The Direct Taxes Clause

No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.

—Andy Grewal

Introduction

Congress’s first enumerated power is the “Power To lay and collect Taxes, Duties, Imposts and Excises.”¹ (See Essay No. 39.) This provision refers to taxes broadly and then refers to three subsets of taxes: duties, imposts, and excises. Duties and imposts are taxes the government applies to the import or export of goods. Excises are taxes levied on the enjoyment of a privilege, such as the right to produce a good or pursue a specific occupation. If a tax is not a duty, impose, or excise—that is, if the tax is a “direct tax”—the tax faces an apportionment requirement.²

Under the apportionment requirement, direct taxes must be laid “in Proportion to the Census or enumeration.” Whether a tax qualifies as direct and thus must follow this apportionment requirement generated uncertainty in the early days of the Republic.³ However, the Sixteenth Amendment, ratified in 1913, reduced the practical importance of the apportionment requirement. (See Essay No. 202.)

History before 1787

The Articles of Confederation were a “fiscal disaster.”⁴ They did not allow Congress to tax the population directly; instead, taxes could be collected only from the states themselves through voluntary “requisitions.”⁵ However, the states often resisted congressional attempts at taxation, and the Articles provided no enforcement mechanism.⁶ Thus, attempts at taxation proved futile. For example, in 1786 the Board of Treasury mandated that the states collectively contribute $3.8 million to the federal purse, but the states paid only $663.⁷

The Constitutional Convention

The Framers, to avoid the revenue challenges experienced under the Articles of Confederation, included broad taxing powers in the new Constitution.⁸ Instead of having to seek revenue from the states, Congress would be able to tax the people themselves, including through direct taxes.⁹ The Constitution specified that capitation (head) taxes qualify as direct taxes.¹⁰ The Convention records shed no further light on what might qualify as a direct tax.¹¹ On August 20, Rufus King of Massachusetts asked “what was the precise meaning of direct taxation?” According to Madison’s notes, “No one answ[ere]d.”¹²

Direct taxes, whatever they might include, must comply with an apportionment requirement.¹³ This means that Congress must allocate a direct tax to the states according to their respective populations.¹⁴ Under the original Constitution, a slave would count as three-fifths of a person for purposes of the population computation.¹⁵ (See Essay No. 9.) Thus, the presence of slaves would increase the amount of tax allocated to a state, but not by as much as the presence of free persons.

A simple example illustrates the apportionment rule. Suppose Congress wants to raise $100 million through a real estate tax, and that tax is considered direct. Congress could not establish a single tax rate to apply to the value of all real estate in the country. Instead, it would need to apportion the $100 million figure to the states, based on their population. Thus, a state with ten percent of the population would need to raise $10 million, a state with five percent of the population would need to raise $5 million, and so on. Under this regime, taxpayers in different states would likely face different tax rates on their real estate. For a state with 10 percent of the population and valuable land, a low tax rate would be needed to collect $10 million; in a state with 10 percent of the population and low-value land, a higher rate would be needed to collect $10 million.

The Ratification Debates

In Federalist No. 36, Alexander Hamilton emphasized that the apportionment rule for real estate taxes would help to prevent abuse. The proportion of real estate taxes paid by the people of a state would not be “left to the discretion of the national legislature.” Instead, if Congress imposed a real estate tax, the burdens would be “determined by the numbers of each state.” The apportionment requirement, Hamilton believed, “effectually shut[] the door to partiality or oppression.”¹⁶

The Anti-Federalists expressed skepticism about a national taxing power. Luther Martin of Maryland, for example, preferred that states enjoy the exclusive authority to levy direct taxes.¹⁷ A Federal Republican did not find solace in the protections offered by the apportionment rule, calling it “a great and fundamental error” and stating that “the apportioning of taxes according to numbers is not just.”¹⁸

Early Practice

At various times in the country’s early history, Congress imposed real estate taxes using the apportionment scheme contemplated by the Constitution,¹⁹ but it did not establish an apportionment scheme for other revenue measures.²⁰ Thus, Congress may have understood that direct taxes include only capitation and real estate taxes.²¹

Some notable figures viewed “direct taxes” more broadly. When Congress considered an unapportioned personal property tax on the ownership of carriages, James Madison voted against the bill. He believed that the federal carriage tax was a direct tax that required apportionment.²² Hamilton also believed that direct taxes went beyond only capitation and real estate taxes. In a judicial filing, he argued that direct taxes would include taxes on “the whole property of individuals, or on their whole real or personal estate.”²³ Thus, to Hamilton, a wealth tax would have qualified as a direct tax.

Judicial Precedent

In Hylton v. United States (1796), the Supreme Court upheld the federal carriage tax, finding that it was not an unapportioned direct tax.²⁴ As was customary at the time, there was no official Court opinion. Instead, the Justices issued individual seriatim opinions. Justice William Paterson’s influential individual opinion understood “direct taxes” narrowly. Paterson wrote that the direct tax clause had a limited purpose: to allay southern fears of targeted federal real estate taxes.²⁵ Thus, he believed, the direct tax limitation should not apply to a tax that reached personal property, like the federal carriage tax.²⁶

Throughout most of the nineteenth century, the Court followed Justice Paterson’s narrow approach, and held that the direct tax limitation applied only to capitation and real estate taxes.²⁷ The Court rejected claims that the direct tax limitation applied to taxes on insurance company receipts, the circulation of state bank notes, and real estate inheritances.²⁸ Springer v. United States (1880) also rejected a challenge to the unapportioned Civil War–era income tax, finding that it qualified as an excise or duty rather than as a direct tax.²⁹

Later, the Court would find that a tax on personal property could qualify as a direct tax. In 1894, Congress imposed an unapportioned income tax, similar to the one upheld in Springer. But in Pollock v. Farmers’ Loan & Trust Co. (1885), a deeply divided Court found that, through reaching rental income, the 1894 income tax imposed an unapportioned real property tax that violated the direct tax requirement.³⁰ Pollock extended similar reasoning to other aspects of the 1894 income tax. The Court concluded that by taxing income from personal property, Congress had taxed the property itself.³¹ And, the Court now concluded, a tax on personal property qualified as a direct tax.³² The Court then found that the unconstitutional portions of the 1894 income tax act could not be severed from the rest of the law. Thus, the whole act fell.³³

Pollock proved severely unpopular, and many public officials and legal scholars excoriated the majority’s decision. For example, a few days after the Supreme Court released its decision, Justice John Marshall Harlan wrote to his sons that Pollock would “become as hateful with the American people as the Dred Scott case was when it was decided.”³⁴ Sylvester Pennoyer, the former governor of Oregon, called for Congress to “impeach the nullifying [Pollock] judges for the usurpation of legislative power, remove them from office, and instruct the President to enforce the collection of the income tax.”³⁵ Fourteen years later, in 1909, President William Howard Taft remarked that “[n]othing has ever injured the prestige of the Supreme Court more than [the Pollock] decision.”³⁶

The fierce backlash against Pollock led Congress to propose the Sixteenth Amendment to the Constitution.³⁷ Under that amendment, ratified in 1913, “taxes on incomes,” even if considered direct, face no apportionment requirement.³⁸ A key issue under the Sixteenth Amendment relates to whether “taxes on incomes” include taxes on unrealized gains. Unrealized gains typically arise when a taxpayer’s property has increased in value, but the taxpayer has not sold it. Eisner v. Macomber (1920) concluded that the Sixteenth Amendment established a realization requirement.³⁹ However, Moore v. United States (2024) leaves open whether Macomber’s realization holding remains good law.⁴⁰

Open Questions

Debates over whether a tax qualifies as direct became less important after the Sixteenth Amendment. That amendment authorizes an unapportioned federal income tax, whether or not that tax is considered direct. Today, the federal income tax has become the main driver of federal revenue.⁴¹ Thus, Congress can exert substantial taxation authority without concern for apportionment restrictions.

Some interpretive issues may arise as Congress considers more aggressive invocations of Sixteenth Amendment authority. Many very wealthy persons, including billionaires, do not have incomes that correspond to their wealth. That is, their wealth is associated with huge increases in the values of their assets rather than huge salaries. Can Congress treat this “unrealized appreciation” as income and tax it without following an apportionment requirement? The Court in Moore left this question open.⁴²

Related questions may arise over Pollock’s holding that direct taxes include taxes on personal property. The Sixteenth Amendment did not alter that holding, and the Court has repeatedly indicated that direct taxes include all property taxes.⁴³ But scholars have urged the Court to revisit Pollock’s holding about personal property.⁴⁴ If the Court does so, Congress could easily impose wealth taxes on billion-dollar stock holdings even if it cannot impose wealth taxes on real estate accumulations.

1. Art. I, § 8, cl. 1. ↩︎
2. Art. I, § 9, cl. 4. ↩︎
3. Hylton v. United States, 3 U.S. 171, 177 (1796); Pac. Ins. Co. v. Soule, 74 U.S. 433 (1868); Veazie Bank v. Fenno, 75 U.S. 533 (1869); Scholey v. Rew, 90 U.S. 331 (1974); Springer v. United States, 102 U.S. 586 (1880). ↩︎
4. Erik M. Jensen, The Taxing Power, the Sixteenth Amendment, and the Meaning of “Incomes,” 33 Ariz. State L.J. 1057, 1068 (2001). ↩︎
5. Articles of Confederation, arts. VIII & IX § 4. ↩︎
6. Federalist No. 15 (Hamilton). ↩︎
7. Calvin H. Johnson, Homage to CLIO: The Historical Continuity from the Articles of Confederation into the Constitution, 20 Const. Comment. 463, 486 (2004). ↩︎
8. Art. I, § 8, cl. 1; 2 Farrand’s 143, 366, 572; 3 Farrand’s 149, 360. ↩︎
9. Art. I, § 8, cl. 1; 2 Farrand’s 572. ↩︎
10. Art. I, § 9, cl. 4. ↩︎
11. Edwin R. A. Seligman, The Income Tax: A Study of the History, Theory, and Practice of Income Taxation at Home and Abroad 565–66 (1911). ↩︎
12. 2 Farrand’s 350. ↩︎
13. Art. I, § 9, cl. 4. ↩︎
14. Art. I, § 2, cl. 3. ↩︎
15. Id. ↩︎
16. Federalist No. 36 (Hamilton). ↩︎
17. Storing 2.4.56. ↩︎
18. Storing 3.6.45. ↩︎
19. John R. Brooks & David Gamage, Taxation and the Constitution, Reconsidered, 76 Tax L. Rev. 201 (2023). ↩︎
20. Joseph M. Dodge, What Federal Taxes Are Subject to the Rule of Apportionment Under the Constitution?, 11 J. Const. L. 839, 871–72 (2009). ↩︎
21. Seligman, supra, at 534. ↩︎
22. 4 Annals of Cong. 730 (1794). ↩︎
23. 8 The Works of Alexander Hamilton 382 (Henry Cabot Lodge ed., 1904). ↩︎
24. 3 U.S. 171 (1796). ↩︎
25. Hylton, 3 U.S. at 177. ↩︎
26. Id. ↩︎
27. Soule, 74 U.S. 433; Veazie Bank, 75 U.S. 533; Scholey, 90 U.S. 331; Springer, 102 U.S. 586. ↩︎
28. Soule, 74 U.S. 433; Veazie Bank, 75 U.S. 533; Scholey, 90 U.S. 331. ↩︎
29. Springer, 102 U.S. at 602. ↩︎
30. Pollock v. Farmers’ Loan & Tr. Co., 158 U.S. 601, 618, 637 (1895). ↩︎
31. Id. at 628. ↩︎
32. Id. at 625, 637. ↩︎
33. Id. at 637. ↩︎
34. David G. Farrelly, Justice Harlan’s Dissent in the Pollock Case, 24 S. Cal. L. Rev. 175, 180 (1951). ↩︎
35. Sylvester Pennoyer, The Income Tax Decision, and the Power of the Supreme Court to Nullify Acts of Congress, 29 Am. L. Rev. 550, 558 (1895); Nat’l Governors Ass’n, Oregon Gov. Sylvester Pennoyer, https://perma.cc/X6JL-FAAT. ↩︎
36. Letter from Archibald Butt to Clara Butt (July 1, 1909), in Taft and Roosevelt: The Intimate Letters of Archie Butt, Military Aide 133–34 (1930). ↩︎
37. Jensen, supra at 1107–15. ↩︎
38. Amend. XVI. ↩︎
39. Eisner v. Macomber, 252 U.S. 189, 207, 211–12 (1920). ↩︎
40. Moore v. United States, 602 U.S. 572, 588 n.3 (2024). ↩︎
41. Erica York & Madison Mauro, The Composition of Federal Revenue Has Changed over Time, Tax Foundation (Feb. 28, 2019), https://perma.cc/RYS9-ZUWX. ↩︎
42. Moore, 602 U.S. at 599. ↩︎
43. Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 571 (2012); Moore, 602 U.S. at 582. ↩︎
44. Dawn Johnson & Walter Dellinger, The Constitutionality of a National Wealth Tax, 93 Ind. L.J. 111, 137 (2018); Bruce Ackerman, Taxation and the Constitution, 99 Colum. L. Rev. 1, 58 (1999). ↩︎