Article I, Section 9, Clause 4 — Direct Taxes

ArtI.S9.C4.1 Overview of Direct Taxes

Under Article I, Section 9, Clause 4 and Article I, Section 2, Clause 3¹ of the Constitution, direct taxes are subject to the rule of apportionment.² Though the Supreme Court has not clearly distinguished direct taxes from indirect taxes,³ the Court has identified capitation taxes—a tax “paid by every person, ‘without regard to property, profession, or any other circumstance’”⁴—and taxes on real and personal property as direct taxes.⁵ Under the rule of apportionment, Congress sets the total amount to be raised by a direct tax, then divides that amount among the states according to each state’s population.⁶ Thus, a state with one-twentieth of the Nation’s population would be responsible for one-twentieth of the total amount of direct tax, without regard to that state’s income or wealth levels.⁷

An 1861 federal tax on real property illustrates how the rule of apportionment operates.⁸ Congress enacted a direct tax of $20 million.⁹ After apportioning the direct tax among the states, territories, and the District of Columbia, the State of New York was liable for the largest portion of the tax, $2,603,918.67,¹⁰ and the Territory of Dakota was liable for the least, $3,241.33.¹¹ The act called for the President to assign collection districts to states, territories, and the District of Columbia to apportion “to each county and State district its proper quota of direct tax”¹² and determine the amounts taxpayers in each collection district would be required to pay.¹³

The lack of clarity surrounding the meaning of a direct tax¹⁴ and the Federal Government’s desire for additional revenues ultimately contributed to the adoption in 1913 of the Sixteenth Amendment, which authorizes Congress to impose taxes on income without regard to the rule of apportionment.¹⁵

ArtI.S9.C4.2 Historical Background on Direct Taxes

The Framers’ principal motivation for granting Congress the power to tax in the Constitution was to provide the National Government with a mechanism to raise a “regular and adequate supply”¹ of revenue and pay its debts.² Under the predecessor Articles of Confederation, the National Government had no power to tax and could not compel states to raise revenue for national expenditures.³ The National Government could requisition funds from states to place in the common treasury, but, under the Articles of Confederation, state requisitions were “mandatory in theory” only.⁴ State governments resisted these calls for funds.⁵ As a result, the National Government raised “very little” revenue through state requisitions,⁶ inhibiting its ability to resolve immediate fiscal problems, such as repaying its Revolutionary War debts.⁷

By contrast, the Constitution provides Congress with broad authority to lay and collect taxes. Article I, Section 8, Clause 1 of the Constitution—commonly known as the Taxing and Spending Clause⁸—empowers Congress “To lay and collect Taxes, Duties, Impost and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.”⁹ The U.S. Supreme Court has described Congress’s power to tax as “very extensive.”¹⁰ Supreme Court Chief Justice Salmon P. Chase famously described the taxing power in the License Tax Cases:

It is given in the Constitution, with only one exception and only two qualifications.

Congress cannot tax exports, and it must impose direct taxes by the rule of

apportionment, and indirect taxes by the rule of uniformity. Thus limited, and thus

only, it reaches every subject, and may be exercised at discretion.¹¹

By proscribing direct taxes “unless in Proportion to the Census or enumeration herein” under Article I, Section 9, Clause 4, the Framers apportioned direct taxes consistent with how they apportioned representation in the House.¹² As James Madison noted in the Federalist Papers, linking tax liability to representation ensured that any advantage a state may have in enhancing its reported population size to increase its representation would be offset by its increased tax liability. Madison stated:

As the accuracy of the census to be obtained by the Congress will necessarily depend,

in a considerable degree on the disposition, if not the co-operation of the States, it is of

great importance that the States should feel as little bias as possible, to swell or to

reduce the amount of their numbers. Were their share of representation alone to be

governed by this rule, they would have an interest in exaggerating their inhabitants.

Were the rule to decide their share of taxation alone, a contrary temptation would

prevail. By extending the rule to both objects, the States will have opposite interests,

which will control and balance each other, and produce the requisite impartiality.¹³

ArtI.S9.C4.3 Early Jurisprudence on Direct Taxes

The Supreme Court first interpreted the Constitution’s “direct tax” language shortly after the Nation’s founding in Hylton v. United States.¹ Hylton presented the question of whether an unapportioned tax on carriages was a “direct tax,” and therefore unconstitutional.² In three separate opinions, the deciding justices³ each held that the tax was not “direct” within the meaning of the Constitution and suggested that the term “direct taxes” applied only to a narrow class of taxes that includes (1) capitation taxes⁴ and (2) taxes on “land.”⁵

In Hylton, the Supreme Court adopted a functional approach to determine whether a tax is direct, focusing on whether the tax at issue can be apportioned and, if so, whether apportionment would produce significant inequities among taxpayers.⁶ As Justice Samuel Chase stated in his opinion, “If [a tax] is proposed to tax any specific article by the rule of apportionment, and it would evidently create great inequality and injustice, it is unreasonable to say, that the Constitution intended such tax should be laid by that rule.”⁷ As the Court recently explained its holding in Hylton, the “Court upheld the tax, in part reasoning that apportioning such a tax would make little sense, because it would have required taxing carriage owners at dramatically different rates depending on how many carriages were in their home State.”⁸ The Court in Hylton did not, however, offer a comprehensive definition of the types of taxes that are “direct.”⁹

The result of Hylton was not challenged until after the Civil War. A number of taxes imposed to meet the demands of that war were challenged as direct taxes. The Supreme Court, however, sustained successively as “excises” or “duties,” a tax on an insurance company’s receipts for premiums and assessments,¹⁰ a tax on the circulating notes of state banks,¹¹ an inheritance tax on real estate,¹² and a general tax on incomes.¹³ In the last case, Springer v. United States, the Court noted that it regarded the term “direct taxes” as meaning capitation taxes and taxes on land.¹⁴ The Court stated: “Our conclusions are, that direct taxes, within the meaning of the Constitution, are only capitation taxes, as expressed in that instrument, and taxes on real estate, and that the tax of which the plaintiff in error complains is within the category of an excise or duty.”¹⁵

ArtI.S9.C4.4 Direct Taxes and the Sixteenth Amendment

In 1895, the Supreme Court expanded its interpretation of the meaning of direct taxes in its two decisions in Pollock v. Farmers’ Loan & Trust Co.,¹ holding that taxes on real and personal property, and income derived from them, were direct taxes.² These decisions significantly altered the Court’s direct tax jurisprudence. Considering whether an 1894 act that imposed unapportioned taxes on income derived from both real and personal property were direct taxes,³ the Court adopted two primary holdings on the scope of the Constitution’s “direct tax” clause. First, the Court held that taxes on real estate and personal property are direct taxes.⁴ Second, the Court held that a tax on income derived from real or personal property—as opposed to income derived from employment or some other source⁵—is, in effect, a tax imposed directly on the property itself and is also a direct tax.⁶ Applying these holdings, the Court held that the provisions before it were unconstitutional because they were unapportioned taxes on income derived from real and personal property.⁷

The Pollock Court concluded that its holding did not conflict with the Court’s prior decisions interpreting the direct tax language.⁸ The Court reasoned that each of those decisions had sustained unapportioned taxes as either “excises” or “duties” imposed on a particular use of, or privilege associated with, the property in question, not as a tax on the property itself.⁹ As to Hylton specifically, the Court determined that it had upheld the unapportioned carriage tax as an “excise” on the “expense” or “consumption” of carriages, rather than as a tax on carriage ownership.¹⁰

After the Pollock decision, taxpayers challenged numerous taxes that Congress had treated as excises subject to the rule of uniformity as unconstitutional direct taxes. The Court, however, distinguished taxes levied “because of ownership” or “upon property as such” from those laid upon “privileges.”¹¹ The Court sustained as “excises” a tax on sales of business exchanges,¹² a succession tax construed to fall on the recipients of the property transmitted rather than on the estate of the decedent,¹³ and a tax on manufactured tobacco in the hands of a dealer, after an excise tax had been paid by the manufacturer.¹⁴ In Thomas v. United States,¹⁵ the Court sustained a stamp tax on sales of stock certificates based on the definition of “duties, imposts and excises.”¹⁶ The Court explained that these terms “were used comprehensively to cover customers and excise duties imposed on importation, consumption, manufacture and sale of certain commodities, privileges, particular business transactions, vocations, occupations and the like.”¹⁷ On the same day, the Court ruled in Spreckels Sugar Refining Co. v. McClain¹⁸ that an exaction on the business of refining sugar and measured by gross receipts was an excise and properly levied under the rule of uniformity. Likewise, in Flint v. Stone Tracy Co.,¹⁹ the Court held a tax on a corporation that was measured by income, including investment income, to be a tax on the privilege of doing business as a corporation rather than an income tax. Similarly, in Stanton v. Baltic Mining Co.²⁰, the Court held a tax on the annual production of mines “is not a tax upon property as such because of its ownership, but a true excise levied on the results of the business of carrying on mining operations.”²¹

Pollock’s holding and rationale were further limited in several respects.²² Most prominently, Congress passed and the states ratified the Sixteenth Amendment in 1913 in direct response to Pollock’s prohibition on the unapportioned taxation of income derived from real or personal property.²³ The Sixteenth Amendment authorized Congress “to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states.”²⁴ Further, while the Court in Pollock held that a tax on income derived from property was indistinguishable from a tax on the property itself, the Court later rejected that reasoning in Stanton v. Baltic Mining Company, upholding an unapportioned tax on a mine’s income as being “not a tax upon property as such . . . , but a true excise levied on the results of the business of carrying on mining operations.”²⁵ The Court opined:

[T]he Sixteenth Amendment conferred no new power of taxation but simply prohibited

the previous complete and plenary power of income taxation possessed by Congress

from the beginning from being taken out of the category of indirect taxation to which it

inherently belonged and being placed in the category of direct taxation subject to

apportionment by a consideration of the sources from which the income was derived,

that is by testing the tax not by what it was—a tax on income, but by a mistaken theory

deduced from the origin or source of the income taxed.²⁶

Despite these developments, the Supreme Court has not expressly overruled Pollock’s central holding that a tax on real or personal property solely because of its ownership is a direct tax.²⁷ In 1920, the Court relied on Pollock in Eisner v. Macomber to hold an unapportioned tax on shares issued as stock dividends unconstitutional.²⁸ There, the Court addressed whether a corporation’s issuance of additional shares to a stockholder as stock dividends was “income” under the Sixteenth Amendment and, if not, whether a tax on those unrealized gains was a direct tax.²⁹ After concluding that the stock dividends were not “income,”³⁰ the Court relied on Pollock to conclude that the tax was a direct tax.³¹

The Eisner Court determined that the limitation on Congress’s taxing power identified in Pollock “still has an appropriate and important function . . . not to be overridden by Congress or disregarded by the courts.”³² The Court observed that the Sixteenth Amendment must be “construed in connection with the taxing clauses of the original Constitution and the effect attributed to them,” including Pollock’s holding that “taxes upon property, real and personal,” are direct taxes.³³ Applying that limitation, the Court held that the tax before it was unconstitutional because it was an unapportioned tax on personal property.³⁴

In the Supreme Court’s 2012 decision, National Federation of Independent Business v. Sebelius, the Supreme Court upheld the Affordable Care Act individual mandate, known as a “shared responsibility payment,” as a tax under Article I, Section 8, Clause 1 of the Constitution.³⁵ In its ruling, the Court explained that the individual mandate was not a direct tax subject to the rule of apportionment. The Court stated:

A tax on going without health insurance does not fall within any recognized category of

direct tax. It is not a capitation. Capitations are taxes paid by every person “without

regard to property, profession or any other circumstance.” The whole point of the shared

responsibility payment is that it is triggered by specific circumstances—earning a

certain amount of income but not obtaining health insurance. The payment is also

plainly not a tax on the ownership of land or personal property. The shared

responsibility payment is thus not a direct tax that must be apportioned among the

several States.³⁶

The Supreme Court further explained that direct taxes are capitation taxes, real estate taxes, and personal property taxes.³⁷ While income taxes are also direct taxes under Pollock, adoption of the Sixteenth Amendment,³⁸ as discussed above, amended the Constitution to permit the federal government to tax income.