create regulations. The case also discussed the conflict between federal regulation of activities usually reserved for states.

Congress passed the Agricultural Adjustment Act in 1933 due to a national economic emergency related to agricultural commodities. It levied a tax on certain agricultural commodities, including cotton. Congress could redistribute the funds to farmers who promised to reduce their acreage or production.

Butler operated a cotton processor. He filed a lawsuit challenging the constitutionality of the Act.

In a 6-3 decision, the Supreme Court ruled that the Act was unconstitutional because it violated the Tenth Amendment and went beyond Congress's grant of power.

Justice Owen J. Roberts authored the majority opinion. He wrote about the limits on Congress's taxing and spending powers, stating:

"[I]ts confines are set in the clause which confers it, and not in those of § 8 which bestow and define the legislative powers of the Congress. It results that the power of Congress to authorize expenditure of public moneys for public purposes is not limited by the direct grants of legislative power found in the Constitution."

Even though the Court accepted Hamilton's view of the spending clause, it still determined the Act was unconstitutional. Justice Roberts wrote that the Act of Congress tried to control an activity, agriculture, over which states had complete control. Therefore, the Act was unconstitutional.

A year later, in Helvering, the Court further solidified its approval of the Hamiltonian perspective. Therefore, the Court has embraced the idea that general welfare is a major determining factor as to whether an action taken under the spending clause is constitutional. Additionally, the other clauses in Section 8 do not limit the spending power.

Modern Spending Clause Cases

Today, most questions about Congress's spending power relate to appropriations. More specifically, the questions relate to the conditions Congress places on the receipt of federal grants and funds.

Appropriations refer to the congressional power to set aside money for a specific purpose. For example, Congress can set aside funds for the states to improve the general welfare, such as creating public parks. If a state meets the conditions requisite to receive the appropriation, the federal government will give the state money. The state must then use the money for the specified purpose.

Congress has the power to impose conditions on appropriations—doing so ensures the states use the funds as intended. The conditions, in theory, encourage the states to act in a way Congress desires in exchange for the grant of money. The Supreme Court has repeatedly held that Congress "may pursue broad policy objectives" through conditions.

However, the line between encouragement and coercion is often difficult to define. The following cases raise the question of the extent to which the federal government can grant (or withhold) federal funds based on whether a state does (or does not) do something. In other words, what strings can Congress attach to federal funding?

South Dakota v. Dole (1987)

In 1984, Congress passed the National Minimum Drinking Age Act. This federal law directed the Secretary of Transportation to withhold a percentage of federal highway funds from states that allowed people under 21 years old to buy alcohol. At the time, South Dakota allowed 19-year-olds to buy beer containing 3.2% alcohol.

South Dakota sued the Secretary of Transportation. It sought a declaratory judgment that the law violated the spending clause and the 21st Amendment.

South Dakota argued that the 21st Amendment reserved the power to the states to set their own minimum drinking age. It argued that the law usurped that power and violated the Constitution. In other words, South Dakota argued that Congress could not use the spending power to indirectly regulate something it did not have the direct power to regulate.

The Secretary argued that the law did not implicate the 21st Amendment. The Amendment confirmed that states had the power to impose restrictions on the sale and distribution of alcohol. However, it did not give states the "power to permit sales that Congress seeks to prohibit."

The U.S. District Court rejected South Dakota's claims, and the Eighth Circuit Court of Appeals affirmed. The Supreme Court granted review of the case.

The Supreme Court first noted that Congress can attach conditions to the receipt of federal funds, as it had in this case. It also noted that the congressional power to do so is subject to certain restrictions. One of these restrictions is that it must be in "pursuit of 'the general welfare.'"

The Court held that the law was reasonably tied to the general welfare because it helped prevent young people from drinking and driving. Specifically, inconsistent drinking ages between states "created particular incentives for young persons to combine their desire to drink with their ability to drive." In other words, young people would cross state lines to drink and then drive home intoxicated.

Ensuring safe motorways is a valid national concern. The restriction advanced the general welfare by creating a uniform drinking age. Therefore, the Court determined it was a valid use of the federal power.

The Court also held that the 21st Amendment limits on spending power did not prevent Congress from attempting to indirectly achieve federal objectives by conditioning the receipt of federal funds.

Finally, the Court held that the five percent withholding was not coercive. The withholding was a "relatively mild encouragement" rather than an unduly coercive condition. If South Dakota chose not to participate, it risked losing less than one-half of one percent of its total budget.

NFIB v. Sebelius (2012)

In 2010, Congress passed the Affordable Care Act (ACA), a comprehensive federal program that reformed healthcare in the United States. The ACA (also known as "Obamacare") established the following:

• By 2014, non-exempt individuals who failed to purchase "minimum essential" health insurance coverage would face tax penalties.

• It included a Medicaid expansion. States had to participate in the Medicaid program to receive Medicaid funds. Congress threatened to withhold all Medicaid funding from states that chose not to participate. Medicaid funding was the largest grant-in-aid funding program at the time.

• Certain employers had to provide health care coverage to their employees.

Soon after President Barack Obama signed the ACA into law, 13 states filed a lawsuit challenging its constitutionality. Subsequently, the National Federation of Independent Business (NFIB), two individual plaintiffs, and 13 other states joined the lawsuit. The lawsuit argued that:

• Congress exceeded its powers under the commerce clause when it passed the ACA.

• The Medicaid expansion was coercive and, therefore, unconstitutional.

• Requiring employers to provide health care coverage to employees violated the Tenth Amendment.

The case eventually reached the Supreme Court. The Court made five important decisions in the case:

1. The Court unanimously held that the Anti-Injunction Act did not bar it from considering the individual mandate issues.

2. A 5-4 majority of the Court held that Congress did not have power under the commerce clause to compel private people to purchase health insurance.

3. By a 5-4 majority, the Court held that the penalty for failing to buy health insurance was a "tax" under the taxing and spending clause. It also was not coercive. Therefore, the individual mandate was constitutional.

4. A 7-2 majority ruled that the ACA's threat to pull all Medicaid funding from non-participating states was unconstitutionally coercive.

5. A 5-4 majority determined that if the ACA removed the threat to pull all Medicaid Funding, the remaining parts of the ACA regarding the Medicaid expansion were constitutional.

With regard to the spending power, the plaintiffs argued that the Medicaid expansion was coercive. Specifically, it argued that threatening to withhold all Medicaid funding from non-participating states served "no purpose other than to force unwilling states to sign up for the dramatic expansion" of health care coverage.

The Court agreed with the plaintiffs. The Court clarified that Congress puts conditions on the funding so that Congress can ensure states use it for the general welfare. Here, the conditions did not govern how the states used the funds. Instead, the conditions took "the form of threats to terminate other significant independent grants."

More specifically, the Court compared the ACA's conditions to those in Dole. In Dole, the Court wrote that the five percent withholding was a "relatively mild encouragement" to the states. In Sebelius, the Court wrote that the condition of withholding all Medicaid funding was a "gun to the head." In doing so, the Court noted the following:

• Medicaid spending accounted for over 20 percent of the average state's total budget.

• Federal funds covered between 50 to 83 percent of a state's Medicaid costs.

• The threat of withholding Medicaid funding averaged out to approximately 10 percent of an individual state's budget.

Compared to Dole, the Court wrote that losing 10 percent of a state's budget was an "economic dragooning." It left the states with no choice but to participate in the Medicaid expansion. Therefore, the Court determined that the withholding condition was outside the scope of Congress's spending power.