It wasn’t long before the prohibition against state-funded internal improvements was challenged in court. Despite recent history, Michigan lawmakers wanted to make another go at publicly financing railroads. They took a different tact this time — passing bills that authorized cities and townships to help finance private railroad corporations from bond proceeds. Gov. Henry Crapo vetoed several bills of this type, apparently out of a concern for their constitutionality. But many were passed nevertheless due to legislative overrides. Meanwhile, voters upheld the 1850 constitutional prohibition when they rejected a new proposed constitution in 1868 that would have again allowed for publicly financed internal improvements. One of the railroad companies approved to receive bond proceeds sued Salem Township when it refused to issue bonds on the railroad’s behalf after having initially approved of the deal.
The case made its way to the Michigan Supreme Court in 1870. It was recognized at the time to be extremely important; there were eight days of oral arguments. Gov. Crapo suspected these programs to be unconstitutional, but many likely believed that the railroads would win the case. After all, most other state and federal courts had approved of local aid to railroads. But the Michigan Supreme Court, led by Justice Thomas Cooley, ruled these programs to be unconstitutional. Surprisingly, however, Cooley’s opinion relied less on the 1850 constitution’s prohibition on internal improvements, and more on a general limitation on the power of the Legislature to tax and spend for public purposes.
Cooley’s reasoning in the case was used for settling many future similar cases and so will be detailed extensively here. Cooley first admitted that the legislative power to tax and spend is very broad:
[The sovereign power of taxation], we are told, is not, and from its very nature cannot, be controlled and limited by precise and accurate rules, which shall designate and define in all cases the particular purposes for which alone moneys shall be raised, or to which they may be appropriated when raised, or the extent of the burden which may be imposed, and it is added that upon all these points a broad and uncontrollable discretion is necessarily vested in the legislative department of every government.
Cooley went on to argue, however, that this taxation power is limited:
It is conceded, nevertheless, that there are certain limitations upon this power, not prescribed in express terms by any constitutional provision, but inherent in the subject itself, which attend its exercise under all circumstances, and which are as inflexible and absolute in their restraints as if directly imposed in the most positive form of words.
He identified three “fundamental maxims in the law of taxation” that “inhere as conditions in the power to impose any taxes whatsoever, or to create any burden for which taxation is to provide.” Only when these principles are observed is “the legislative department . . . exercising an authority over this subject which it has received from the people.” These principles are: (1) the tax must be “imposed for a public, and not for a mere private purpose” because a tax that is “in no way connected with the public interests or welfare . . . ceases to be taxation and becomes plunder;” (2) the tax must be apportioned fairly; for instance, state burdens must be borne equally by all state taxpayers; and (3) when taxes are imposed only on certain localities, the benefit should go solely to that locality.
Cooley argued that it is the role of the courts to enforce these principles. He then went on to define what constituted a public purpose:
I do not understand that the word public, when employed in reference to this power, is to be construed or applied in any narrow or illiberal sense, or in any sense which would preclude the Legislature from taking broad views of State interest, necessity or policy, or from giving those views effect by means of the public revenues. Necessity alone is not the test by which the limits of State authority in this direction are to be defined, but a wise statemanship must look beyond the expenditures which are absolutely needful to the continued existence of organized government, and embrace others which may tend to make that government subserve the general well-being of society, and advance the present and prospective happiness and prosperity of the people. To erect the public buildings, to compensate the public officers and to discharge the public debts, are not the sole purposes to which the public revenues may be applied, but, on the contrary, considerations of natural equity, gratitude and charity are never out of place when the general good of the whole people is in question, and may be kept in view in the imposition of the public burdens.
Having set out the general rules of legal taxation, Justice Cooley analyzed the legislation in question. He noted that the tax was a local tax that was supposed to have a local benefit. But the railroad is a private enterprise that would be “owned, controlled, and operated by a private corporation for the benefit of its own members[.]” The benefit to the corporation would be the main result and the benefit to the locality would be only ancillary:
Primarily, therefore, the money, when raised, is to benefit a private corporation; to add to its funds and improve its property; and the benefit to the public is to be secondary and incidental, like that which springs from the building of a grist-mill, the establishment of a factory, the opening of a public inn, or from any other private enterprise which accommodates a local want and tends to increase local values.
Because the railroads strenuously argued they were akin to public roads, Justice Cooley examined this argument at length. He noted that while railroads do accommodate public travel, they remain in private hands. Railroads are businesses just like hotels, stage coach lines, or grist mills, he argued. Justice Cooley cited with approval a Wisconsin case wherein that state’s court determined that taxation to create a public hotel was improper despite “the incidental benefits which the public” was to receive from the hotel’s construction.
Justice Cooley then discussed whether the fact that eminent domain is occasionally used to benefit railroads makes them materially different from other businesses. He argued that the only reason eminent domain could be allowed to assist railroads is the impracticability of requiring every property owner to acquiesce and sell their land, not because railroads met the requirements of a public purpose. Further, the state must reserve the right to supervise and control a railroad that relies on the use of eminent domain so as to ensure that the public benefits.
Even if building a railroad reached the level of being an absolute necessity, it still would not meet the definition of a public purpose for which taxation may be used, Justice Cooley went on to argue. He used a shortage in physicians as an example:
Certain professions and occupations in life are also essential, but we have no authority to employ the public moneys to induce persons to enter them. The necessity may be pressing, and to supply it may be, in a certain sense, to accomplish a “public purpose;” but it is not a purpose for which the power of taxation may be employed. The public necessity for an educated and skillful physician in some particular locality may be great and pressing, yet if the people should be taxed to hire one to locate there, the common voice would exclaim that the public moneys were being devoted to a private purpose. (Emphasis in original)
And the size of the benefit to the public should not matter either, he reasoned, marking a distinction between the construction of public roads and that of business enterprises:
The opening of a new street in a city or village may be of trifling public importance as compared with the location within it of some new business or manufacture; but while the right to pay out the public funds for the one would be unquestionable, the other by common consent is classified as a private interest, which the public can aid as individuals if they see fit, while they are not permitted to employ the machinery of the government to that end.
Justice Cooley indicated that most of society needs, i.e. its necessities, are not the concern of the government, but of “private inclination and enterprise”:
By common consent also a large portion of the most urgent needs of society are relegated exclusively to the law of demand and supply. It is this in its natural operation, and without the interference of the government, that gives us the proper proportion of tillers of the soil, artisans, manufacturers, merchants and professional men, and that determines when and where they shall give to society the benefit of their particular services. However great the need in the direction of any particular calling, the interference of the government is not tolerated, because, though it might be supplying a public want, it is considered as invading the domain that belongs exclusively to private inclination and enterprise. We perceive, therefore, that the term “public purposes,” as employed to denote the objects for which taxes may be levied, has no relation to the urgency of the public need, or to the extent of the public benefit which is to follow. It is, on the other hand, merely a term of classification, to distinguish the object for which, according to settled usage, the government is to provide, from those which, by the like usage, are left to private inclination, interest or liberality. (Emphasis in original)
It creates a broad and manifest distinction — one in regard to which there need be neither doubt nor difficulty — between public works and private enterprises; between the public conveniences which it is the business of government to provide and those which private interest and competition will supply whenever the demand is sufficient. When we draw this line of distinction, we perceive immediately that the present case falls outside of it.
Justice Cooley then noted that the elimination of the “internal improvements” language from the 1835 constitution meant that railroads were no longer a public purpose:
It was at one time in this State deemed true policy that the government should supply railroad facilities to the traveling and commercial public, and while that policy prevailed, the right of taxation for the purpose was unquestionable. Our policy in that respect has changed; railroads are no longer public works, but private property; individuals and not the State own and control them for their own profit; the public may reap many and large benefits from them, and indeed are expected to do so, but only incidentally, and only as they might reap similar benefits from other modes of investing private capital. It is no longer recognized as proper or politic that the State should supply the means of locomotion by rail to the people, and this species of work is therefore remitted to the care of private enterprise, and cannot be aided by the public funds, any more than can any other private undertaking which in like manner falls outside the line of distinction indicated.
His argument continued that governmental discrimination of different industries — in this case, to single out some for favors — is not legal and only can be authorized if the state enacts a constitutional amendment specifically permitting it (similar to the “internal improvement” language of the 1835 constitution):
But the discrimination by the State between different classes of occupations, and the favoring of one at the expense of the rest, whether that one be farming or banking, merchandising or milling, printing or railroading, is not legitimate legislation, and is an invasion of that equality of right and privilege which is a maxim in State government. When the door is once opened to it, there is no line at which we can stop and say with confidence that thus far we may go with safety and propriety, but no further. Every honest employment is honorable, it is beneficial to the public; it deserves encouragement. The more successful we can make it, the more does it generally subserve the public good. But it is not the business of the State to make discriminations in favor of one class against another, or in favor of one employment against another. The State can have no favorites. Its business is to protect the industry of all, and to give all the benefit of equal laws. It cannot compel an unwilling minority to submit to taxation in order that it may keep upon its feet any business that cannot stand alone. Moreover, it is not a weak interest only that can give plausible reasons for public aid: when the State once enters upon the business of subsidies, we shall not fail to discover that the strong and powerful interests are those most likely to control legislation, and that the weaker will be taxed to enhance the profits of the stronger. I shall not question the right of the people, by their Constitution, to open the door to such discriminations, but in this State they have not adopted that policy, and they have not authorized any department of the government to adopt it for them.
Justice Cooley examined two additional justifications for the railroad tax: the incidental local benefit from increased property values and enhanced transportation services for personal travel or business. He made short work of negating the first rationalization: “The incidental benefit which any enterprise may bring to the public, has never been recognized as sufficient of itself to bring the object within the sphere of taxation.” The second justification made a better case, but was still found wanting:
If this consideration is sufficient in the case of common carriers [which include railroads], it must be sufficient also in the case of any other employment. There is nothing in the business of carrying goods and passengers which gives the person who conducts it a claim upon the public different in its nature from that of the manufacturer or the merchant. … But if the Legislature should pass an act providing that the township of Salem should give or loan a certain percentage of its taxable property to any merchant who will undertake to erect a store within the township, and hold himself ready at all times to sell goods therein to the people of the township on terms as favorable as those he would exact from others, he would be a bold man who should undertake to defend such legislation on constitutional principles. Yet the case would possess all the elements of public interest which are to be found in the case before us; the public convenience would be subserved, and there would be a like tendency to increase local values. … And when we have once determined that a municipal government can tax its citizens to make a donation to a railroad company, because of the incidental benefits expected from its operation, we do not go a single step further when we hold that it may use the public funds to erect a cotton or woolen factory, or a building suited to the manufacture of tobacco, and present it, on grounds of public benefit, to any person who will occupy it.
Justice Cooley concluded by claiming that issuing public bonds for the purpose of financing railroads would violate the 1850 constitution because the state did not have the power to use taxation for the primary purpose of benefiting a private enterprise:
The case before us is that of a private corporation demanding a gratuity which has been voted to it in township meeting upon the assumption that its business operations and facilities will incidentally benefit the township. … [T]he first and most fundamental maxim of taxation is violated by the act (…).
Chief Justice Campbell joined Justice Cooley’s opinion, but elaborated and likened taxations for private purposes to robbery:
It has been said to be too clear to need argument that it would be usurpation and not legislation to take the property of A and give it to B. It must be on the same ground equally illegal to tax A for the benefit of B; for the amount of property taken against his will cannot make any difference in the principle, neither can it make the wrong any less that he has companions in misery. Taxation for private purposes is no more legal than robbery for private purposes.
Chief Justice Campbell also rejected the concept that public money could be taxed to aid one business at the expense of another without a clear language in the constitution authorizing such:
All industry helps general prosperity. No line can be found which can, in law, make one business more public than another. The power to resort to taxation to set men up in any business is a power that is foreign to the purposes of government. It is not legislative power, but unlimited sovereign will, that can compel one private citizen to furnish means to another. Taxation is only lawful to enable the government to fulfill its public duties, and to pay such expenses as are incident to public business. There is necessarily a considerable discretion to determine what means may be desirable to enable the government to do its work creditably, but a power to tax one citizen for the private emolument of another, upon any theory of mere incidental advantage to the general prosperity of large or small communities, can only rest on a foundation of absolute and irresponsible power to make favored classes and citizens, and make the whole body of tax-payers tributary to them. No such power can be tolerated in a republic, and no hint of such a power is to be found in our constitution. As far as it speaks at all on the subject it prohibits State aid to private persons or enterprises, and if there is no specific prohibition of taxation for private purposes, it was on the same principle which left out prohibitions against giving private property away to private persons, — that is to say, the principle which renders it unnecessary to forbid powers which could not exist without clear and express grant.
And with this, the court ruled unconstitutional the 1864 bill that authorized municipalities to help finance railroads. In many ways, this case was seminal; in the decades that followed, courts relied on it when deciding on similar challenges to the prohibition against state-funded internal improvements and other subsidy programs for private firms or industries. Several other cases involving local bonding for railroads were brought before the court over the next few decades, and in each case, the court repeatedly reaffirmed its ruling in Salem.
Then in 1898, a trial court refused to follow Salem and the rulings that followed from it. That court was utterly convinced that because the courts of other states and the U.S. Supreme Court had not concurred, these cases were “radically wrong” and not binding precedent. But, once again, the Michigan Supreme Court affirmed the holding of its prior decisions.