United States v. Butler
As part of the New Deal, the Agricultural Adjustment Act authorized the Agriculture Department to contract with farmers to pay them to limit their production. This was funded by a tax on the first processor of agricultural components. Butler challenged the whole scheme as an unconstitutional attempt to control agricultural production.
District court found the scheme to be valid.
Court of appeals reversed and ruled that it was invalid.
Can Congress use its spending power to encourage with a regulation it cannot impose directly?
This is not a true tax, as the revenue is only used for the other part of the statute. The Constitution should grant the federal government the power to spend money for anything conducive to the general welfare. However, this act invades the reserved rights of the states. They alone have the power to regulate and control agricultural production. Congress can not infringe upon this under the pretext of spending for the general welfare.
It is said to be valid because it is voluntary, but it is not. If a farmer refuses to comply, he loses the benefits. The power to confer or withhold unlimited benefits is the power to coerce or destroy.
Even if it were purely voluntary, it would still be invalid. This is not within the federal power to regulate and encouraging compliance with appropriations is clearly bad and would nullify all constitutional limitations upon legislative power.
Congress can use its spending power neither to coerce nor to encourage compliance with a regulation that it cannot impose directly.
This falls within Congress' power to "provide for the general welfare." The majority does not even say otherwise. There is no evidence that this is coercion. Spending any money exerts persuasion over areas Congress does not have control, but Congress' spending power is in addition to its legislative power, not subordinate to it. Here it is in furtherance of a valid national purpose and thus valid. The government cannot coerce compliance, but it can encourage it. To hold otherwise would allow the government to give welfare to people without controlling what they do in exchange.
This view has prevailed since the case.