Reading Railroad Company v. Pennsylvania (1872)

Reading Railroad Company v. Pennsylvania
Supreme Court of the United States
Decided March 7, 1872
Full case name	Reading Railroad Company v. Pennsylvania
Citations	82 U.S. 232 (more)
Court membership
Chief Justice Salmon P. Chase Associate Justices Samuel Nelson · Nathan Clifford Noah H. Swayne · Samuel F. Miller David Davis · Stephen J. Field William Strong · Joseph P. Bradley
Case opinions
Majority	Strong, joined by Bradley, Miller, Field
Concurrence	Davis
Concur/dissent	Swayne
Laws applied
Dormant Commerce Clause

Reading Railroad Company v. Pennsylvania 82 U.S. 232 (1872) was a U.S. Supreme Court decision that ruled that the state of Pennsylvania violated the Constitution by imposing unjust taxes on interstate commerce.

The case was brought by Reading Railroad Company, which challenged Pennsylvania's Act of August 25, 1864, also referred to as 'An act to provide additional revenue for the use of the Commonwealth'. The act was established to provide additional revenue for the Commonwealth of Pennsylvania after the American Civil War. It imposed systematic taxes on transportation companies, based on freight weight, for municipal purposes. All freight transported within Pennsylvania was subject to this tax.

Reading Railroad Company argued that the tax burdened its ability to operate within the state of Pennsylvania, and thus interfered with interstate commerce. They contended that railroad companies operating across state lines were discriminated against by being taxed heavier than local businesses for goods transported through Pennsylvania but delivered to other states.

The Supreme Court ruled that the tax violated the Commerce Clause, which grants Congress the power to regulate commerce between states and foreign nations to promote free trade. The decision specifically connects to the Dormant Commerce Clause, as Congress can prohibit states from enacting laws that discriminate against or unduly burden interstate commerce.

Contextual background

American Civil War

Complete map of the states in the Civil War (including states that joined after 1861). Blue represents Union states, red represents Confederate states, and white represents territories. Purple represents southern border states with economic ties to the Union.

Overview

The American Civil War was fought between 1861 and 1865 due to rising tensions between the northern (Union) states and the southern (Confederate) states. Following the onset of the Industrial Revolution, the North powered its economy through industrialization, emphasizing large-scale manufacturing. In contrast, the South powered its economy through agriculture, emphasizing the production of cotton and tobacco. Southern state governments established slavery to support large-scale farming, which discouraged any push toward industrial development. Their differing economic practices caused social disagreements, particularly concerning the merits of a free market versus slave labor.

Upon the presidential election of unionist, Abraham Lincoln, southern leaders feared that slavery would be abolished and tensions heightened. The southern states then formed the Confederate States of America to secede from the other states. While the southern states wanted to break away, the northern states aimed to preserve the union of the country, ultimately leading to the outbreak of war. The war lasted for approximately four years until the Confederacy surrendered.

Pennsylvania's involvement

Pennsylvania played a crucial role in American industrialization. The state's rich deposits of coal, iron, and other raw materials were essential for powering machinery. Pennsylvania's foundries alone produced nearly 270,000 tons of iron in 1860, showcasing its significance to the North. To support the extensive manufacturing industry, the North required a railroad system to facilitate the transportation of raw materials, finished goods, and large machinery.

Historical map of early railroad lines emerging from Pennsylvania.

During the Civil War, the Union took full advantage of its extensive railroad system. Union General William Tecumseh Sherman skillfully used these rail lines to deliver fresh supplies and soldiers to the battlefields. Notably, ever battle fought east of the Mississippi River occurred within twenty miles of a railroad.

One of the most significant Civil War battles was the Battle of Gettysburg, which took place in Gettysburg, Pennsylvania. This battle not only resulted in the highest number of war casualties, but is also regarded as the turning point of the war in favor of the Union. Pennsylvania's railroads played a crucial role in supplying this battle, which placed a financial burden on the state. The costs of rebuilding devastated battlefields and the economic losses from decreased wartime manufacturing created lasting challenges for Pennsylvania’s economy.

Financial implications of the Civil War

On August 25th, 1864, the Legislature of Pennsylvania passed 'An act to provide additional revenue for the use of the Commonwealth', which has also been referred to as the Pennsylvania Revenue Act of 1864 (not to be confused with the U.S. Revenue Act of 1864). The act imposed a tax on all freight transported within the state of Pennsylvania and was included in a plan to raise revenue for the Commonwealth after the Civil War. The companies affected by this tax included railroad, steamboat, canal, and slackwater navigation companies. These companies were specifically taxed because they were involved in the state's main industry.

The companies would receive a tax that varied in price depending on the weight and product type of the freight. For every ton of freight carried by mines, quarries, and clay beds, companies would pay a 2-cent tax. For freight with hewn timber, animal food, agricultural products, and forest products, companies would pay a 3-cent tax. For all other products and freight not listed, companies would pay a 5-cent tax. The act also specifies that toll companies that charge other businesses for using their transportation lines could add the freight tax to their tolls if the freight had not already been taxed by the state.

The regulations were as follows:

Where the same freight shall be carried over and upon different but continuous lines, said freight shall be chargeable with tax as if it had been carried but upon one line, and the whole tax shall be paid by such one of said companies as the State treasurer may select and notify thereof. Corporations whose lines of improvements are used by others for the transportation of freight, and whose only earnings arise from tolls charged for such use, are authorized to add the tax hereby imposed to said tolls and collect the same therewith, but in no case shall tax be twice charged on the same freight carried on or over the same line of improvements: Provided, That every company now or hereafter incorporated by this Commonwealth, whose line extends into any other State, and every corporation, company, or individual of any other State, holding and enjoying any franchises, property, or privileges whatever in this State, by virtue of the laws thereof, shall make returns of freight and pay for the freight carried over, through, and upon that portion of their lines within this State, as if the whole of their respective lines were in this State.

The regulation indicates that the tax is not intended to be a burden on the franchise of transportation companies or their property. Instead, it is specifically imposed on the freight itself. This means that the tax amount remains constant, regardless of the distance the freight travels. This structure implies that companies operating on connected lines can transport freight without incurring a great tax liability.

The regulation further indicates that companies that operate across state lines and transport freight through Pennsylvania must report and pay taxes on the freight as if their entire operations are based in the state. This increases the overall tax liabilities for these companies, particularly because they often handle larger freight volumes. They are also more likely to switch lines and use tolls if they don't have well-established property in the state.

Reading Railroad Company's argument

Opposition to the act

Overview

Pennsylvania's manufacturing industry relied on Reading Railroad Company for the transportation of coal. Notably, Reading Railroad Company did not carry goods of its own because it served as a freight transportation company. They carried coal from the mountains of Pennsylvania to Port Richmond outside of Philadelphia, Pennsylvania. They also carried coal to the Schuylkill Canal. Both destinations primarily exported the coal to other states.

On October 25th, 1866, the accounting officers of Pennsylvania delivered a financial account to Reading Railroad Company for a tax on their freight tonnage. This account accumulated charges over three consecutive quarters. The charges were as follows:

• For freight transported to points within the State of Pennsylvania................. $38,361
• For freight transported outside of the State.................................................... $46,520

Argument

Reading Railroad Company refused to pay the $46,520 portion of the tax because they believed Pennsylvania's Revenue Act of 1864 only had the authority to tax freight transported and delivered in Pennsylvania. They argued that the latter tax imposed unconstitutional regulations on interstate commerce, the movement of goods across state lines.

Supreme Court decision

Justice William Strong, the author of the majority opinion in Reading Railroad Company v. Pennsylvania.

Opinion of the court

During the December 1872 term, the Supreme Court issued a decision in favor of Reading Railroad Company, declaring Pennsylvania's Act of August 25, 1864 unconstitutional for imposing a tax on freight. Justice William Strong authored the majority opinion of the Court.

In reaching the decision, the Court relied on precedents from similar cases, like Bank of Commerce v. New York City. To further shape it's reasoning, the Court interpreted the Dormant Commerce Clause, found in Article I, Section 8, Clause 3 of the U.S. Constitution. Strong stated:

[The decision] calls upon us to trace the line, always difficult to be traced, between the limits of State sovereignty in imposing taxation, and the power and duty of the Federal government to protect and regulate interstate commerce. While, upon the one hand, it is of the utmost importance that the States should possess the power to raise revenue for all the purposes of a State government, by any means, and in any manner not inconsistent with the powers which the people of the States have conferred upon the General Government, it is equally important that the domain of the latter should be preserved free from invasion, and that no State legislation should be sustained which defeats the avowed purposes of the Federal Constitution, or which assumes to regulate, or control subjects committed by that Constitution exclusively to the regulation of Congress.

Dormant Commerce Clause

By applying the Dormant Commerce Clause, the Court believed that allowing Pennsylvania to tax freight could lead to burdensome restrictions on interstate commerce. The Court expressed its concerns about the impact of such taxes:

And as there is no limit to the rate of taxation she may impose, if she can tax at all, it is obvious the condition may be made so onerous that an interchange of commodities with other States would be rendered impossible. The same power that may impose a tax of two cents per ton upon coal carried out of the State, may impose one of five dollars. Such an imposition, whether large or small, is a restraint of the privilege or right to have the subjects of commerce pass freely from one State to another without being obstructed by the intervention of State lines.

Pennsylvania's tax on freight transport was viewed as a hindrance to the free movement of goods between states, potentially imposing significant restrictions on commerce. The ruling emphasized that permitting Pennsylvania to impose such a tax could result in an excessive amount of regulations that would hinder trade, undermining the U.S Constitution’s intent to create a unified economic system. The Court expressed concerns that this tax could disrupt market competition by discriminating against out-of-state businesses. Thus, to protect the integrity of interstate commerce, the Court ultimately declared the tax unconstitutional.

The Supreme Court also accounted for the fact that the state did not own its transportation infrastructure. It noted that the tax did not serve as compensation for using state-owned infrastructure, as Pennsylvania did not own the railroads or canals. The Court distinguished between a tax and a toll, as a tax is a sovereign demand and a toll is a fee for services or infrastructure. Ultimately, the Supreme Court concluded that the state was overstepping its authority, as the tax was imposed on freight rather than the transportation services themselves.

Dissent

Justice Noah H. Swayne, a dissenter of Reading Railroad Company v. Pennsylvania.

Justice Noah H. Swayne dissented from the Court's decision. Swayne interpreted that the tax was levied on businesses and implied uniformly:

I dissent from the opinion just read. In my judgment, the tax is imposed upon the business of those required to pay it. The tonnage is only the mode of ascertaining the extent of the business. That no discrimination is made between freight carried wholly within the State, and that brought into or carried through or out of it, sets this, as I think, in a clear light, and is conclusive on the subject.

Swayne argued that the tax was imposed on businesses instead of freight weight, as tonnage was used as a measurement in determining the amount of business being done. He further argues that the tax was enforced uniformly as the price per ton did not differentiate between freight transported locally and freight transported across state lines.

See also

• Dormant Commerce Clause
• Commerce Clause