Supreme Court was sharply divided as to the constitutionality of other
features of the law, it was unanimous as to the lack of authority in the
United States to tax the interest on municipal bonds.

[Footnote 1: _Pollock v. Farmers Loan & Trust Co._, 157 U.S., 429; same
case on rehearing, 158 U.S., 601.]

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