Instrumentality

What Is Instrumentality?

An instrumentality commonly refers to a subsidiary agency of a government that acts independently for the public good and whose obligations are backed by said government.

Understanding Instrumentality

An instrumentality is created specifically to carry out work that is deemed to be in the public's interest. Instrumentalities may exist and operate at the federal, state, or municipal levels depending on the entity.

The legal groundwork for instrumentality is based on the necessary and proper clause of the U.S. Constitution (Article 1, Section 8), which precludes federal and state governments from taxing each other's governmental operations. Instrumentality also provides for the backing of government agency obligations based on the full faith and credit of the federal government.

The concept of instrumentality may be applied to a number of contexts. For example, Government-Sponsored Enterprises (GSE), such as Fannie Mae (Federal National Mortgage Association), Ginnie Mae (Government National Mortgage Association), Freddie Mac (Federal Home Loan Mortgage Corporation), and Sallie Mae (Student Loan Marketing Association), are all federal instrumentalities that provide mortgages and student loans to borrowers. Their public purpose is to promote homeownership and higher education.

Libraries, schools, and hospitals may be instrumentalities, along with other associations formed for public purposes depending on the circumstances. To determine if an organization is an instrumentality, a number of factors must be considered, such as state regulation of activities, state sponsorship of the entity, and whether employees participate in a state-sponsored retirement system, among others.

An instrumentality also may be interstate in nature, as well. For example, a formal legal entity that is set up by two or more states to engage in governmental functions, such as an interstate transit or port authority, water district, or interstate planning authority, is an instrumentality.

Instrumentalities like Fannie Mae and Freddie Mac provide access to low-interest mortgages, affordable student loans, and provide a way for borrowers to improve and build their credit.

The History of Instrumentality

The necessary and proper clause provided Congress with the power to create a key federal instrumentality — a national bank. Since this first, pivotal assertion of federal power, America's national banking system has since grown into the Federal Reserve System (FRS), and from that national banks, commercial banks, most thrifts, credit unions, and insurance companies.

McCulloch v. Maryland (1819), which provided the legal groundwork for the necessary and proper clause, involved a landmark court case that saw Maryland attempt to levy a tax on a national bank branch in Baltimore. At its essence, instrumentality forbids states from taxing federal instrumentalities and vice versa, otherwise known as the doctrine of intergovernmental immunity.

The U.S. Internal Revenue Service (IRS) defines instrumentality as such:

"An instrumentality is an organization created by or pursuant to state statute and operated for public purposes. Generally, an instrumentality performs governmental functions, but does not have the full powers of a government, such as police authority, taxation, and eminent domain. A wholly-owned instrumentality of one or more states or political subdivisions is treated as a state or local government employer for purposes of the mandatory social security and Medicare provisions and also applies to entities covered under Section 218 of the Social Security Act."