ies,
in order to be exempt from national taxation, must be of a strictly
governmental character; the exemption does not extend to agencies and
instrumentalities used by the state in carrying on an ordinary private
business. This was decided in the South Carolina Dispensary case.[1] The
State of South Carolina had taken over the business of selling liquor
and the case involved a federal tax upon such business. The Court, while
reaffirming the general doctrine, nevertheless upheld the tax on the
ground that the business was not of a strictly governmental character.
This decision suggests the possibility that if an attempt were made to
tax state and municipal bonds the Court might draw a distinction based
on the purpose for which the bonds were issued, and hold that only such
as were issued for strictly governmental purposes were exempt.

[Footnote 1: _South Carolina v. United States_, 199 U.S., 437, decided
in 1905.]

It remains to consider the effect of the Sixteenth Amendment.

After the Supreme Court had held the Income Tax Law of 1894
unconstitutional on the ground that it was a direct tax and had not been
apportioned among the states in proportion to population the Sixteenth
Amendment to the Constitution was proposed and ratified. This amendment
provides that

the Congress shall have power to lay and collect taxes on
incomes, from whatever source derived, without apportionment
among the several states, and without regard to any census or
enumeration.

When the amendment was submitted to the states for approval some lawyers
apprehended that the words "incomes from whatever source derived" might
open the door to the taxation by the Government of income from state and
municipal bonds. Charles E. Hughes, then Governor of New York, sent a
special message to the Legislature opposing ratification of the
amendment on this ground.

Other lawyers, notably Senator Elihu Root, took a different view of the
scope of the amendment, holding that it would not enlarge the taxing
power but merely remove the obstacle found by the Supreme Court to the
Income Tax Law of 1894, i.e., the necessity of apportionment among the
states in proportion to population. This latter view has now been
confirmed by the Supreme Court. In a case involving a tax on income from
exports the Court said:[1]

The Sixteenth Amendment ... does not extend the taxing power
to new or excepted subjects, but merely removes all occ