November 06, 2019 Counterpoint

A Sur-Rebuttal to Professor Jensen on the Constitutionality of an Unapportioned Wealth Tax

By Calvin H. Johnson, John T. Kipp Chair in Corporate and Business Law, University of Texas

Professor Jensen’s counterpoint in this issue, An Unapportioned Wealth Tax Has Constitutional Problems, misses the key point that under the Founders’ meaning of the Constitution, apportionment was never intended to protect wealth from tax nor be a restraint on any federal tax. Under the Founders’ meaning, expressed both by ordinary language and by Hylton, if apportionment is not a reasonable administrative measure, apportionment is not required.

Requisitions Were the Framers’ Way of Reaching Wealth

Apportionment of direct tax by population arose in 1783 (not 1787) in a proposal to determine state quotas under requisitions—that is, direct taxes on the states. Under the Articles of Confederation, all national tax was a direct tax because Congress had power to raise tax revenue only by requisitions. The Articles determined states’ quotas under a requisition by value of real estate and improvements, but Pennsylvania submitted appraisals that cut their tax to half of Virginia’s, which the rest of the states thought was cheating. The 1783 proposal would have determined state wealth by population (counting slaves’ contribution to wealth at three-fifths). In the context of the founding, the Framers found that apportioning state tax between Boston and the rest of Massachusetts or between Philadelphia and the rest of Pennsylvania was about the same whether using population or wealth. Madison’s rule was that as long as movement was free, people would move to fertile land and cities where wealth was to be had. Population was the Founders’ best measure of wealth given manipulations of real estate appraisals. The Founders abhorred tax that was the same tax per person. Apportionment by population was always an attempt to make direct tax reach wealth.

The Taxing Power Was Intended to Generate Revenue

Apportionment was never intended to be a restraint on any federal tax. The Articles of Confederation failed because the states stopped paying their requisitions. The Constitution replaced the Articles primarily to give the national government its own plenary taxes to carry the war debts. In the coming inevitable war, the national government would need to borrow again, and it needed to make payments at least to the Dutch to be able to borrow. In that desperate context, no hobble on a federal tax could ever be implied.

Reasonable Apportionment is the Defining Characteristic of “Direct Tax”

The defining characteristic of “direct tax” for constitutional purposes is that the tax must be capable of reasonable apportionment among the states by population without perverse results. If a tax base is not equal per capita among the states, apportionment requires that the tax rate must be higher where the base is smaller: that is never allowed by the definition of direct tax.

Taxes in which apportionment is not reasonable have been expelled from the definition of direct tax either by the ordinary adaption of language to principle or by Supreme Court holding. All federal taxes started as direct taxes because the only federal taxes under the Articles were requisitions. Taxes that could not be apportioned were not direct. The Constitution, for instance, gave the national government exclusive power to lay taxes on imports, but imposts were not called direct taxes on the states because one could never tell where the goods would end up or what state should get credit for an impost toward payment of its quota. Imposts were thus expelled from the term “direct tax” by ordinary language usage under the principle that all direct taxes were reasonably apportioned, leaving “direct tax” to refer to all internal or dry land taxes that were not imposts.

James Madison as well as Anti-Federalist Brutus and Federal Farmer referred to excises as direct taxes, which fit the usage of the time since they were dry-land internal taxes. Nonetheless, excises were required by the Constitution itself to have a uniform rate in all states, but it was impossible to maintain a uniform rate while also apportioning excises by population (counting slaves at three fifths). The Founders, including Madison, didn’t know that excises could not be apportioned. When they discovered it, ordinary language fixed the problem by expelling excises from the direct tax category and from the apportionment requirement.

The Hylton Opinion

In the Hylton case, the Supreme Court in 1797 adopted a clear rule that if apportionment was not reasonable, the tax was not a direct tax. Hylton involved a carriage tax, which was on Treasury’s inventory of direct taxes—an inventory constructed almost contemporaneously with Hylton in preparation for a requisition. Carriage taxes were common taxes on luxury. In Hamilton’s hypothetical, Virginia had only 1/10th the carriages per capita of New York. Virginians thus would have to pay a tax rate on carriages that was 10 times what New Yorkers paid if apportionment were required. There is no rationale for such idiocy: Virginia simply had a smaller tax base over which to spread its quota.

The Supreme Court Justices in Hylton were Founders, each of whom had contributed at least some paragraphs to the debates over apportionment. They did not see the idiocy in the original debates, but they fixed the problem once they saw it. They held that the Constitution did not require idiocy, and that the carriage tax was therefore not direct.

Over the next 100 years, the Court repeatedly held that if apportionment of a tax would result in unreasonably different rates, then the tax was not a direct tax akin to a requisition directly on a state. The Supreme Court during that period held that an income tax was not a direct tax, under the Hylton rationale, because income varied per capita across the states. Hylton is the wise and binding doctrine on this issue, straight from the Founders sitting as Supreme Court Justices. Hylton is also a decision consistent with the decision already made by ordinary English, expelling “imposts” and “excises” from “direct tax” because they could not be apportioned among the states.

The Presumption of Equal per Capita Real Estate

If any tax base is equal per capita among the states, then apportionment will guarantee uniform tax rates per state. The requirement is then a reasonable enforcement of equity among the states. In the founding debates, it was presumed, without examination, that wealth and population were equal measures of each other. Under that presumption, apportionment was required.

In the original 1783 proposal, the Founders used population instead of the value of real estate (required by the Articles) as the best administrable measure of wealth available. In the 1787 Convention, Madison defeated a proposal that voting in the House would be determined (as under the Articles) by equal votes per state with a proposal to determine House votes by population. To do so, he needed to hold together a coalition of those who believed a government should represent people and those who believed a government should represent wealth, under the presumption that people and wealth would be exact representations of each other. Under that presumption, allocation by population yields equal tax rates on wealth across the states. There are many references during this time to capitations and real estate taxes as direct taxes, because equal per capita wealth, consistent with the presumption, led to the just rule of uniform rates in all states.

Per capita wealth is of course now known not to be equal: with apportionment, the differences would require higher tax rates in poorer states. Mississippi is about half as rich per capita as DC. If tax on wealth, or income or any other measure of economic wellbeing were apportioned, Mississippi tax rates would have to be twice as high as in DC, because Mississippi has too little a tax base over which to spread its quota. Under Hylton that consequence disproves the premise that the tax is direct. Our sacred Constitution, under Hylton, does not require idiocy.

Direct Tax Not Intended as a Restraint

Professor Jensen’s counter is that Congress intended the unreasonableness of apportionment to be a constitutional signal against adopting direct taxes. That interpretation is inappropriate to this Constitution in the context in which was adopted. This was a coast-line nation vulnerable to predation by three rapacious empires. The Founders were desperate and would have not tolerated any monkey wrench preventing imposition of a national tax, including the internal and dry land taxes that were then called direct taxes (once the impost was not considered a direct tax). There is not an iota of tax-hobbling purpose in this Constitution. It was made up only later by anti-tax fanatics, in ignorance of history.

The Federalist framers of the Constitution won the debate in the ratification that the federal government would have plenary power to tax to prepare for the next war. The major issue was whether the federal government would have the power to lay taxes on dry land. The Anti-Federalists strongly favored continuation of requisitions as the only taxing power. Future President and Anti-Federalist James Monroe, for instance, declared that to render the Constitution safe and proper, he would take away one power only – “I mean that of direct tax.”1 The South did not want Congress to be able to tax slaves to manumission.2 But Anti-Federalist opposition to direct taxes had no influence on the constitutional text. Anti-Federalists were not at the Federal Convention that drafted the text, and they hated what they saw. The Federalist victors were not about to limit the constitutional taxing power of the new national government. As Washington had to explain to Jefferson in far-off Paris, if the new Congress was not to have the direct tax (that is, the internal and dry land taxes), how was it to repay the war debts and redeem congressional honor? If it did not have the direct tax, the country might as well revert to the confederation form.3 The direct tax quite clearly was not meant as a limitation on the power to tax, but as an expression of a strong power to tax.

Professor Jensen expands his argument with a claim that apportionment was “a special rule limiting Congress’s power [made] necessary because direct taxation was thought to be much more dangerous than indirect taxes.”4 That is made up history and an error. The Anti-Federalists thought that way, but they lost.

Professor Jensen further objects that Professor Johnson’s analysis results in direct tax being imposed only when it doesn’t matter.5 That is a fair description of both the Founders’ and Johnson’s stance. If the per capita tax base is equal across the states, then apportionment yields a uniform tax rate in all states, and apportionment in fairness is required. Still, apportionment is part of a rational scheme to apportion taxes to reach wealth and if apportionment does not function reasonably, its range ends and the tax is not a direct tax.

Professor Jensen’s Reliance on the NFIB case

In the recent National Federation of Independent Business v. Sebelius case,6 the Supreme Court held that a tax imposed by the Affordable Care Act (ACA) on failure to have or buy insurance was not a direct tax, so that it was constitutional without need for apportionment. The Court cited and indeed relied on the Hylton carriage tax case, summarizing its key rationale 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.”7 That is the first favorable cite of Hylton since the Pollack dissent, and it is the core of the Court’s NFIB holding. Hylton lives and rules!

The NFIB Court’s opinion went beyond its holding, in dicta neither necessary nor helpful to its decision, by repeating the once routine statements that a tax on real estate was direct. The issue of whether apportionment was required was briefed by neither party before the Court, and having decided the ACA tax was constitutional, the Justices’ reflections on other taxes that might need to be apportioned were dicta beyond their authority in the case and not well considered. Statements such as those were fine when population and wealth were presumed to be equal to each other, so that apportionment yielded uniform rates across the states, but they will not survive closer examination when per capita wealth is unequal and apportionment would force extreme differences in tax rates. In any event, we can discuss the Founders’ meaning of the apportionment requirement without spending any significant time on NFIB. If we consider NFIB at all, its reliance on the Hylton rule—that a tax that cannot be reasonably apportioned is not a direct tax—is all that we need to mention.

  1. James Monroe, Debates in the Virginia Ratification Convention (June 10, 1788), 9 Documentary History of the Ratification of the Constitution 1109 (John Kaminsky, et. al., eds.,1988).
  2. Patrick Henry, Virginia Ratification Convention (June 17, 1788), 10 Documentary History of the Ratification of the Constitution 1341 (1993) (arguing that if this Constitution is adopted, the Congress would be able to lay such heavy taxes on sales that they would amount to emancipation, so that “this property would be lost to this country”).
  3. Letter from George Washington to Thomas Jefferson (August 31, 1788), in 30 The Writings of George Washington from the Original Manuscript Sources, 1745–1799, at 82-83 (John C. Fitzpatrick ed., 1931–1944).
  4. Jensen, An Unapportioned Wealth Tax Has Constitutional Problems: A Reply to Professor Johnson (emphasis added).
  5. Id.
  6. 567 U.S. 519 (2012).
  7. 567 U.S. at 559.

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