The decision in those cases is the law to-day (except in so far as it has been changed by the recent Sixteenth Amendment) with one possible limitation.  It has been held that state agencies and instrumentalities, 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 occasion, which otherwise might exist, for an apportionment among the states of taxes laid on income, whether it be derived from one source or another....

[Footnote 1:  Peck v.  Lowe, 247 U.S., 165.]

In a case decided a little earlier[1] the Court, speaking through Chief
Justice White, had said: