Posted on 05/24/2002 8:08:50 AM PDT by Lost Highway
As state senators search for an income tax package that could command a majority vote, many of those opposed to the concept continue to assert that a tax on general income is unconstitutional in Tennessee.
The last five state attorneys general have signed opinions defending the constitutionality of such a tax. The present attorney general, Paul Summers, issued the most detailed of these opinions two years ago. And he has several times appeared before legislative committees and met with legislators in private settings to reaffirm his position and answer questions.
Yet, for the nearly three years in which the current tax debate has raged, unconstitutionality has been a mantra of the opposition. To be sure, some of the loudest proclaimers of this view have little idea what they're talking about. But it's also the view of some learned lawyers.
There is neither a specific authorization nor prohibition of a general income tax in the Tennessee Constitution. But the state Supreme Court held in a 1932 case, Evans v. McCabe, that an income tax is not constitutional. A later court reached the same conclusion in a rather odd case, Jack Cole Co. v. MacFarland, in 1960.
Because it dealt directly with a general income tax, the Evans case is the more serious barrier. Summers has described the decision as misinformed and "bad law." He told legislators last summer the ruling is a "historic relic."
A well-researched article by Nashville lawyer Robert Cooper, published in 1992 in the Tennessee Bar Journal, suggests that the Evans ruling was indeed flawed - though Cooper contends for other reasons that the constitution does prohibit a broad-based income tax.
Background. As adopted in 1870, Article II, Section 28 of the constitution required that all property - real, personal, or mixed - be taxed, and that it be taxed according to its value. No "species" of property could be taxed higher than any other species of the same value. In other words, the owner of a piece of machinery worth $1,000 couldn't be taxed more than the owner of a $1,000 parcel of land. The same section gave the legislature power to tax merchants, peddlers, and privileges. And it also authorized the legislature to "levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem." The single sentence about income from stocks and bonds is the heart of the controversy.
In the 1870 constitutional convention, delegates were looking for a way to tax earnings from federal bonds, since U.S. law exempted the bonds themselves from ad valorem, or personal property, taxation. This was shortly after the Civil War, and there was considerable resentment of federal power and restrictions imposed on states.
Cooper's article shows that the original draft of the provision simply referred to "incomes derived from stocks and bonds exempted by the laws of the United States from taxation." But partly out of concern that the direct language might be challenged more easily, and partly because delegates were also looking for a way to tax income from railroad bonds that the state legislature had made tax-exempt, the convention settled on the language about stocks and bonds that are not taxed ad valorem.
Hall income tax. By the early 20th century, wealthy Tennesseans were holding growing amounts of stocks and bonds. As personal property they were taxed at 3 percent of their value. If an investor had an annual return of, say, 5 percent of a stock's or bond's value, 60 percent of it would be owed in taxes. The tax was so outrageous that large numbers of wealthy citizens simply refused to pay it. The legislature could not lower the tax rate on these instruments because the constitution required that everything be taxed on its value - with no distinctions.
In 1929, the legislature addressed the problem with two laws. One of them removed the ad valorem tax from stocks and bonds. The other, sponsored by Sen. Frank Hall, imposed a tax of 5 percent on income from stocks and bonds. The tax change was immediately challenged, but the Tennessee Supreme Court ruled that same year, in Shields v. Williams, that the constitutional language about stocks and bonds permitted the legislature either to tax such holdings as personal property or, in the alternative, to tax incomes derived from them. Plaintiffs in the case argued unsuccessfully - though apparently with perfect accuracy - that the language had been intended to get at incomes already exempt from ad valorem taxation, not to permit the legislature to exempt otherwise taxable securities or to tax the income from such securities.
In any event, the Hall income tax was upheld. Two years later, the legislature passed a general income tax. In 1932 the Supreme Court struck it down in Evans. The ruling followed the reasoning of Shields that the stocks and bonds clause in Article II, Section 28 was an exception to the section's property and privilege tax provisions. On that basis, the court decided that by singling out securities as eligible for income taxation, the framers of the constitution "necessarily denied to the legislature the power to tax incomes of other classes."
Excise. The court did not mention in Evans a 1924 ruling, Bank of Commerce & Trust Co. v. Senter, that upheld the corporate excise tax. That tax - imposed in 1923 and still in effect today - is technically a tax on the privilege of doing business. But in its measure, it's an income tax - 6 percent of net earnings. Lewis Donelson of Memphis, senior partner in Baker, Donelson, Bearman & Caldwell, the state's biggest law firm, points out in a 1999 Tennessee Bar Journal article that one delegate to the 1870 convention tried to strike the word "privileges" from Section 28, where the permissible subjects of taxation were enumerated. The delegate proposed to substitute the phrase "such occupations as are not permanent in their character, or special in their nature." The amendment was defeated 45-18. Thus, Donelson argues, the convention chose to leave intact "the inherent sovereign power of the legislature to tax anything which it deemed to be a privilege" - including work and activity to earn income.
Jack Cole. In 1960 the Supreme Court invalidated a limited income tax in the Jack Cole case. The narrow tax was imposed on businesses engaged in interstate commerce that were avoiding franchise and excise taxes through a loophole created by federal court decisions. In trying to circumvent the federal rulings, the legislature used some quirky language that prevented the Supreme Court from viewing the act as a privilege tax. The case would have long since been forgotten had the court not made a couple of broad declarations. It held that "realizing and receiving income or earnings is not a privilege that can be taxed." And it also stated that "since the right to receive income or earnings is a right belonging to every person, this right cannot be taxed as privilege."
The court did not consider how its conclusions might apply to the excise tax.
Question 3. After a 1971 constitutional convention and approval of "Question 3" in a referendum, Article II, Section 28 was changed in '73 to permit different rates of taxation for different classifications of property. This theoretically opened the possibility of classifying income as personal property and taxing it at a specified rate. The case for such an approach isn't helped, though, by the fact that the '71 convention call expressly prohibited consideration of an income tax.
Still, the constitutional amendment - along with other factors - fostered optimism among tax reform advocates in the mid-'70s that the Supreme Court might uphold an income tax. In '76, Gov. Ray Blanton proposed one. It got nowhere - though constitutional concerns were hardly the reason.
Leech & successors. In 1981, State Attorney General Bill Leech issued an opinion that an income tax "would be a valid enactment" under the constitution, though "serious constitutional issues" would be raised. One possible avenue, he suggested, would be in the form of a personal property tax. The "most obvious route" would be as a privilege tax "if Jack Cole is reconsidered." Leech noted, as have his successors and income tax advocates such as Donelson, that there is a string of Supreme Court rulings - better reasoned than the aberrant Jack Cole - broadly defining "privilege."
A third possibility would be an enactment based simply on inherent legislative power. It could be argued that the specific constitutional mention of merchants, peddlers, and privileges was not intended to restrict taxation to those areas. Rather, Leech suggested, these were the sorts of taxes levied at the time and the framers "mentioned them to structure and condition them."
In 1985, State Attorney General Mike Cody issued a brief opinion reaffirming the conclusions of Leech. That opinion was signed by his deputy, Knox Walkup, who later became AG. Attorney General Charles Burson, in a 1993 opinion, also maintained an income tax would be valid if properly structured. The opinion by Summers in '99 is by far the most comprehensive analysis the office has produced. One person - Charles L. "Larry" Lewis, an assistant attorney general in '81 and now a deputy attorney general - worked on and signed Leech's, Cody's, Burson's, and Summers' opinions.
Governors. After Blanton's ill-fated proposal, a governor didn't try to pass an income tax again until Ned McWherter proposed one in '91. He eventually abandoned the idea in favor of a sales tax hike. Before McWherter, Gov. Lamar Alexander flirted with the idea of enacting an income tax through a constitutional amendment - with voters having the ultimate say - so that limitations could be placed on it. He quickly backed away from the idea. Even so, it was used against him in the '96 presidential primary in New Hampshire (which doesn't have an income tax) and helped derail his candidacy.
In '99, a couple of months after telling citizens in a televised speech that Tennessee "does not need a state income tax," Gov. Don Sundquist reached the conclusion that the state did after all need one - badly. He has fought much harder for the tax than Blanton or McWherter did.
Another convention? The latest income tax discussions among Senate leaders have involved a constitutional convention. Some want the convention before the tax is imposed; some want it after the tax has been in effect a couple of years. Compromises have been talked about. The Senate is still at least a vote or two shy under any scenario. Lt. Gov. John Wilder and Senate Speaker Pro Tem Bob Rochelle joined the chamber's Democratic and GOP leaders and caucus chairmen in talks last week.
High court. As Summers told legislators last summer, the "constitutionality of any act is what three members of the Supreme Court think it is." While cautioning that there is no way to know, the AG said he felt "comfortable that we could argue the case successfully" if the legislature passed a properly crafted income tax.
Indeed, even many income tax opponents consider it likely the present court would uphold such a tax. The precedents of Evans, Jack Cole, and a 1964 case that cited Evans with approval present a problem. But as the recent AGs have noted, those decisions had some peculiar circumstances. And the acts considered in those cases weren't crafted to maximum constitutional effect.
If the legislature passes an income tax bill - either this fall or next year - it almost certainly will contain a provision for automatic, expedited consideration by the Tennessee Supreme Court of its constitutionality. That would be a politically explosive issue for the five justices to tackle. In this age of talk radio and activist web sites, a campaign to defeat any justice who ruled in favor of the tax would be a certainty.
In Tennessee, Supreme Court justices initially are appointed by the governor. They serve eight-year terms. Under the so-called Tennessee Plan, they do not face a reelection opponent unless an evaluation commission fails to recommend them. Otherwise, their names are simply put before the voters every eight years for a yes/no retention vote. In 1996, Justice Penny White was removed in this manner amid a public outcry over some rulings perceived as undermining the death penalty.
In 1998, when all the justices were up for a retention election, Justice A.A. Birch came under fire for some death penalty decisions, too. But he had some powerful supporters and a longer and more varied record, and he won retention. The justices will be on the ballot for retention or removal again in 2006.
By then, Birch and Justice Riley Anderson will be 74, and Chief Justice Frank Drowota will be 68. Justice Mickey Barker, a Sundquist appointee and the most conservative member of the court, will be 65. Justice Janice Holder, the other Sundquist appointee, will be 57. Some of the justices likely will retire.
Reprinted by permission of The Tennessee Journal. To subscribe ($227 per year), write M. Lee Smith Publishers LLC, 5201 Virginia Way, P.O. Box 5094, Brentwood, TN 37024-5094.
1. There is no state in the country that "needs" an income tax. Period. There are myriad ways to generate revenue: sales tax, property tax, lottery, whatever.
2. The real issue is that the government wants to spend money for social programs, and how best can they raise that money with the least political damage. Governments all over are doing their best to locate new and creative sources of revenue.
3. The Gov. of TN has determined that the Most Politically Expedient way to accomplish his goal of getting more money is via an income tax. Why? I can't figure -- because all reports suggest it's political suicide.
4. He therefore has lawyers sent out to worthsmith the issue to death in the hopes of convincing legislators, judges, AND the public that it's all okay. Sometimes beating an issue to death gets your task accomplished by wearing down the resolve of your opponents. Or maybe this man is content to retire after this term and could care less about political damage.
5. The issue isn't really the courts. It's Tennesseans, who have obviously, repeatedly, and soundly made it clear that they don't want an income tax.
6. If the population didn't care, there would be a constitutional convention tomorrow to remove the obvious legal roadblocks. It is because the people don't really want this that the underhanded parsing of legal sentences is taking place.
What you have now is a stand-off: does the legislature have the political cahones to push this through? Legalities won't stop them, but it might be the excuse to say no.
800-449-8366 or 615-741-3011 or
Folks to target:
Ralph Cole (R)
Ron Davis (R)
Stancil Ford (R)
Steve McDaniels (R-chair of House GOP)
Raymond Walker (R)
Zane Whitson (R) co-sponsor of benedict naifeh's IT
Keith Westmoreland(R)
Chris Newton (R) co sponsor of expand sales tax to services
Frank Buck (D)
George Farley (D)
John Tidwell(D)
John Mark Windle(D)
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