It results from the peculiarities of our dual government, involving the co-existence within the same territorial limits of federal and state authority, that neither government can tax the property, the agencies, or the instrumentalities of the other. Thus a state cannot tax lands or buildings belonging to the federal government (Wisconsin Central R. Co. v. Price County), nor can a state, without the permission of the federal government, tax as property the bonds or currency issued by the federal government, though owned by private individuals. It has frequently been said, and the statement is considered to be an axiom, that the power to tax involves the power to destroy, and if a state could tax the persons who owned bonds or currency of the federal government, it could thereby make it more difficult for the federal government to borrow money by the issuance of bonds, interfere with its proper regulation and control of the currency, and thus impair its efficiency. Therefore, a bank having a portion of its capital stock invested in United States bonds cannot be directly taxed by the state on the portion of its capital stock thus invested (Bank of Commerce v. New York City); but there seems to be no valid reason why the owners of shares of stock in a bank should not be taxed on the basis of the value of such shares, though the property of the bank may be to some extent invested in United States bonds. For similar reasons, currency issued by the United States government was held not to be subject to state taxation in the hands of persons holding it; but the statutes of the United States now authorize the taxation of United States currency, the same as other money held by individuals (see Act of 1894), and such consent by the United States removes any objection to such taxation by the states.

National bank notes are subject to state taxation under the federal statute which authorizes the creation and operation of the national banks as well as under the statute relating to taxation of treasury notes just referred to. The same reasons which require the exemption of United States property and the bonds and currency issued by the United States from state taxation except by the consent of the federal government, also require that the officers of the federal government shall not be taxed on their salaries by the states in which they reside (The Collector v. Day and Dobbins v. Commissioners).

On the other hand, the federal government cannot impair or interfere with the legitimate operations of the state governments. Therefore, the federal government has no authority to exact an income tax from state officers on the basis of their salaries; nor to require federal stamps to be placed on the processes of state courts, or on state bonds or warrants, or on the bonds of state officers. Neither government has any power to interfere with the other in the exercise of its legitimate functions.

Some of the functions of the federal government may be carried on by corporations organized under its authority. Thus in McCulloch v. Maryland it was held that the property of a branch of the United States Bank, chartered by Congress, was exempt from state taxation. Under its authority to regulate post-offices and post-roads and provide for the carrying on of its necessary operations in the transportation of property and troops, the federal government has also granted charters or franchises; and it has been held (Pacific Railroad Cases) that the franchises of such corporations, and the property used by them in carrying on the operations authorized by the federal government, are not subject to state taxation. But the fact that a railroad company enjoys a franchise granted to it by the federal government does not necessarily exempt it entirely from taxation by a state in which it carries on its business. The rule seems to be that such a corporation is exempt from state taxation only so far as it is using its property in the performance of the functions authorized by the federal government.