State Taxing Power

prev | next

All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

It was not contemplated that the adoption of the Fourteenth Amendment would restrain or cripple the taxing power of the states.1 When the power to tax exists, the extent of the burden is a matter for the discretion of the lawmakers,2 and the Court will refrain from condemning a tax solely on the ground that it is excessive.3 Nor can the constitutionality of taxation be made to depend upon the taxpayer’s enjoyment of any special benefits from use of the funds raised by taxation.4

Theoretically, public moneys cannot be expended for other than public purposes. Some early cases applied this principle by invalidating taxes judged to be imposed to raise money for purely private rather than public purposes.5 However, modern notions of public purpose have expanded to the point where the limitation has little practical import.6 Whether a use is public or private, although ultimately a judicial question, “is a practical question addressed to the law-making department, and it would require a plain case of departure from every public purpose which could reasonably be conceived to justify the intervention of a court.” 7

The authority of states to tax income is “universally recognized.” 8 Years ago the Court explained that “[e]njoyment of the privileges of residence in the state and the attendant right to invoke the protection of its laws are inseparable from responsibility for sharing the costs of government. . . . A tax measured by the net income of residents is an equitable method of distributing the burdens of government among those who are privileged to enjoy its benefits.” 9 Also, a tax on income is not constitutionally suspect because it is retroactive. The routine practice of making taxes retroactive for the entire year of the legislative session in which the tax is enacted has long been upheld,10 and there are also situations in which courts have upheld retroactive application to the preceding year or two.11

A state also has broad tax authority over wills and inheritance. A state may apply an inheritance tax to the transmission of property by will or descent, or to the legal privilege of taking property by devise or descent,12 although such tax must be consistent with other due process considerations.13 Thus, an inheritance tax law, enacted after the death of a testator but before the distribution of his estate, constitutionally may be imposed on the shares of legatees, notwithstanding that under the law of the state in effect on the date of such enactment, ownership of the property passed to the legatees upon the testator’s death.14 Equally consistent with due process is a tax on an inter vivos transfer of property by deed intended to take effect upon the death of the grantor.15

The taxation of entities that are franchises within the jurisdiction of the governing body raises few concerns. Thus, a city ordinance imposing annual license taxes on light and power companies does not violate the Due Process Clause merely because the city has entered the power business in competition with such companies.16 Nor does a municipal charter authorizing the imposition upon a local telegraph company of a tax upon the lines of the company within its limits at the rate at which other property is taxed but upon an arbitrary valuation per mile, deprive the company of its property without due process of law, inasmuch as the tax is a mere franchise or privilege tax.17

States have significant discretion in how to value real property for tax purposes. Thus, assessment of properties for tax purposes over real market value is allowed as merely another way of achieving an increase in the rate of property tax, and does not violate due process.18 Likewise, land subject to mortgage may be taxed for its full value without deduction of the mortgage debt from the valuation.19

A state also has wide discretion in how to apportion real property tax burdens. Thus, a state may defray the entire expense of creating, developing, and improving a political subdivision either from funds raised by general taxation, by apportioning the burden among the municipalities in which the improvements are made, or by creating (or authorizing the creation of) tax districts to meet sanctioned outlays.20 Or, where a state statute authorizes municipal authorities to define the district to be benefited by a street improvement and to assess the cost of the improvement upon the property within the district in proportion to benefits, their action in establishing the district and in fixing the assessments on included property, cannot, if not arbitrary or fraudulent, be reviewed under the Fourteenth Amendment upon the ground that other property benefited by the improvement was not included.21

On the other hand, when the benefit to be derived by a railroad from the construction of a highway will be largely offset by the loss of local freight and passenger traffic, an assessment upon such railroad violates due process,22 whereas any gains from increased traffic reasonably expected to result from a road improvement will suffice to sustain an assessment thereon.23 Also the fact that the only use made of a lot abutting on a street improvement is for a railway right of way does not make invalid, for lack of benefits, an assessment thereon for grading, curbing, and paving.24 However, when a high and dry island was included within the boundaries of a drainage district from which it could not be benefited directly or indirectly, a tax imposed on the island land by the district was held to be a deprivation of property without due process of law.25 Finally, a state may levy an assessment for special benefits resulting from an improvement already made26 and may validate an assessment previously held void for want of authority.27

1: Tonawanda v. Lyon, 181 U.S. 389 (1901); Cass Farm Co. v. Detroit, 181 U.S. 396 (1901). Rather, the purpose of the amendment was to extend to the residents of the states the same protection against arbitrary state legislation affecting life, liberty, and property as was afforded against Congress by the Fifth Amendment. Sw. Oil Co. v. Texas, 217 U.S. 114, 119 (1910).
2: Fox v. Standard Oil Co., 294 U.S. 87, 99 (1935).
3: Stewart Dry Goods Co. v. Lewis, 294 U.S. 550 (1935). See also Kelly v. City of Pittsburgh, 104 U.S. 78 (1881); Chapman v. Zobelein, 237 U.S. 135 (1915); Alaska Fish Co. v. Smith, 255 U.S. 44 (1921); Magnano Co. v. Hamilton, 292 U.S. 40 (1934); City of Pittsburgh v. Alco Parking Corp., 417 U.S. 369 (1974).
4: Nashville, Chattanooga & St. Louis Ry. v. Wallace, 288 U.S. 249 (1933); Carmichael v. S. Coal & Coke Co., 301 U.S. 495 (1937). A taxpayer, therefore, cannot contest the imposition of an income tax on the ground that, in operation, it returns to his town less income tax than he and its other inhabitants pay. Dane v. Jackson, 256 U.S. 589 (1921).
5: Loan Ass’n v. Topeka, 87 U.S. (20 Wall.) 655 (1875) (voiding tax employed by city to make a substantial grant to a bridge manufacturing company to induce it to locate its factory in the city). See also City of Parkersburg v. Brown, 106 U.S. 487 (1882) (private purpose bonds not authorized by state constitution).
6: Taxes levied for each of the following purposes have been held to be for a public use: a city coal and fuel yard, Jones v. City of Portland, 245 U.S. 217 (1917), a state bank, a warehouse, an elevator, a flour mill system, homebuilding projects, Carmichael, 300 U.S. at 495, a society for preventing cruelty to animals (dog license tax), Nicchia v. New York, 254 U.S. 228 (1920), a railroad tunnel, Milheim v. Moffat Tunnel Dist., 262 U.S. 710 (1923), books for school children attending private as well as public schools, Cochran v. Louisiana Bd. of Educ., 281 U.S. 370 (1930), and relief of unemployment, Carmichael, 301 U.S. at 515.
7: In applying the Fifth Amendment Due Process Clause the Court has said that discretion as to what is a public purpose “belongs to Congress, unless the choice is clearly wrong, a display of arbitrary power, not an exercise of judgment.” Helvering v. Davis, 301 U.S. 619, 640 (1937); United States v. Butler, 297 U.S. 1, 67 (1936). That payment may be made to private individuals is now irrelevant. Carmichael, 301 U.S. at 518. Cf. Usery v. Turner Elkhorn Mining Co., 428 U.S. 1 (1976) (sustaining tax imposed on mine companies to compensate workers for black lung disabilities, including those contracting disease before enactment of tax, as way of spreading cost of employee liabilities).
8: New York ex rel. Cohn v. Graves, 300 U.S. 308, 313 (1937).
9: 300 U.S. at 313. See also Shaffer v. Carter, 252 U.S. 37, 49–52 (1920); and Travis v. Yale & Towne Mfg. Co., 252 U.S. 60 (1920) (states may tax the income of nonresidents derived from property or activity within the state).
10: See, e.g., Stockdale v. Ins. Cos., 87 U.S. (20 Wall.) 323 (1874); United States v. Hudson, 299 U.S. 498 (1937); United States v. Darusmont, 449 U.S. 292 (1981).
11: Welch v. Henry, 305 U.S. 134 (1938) (upholding imposition in 1935 of tax liability for 1933 tax year; due to the scheduling of legislative sessions, this was the legislature’s first opportunity to adjust revenues after obtaining information of the nature and amount of the income generated by the original tax). Because “[t]axation is neither a penalty imposed on the taxpayer nor a liability which he assumes by contract,” the Court explained, “its retroactive imposition does not necessarily infringe due process.” Id. at 146–47.
12: Stebbins v. Riley, 268 U.S. 137, 140, 141 (1925).
13: When remainders indisputably vest at the time of the creation of a trust and a succession tax is enacted thereafter, the imposition of the tax on the transfer of such remainder is unconstitutional. Coolidge v. Long, 282 U.S. 582 (1931). The Court has noted that insofar as retroactive taxation of vested gifts has been voided, the justification therefor has been that “the nature or amount of the tax could not reasonably have been anticipated by the taxpayer at the time of the particular voluntary act which the [retroactive] statute later made the taxable event . . . . Taxation . . . of a gift which . . . [the donor] might well have refrained from making had he anticipated the tax . . . [is] thought to be so arbitrary . . . as to be a denial of due process.” Welch v. Henry, 305 U.S. 134, 147 (1938). But where the remaindermen’s interests are contingent and do not vest until the donor’s death subsequent to the adoption of the statute, the tax is valid. Stebbins v. Riley, 268 U.S. 137 (1925).
14: Cahen v. Brewster, 203 U.S. 543 (1906).
15: Keeney v. New York, 222 U.S. 525 (1912).
16: Puget Sound Co. v. Seattle, 291 U.S. 619 (1934).
17: N.Y. Tel. Co. v. Dolan, 265 U.S. 96 (1924).
18: Nashville, Chattanooga & St. Louis Ry. v. Browning, 310 U.S. 362 (1940).
19: Paddell v. City of New York, 211 U.S. 446 (1908).
20: Hagar v. Reclamation Dist., 111 U.S. 701 (1884).
21: Butters v. City of Oakland, 263 U.S. 162 (1923). It is also proper to impose a special assessment for the preliminary expenses of an abandoned road improvement, even though the assessment exceeds the amount of the benefit which the assessors estimated the property would receive from the completed work. Mo. Pac. R.R. v. Road Dist., 266 U.S. 187 (1924). See also Roberts v. Irrigation Dist., 289 U.S. 71 (1933) (an assessment to pay the general indebtedness of an irrigation district is valid, even though in excess of the benefits received). Likewise a levy upon all lands within a drainage district of a tax of twenty-five cents per acre to defray preliminary expenses does not unconstitutionally take the property of landowners within that district who may not be benefited by the completed drainage plans. Houck v. Little River Dist., 239 U.S. 254 (1915).
22: Mo. Pac. R.R., 274 U.S. at 188.
23: Kansas City Ry. v. Road Dist., 266 U.S. 379 (1924).
24: Louisville & Nashville R.R. v. Barber Asphalt Co., 197 U.S. 430 (1905).
25: Myles Salt Co. v. Iberia Drainage Dist., 239 U.S. 478 (1916).
26: Wagner v. Baltimore, 239 U.S. 207 (1915).
27: Charlotte Harbor Ry. v. Welles, 260 U.S. 8 (1922).