[The following is an excerpt from the Winter 2001 issue of the Tennessee Historical Quarterly and is copyrighted 2001 to the Tennessee Historical Society. The complete, illustrated issue is available for $5 plus $1.33 postage, and 41¢ tax for Tennessee residents.]
A History of Personal Income Taxation in Tennessee
Photograph of 1870 Constitutional Convention used with permission of George Whitworth, Memphis, TN
Garesche's blood and brains spattered Rosecrans's coat. Garesche's horse galloped twenty yards and the rider's body fell off. The charming and graceful Cuban-born Garesche was the most popular officer in Rosecrans's army. Even the Confederates considered him the "most gallant gentleman in the army."(1)
As dusk came, Gen. William S. Hazen, a West Point classmate (1841), searched for his friend's body. At the moment he found it, the muscles of Garesche's dead arm suddenly contracted and the dead hand reached toward him. Hazen grasped it, removing the West Point ring and took from the body the book Garesche constantly read, a still popular Catholic devotional, Imitation of Christ.
Volunteers performed a rare nighttime burial in a temporary grave. A dazed Confederate deserter wandered over and offered Hazen his blanket as comfort from the rain and wind. The blanket was filthy and glazed with blood, but Hazen accepted and wrapped himself gratefully.
Few on the battlefield that night knew the next day their world would change forever, regardless of the outcome of fighting, known to the winners as the Battle of Stone's River, to the losers as the Battle of Murfreesboro.
But in Washington, Lincoln dealt a mortal blow to the Confederacy. With a pen stroke he issued the final Emancipation Proclamation. To northerners and to the British Parliament it was a humanitarian gesture. But for what remained of Confederate Tennessee, and the Old South, the document spelled economic warfare. Almost one-third of the tax base disappeared. What had once been private taxable assets worth $114,976,374 in Tennessee now, for the most part, became destitute, landless migrants.
Tennessee was already financially broken. For the first time, the Army of Tennessee was seen scavenging the battlefield dead, taking boots and rations from Union dead on a visible scale.
Like Gareshe's dead arm, the Tennessee army fought reflexively for another two years. Indeed, when ninety-five wagons of ammunition and hospital supplies arrived on the evening of January 2, 1863, Rosecrans knew he had "won" the battle despite having taken 13,249 casualties, including 1,630 killed, against 9,870 Confederate, including 1,236 killed. The Army of Tennessee had neither the leadership, the will, nor the weapons to attack, and retreated to Tullahoma for the winter.
Tennessee fiscal government endured an economic winter that lasted twenty years. The so-called "Common School Fund"(2) had been turned over to the Bank of Tennessee, which exchanged gold for Confederate promises, then issued its own banknotes and bonds. The latter were purchased at discount and used to pay taxes - a practice akin to allowing a taxpayer to pay taxes with Confederate money even after the war was over.(3) The war-era and Reconstruction state government issued millions of dollars in railroad construction and improvement bonds to railroads whose charters often gave tax immunity to the railroads themselves.(4) State government itself was supported by a system of property taxes, but with land values low, the revenues were static, and the collection system was both inefficient and corrupt.(5)
Compared to 1860, Tennessee produced 114,622 fewer bales of cotton in 1870. The tobacco harvest had dropped by half, the corn crop was down by twenty percent, livestock value down twelve percent. The average value per acre of land was $8.13 in 1860. In seven years it had dropped to $6.09. Assessed real property had declined in value $130 million dollars by 1870. Tennessee did not attain pre-war property values until 1892.(6)
Every man age twenty-one or older had to pay a tax of one dollar a year to support the public schools, but the tax went unenforced. Tennessee had something called the University of Tennessee, but it received no state funds during the nineteenth century. In 1873, Governor John C. Brown sarcastically said that "Tennessee is third in ignorance of the States of the American Union," but it became more ignorant by 1911, when Governor Hooper said, "Tennessee is forty-sixth in illiteracy among the states."(7)
Soldiers at Murfreesboro, Statesmen in Nashville, 1870
Seven years after the Battle of Murfreesboro, almost to the day, Tennessee leaders met in the Nashville courthouse to draft a new state constitution. By now, the state seemed hopelessly in debt and crop values remained low. The delegates to the 1870 Constitutional Convention faced the problem of how to reconstruct their state's government, its fiscal health, and their own battered lives.
Among the delegates was William M. Wright, M.D. He had been a private in the 8th Tennessee Infantry Regiment which sustained 306 casualties out of 474 engaged in the Battle of Murfreesboro. During the battle, the Union Army fired 20,000 cannon rounds and 2 million musket rounds. None hit James D. Porter, chief of staff to Gen. Benjamin Cheatham. Porter was elected governor of Tennessee in 1875.(8) Captain George C. Porter, 6th Tennessee, escaped harm but not terror. Arriving late upon the field, he heard fellow soldiers screaming at artillery thought to be Confederate, "Cease firing! You are firing on your own men!" They were wrong.
Delegate Alfred Tyler Fielder had enlisted as a private in the 12th Tennessee at the age of forty-seven. He was a captain at Murfreesboro and led a company that made "two successful Charges driving the enemy before us some three miles and strewing the ground with his dead and wounded and taking a large number of prisoners."(9) Fielder wrote in his diary, "I had my Coat sleeve pierced by a ball that grained [sp] my left arm and hit with two spent balls," and continued, "Thanks be to God who gave us the victory and enabled us to drive the boasting foe before us in wild confusion or causing him to throw up his hands and beg for mercy." Capt. Fielder continued, "This days battle was an awful one and will be talked about and read of when my name shall have been quite forgotten and may our enemies learn from this that they cannot conquer us and go home and let us enjoy our rights as they wish to enjoy theirs."(10)
Actually, Capt. Fielder was one of five members of the Fielder family in his regiment. Five days after the battle he wrote, "I just learned that my nephew B.F.W. Fielder who was badly wounded in the battle Wednesday last died at his fathers house on last Saturday morning." Capt. Fielder wrote sadly, "Franklin Fielder was a pious young man and declared to us all when were preparing to go into battle that he had never thought he would be Killed in battle before but he was certain he should be Killed in this and that it would matter little as he felt he would be better off -- Lord, help us his relations to meet him in heaven is my prayer, for Christ's sake."(11)
Col. John C. Brown, of the 32nd, was present but could not fight. He had been severely wounded in the thigh at Perryville and was still recovering, doing post duty. He was shot in the same thigh at the Battle of Franklin (1864). Brown was a trusted leader. He entered the war as a private and ended it as a major general. He was the overwhelming choice as constitutional convention president. In September 1870, the state Democratic Convention unanimously nominated him as their candidate on the first vote, and in November he was easily elected governor, serving until 1875.
A Constitutional Convention in 1870 and an Income Tax Law in 1931
The actions of a Tennessee Constitutional Convention in 1870 hold little interest to the public and government officials in the year 2001 but for this fact: The provisions of the Tennessee Constitution, ratified in 1870 following the convention, which bear on the issue of taxation have changed little since that time, and have not changed at all regarding the issue of whether the state can legally adopt a personal income tax. Today, the question has returned in earnest - may the Tennessee General Assembly adopt a personal income tax and not run afoul of the Tennessee Constitution? The answer, drawn from history, is yes - notwithstanding a Tennessee Supreme Court decision in 1932 to the contrary, the current view is that a personal income tax will pass constitutional muster if the Tennessee Supreme Court will look to Tennessee history.
This essay attempts to show the informed layman the history and law surrounding the most controversial issue in Tennessee politics today, namely, the legality of a tax on personal income, in particular, case law and commentary regarding quaint language of the 1870 constitution: "The legislature shall have power to tax merchants, peddlers and privileges in such manner as they may from time to time direct. . . .The legislature shall have the power to levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem."(12) Lawyers have written extensively on this matter for over twenty-five years.(13) Governor Albert H. Roberts endorsed an income tax in 1919,(14) as did several successors.(15) However, no historical journal has treated the subject.
A Detour Into the Language of Taxation
But a warning is necessary - words do not always mean what they say in a discussion of taxes. This is especially true in Tennessee. Misunderstanding abounds among the public about concepts that seem self-evident. To begin, consider the Tennessee sales tax.(16) Precisely, this is not a tax that consumers must pay. Rather, it is a privilege tax. That is, it is a tax on the privilege of selling things in Tennessee and must be paid by the seller. Conveniently, the law allows the seller to ask or require the buyer to pay the tax, but regardless of what the buyer does, the seller must remit the tax to the state.(17) Another form of privilege tax is the so-called business tax which is assessed on the privilege of doing business at the local level, with fifteen percent going to the state. It is based on a business's gross receipts,(18) and from the business owner's perspective is an income tax.
Next, there is (or rather was) the poll tax. This tax became infamous after 1890 in Tennessee, but had been a fixture in state taxation even before statehood -- and had nothing to do with voting. The word "poll" means "person," hence, it was a specific tax on people or things.(19) To illustrate, in 1792, Andrew Jackson, landholder and merchant, paid a poll tax of twelve and one-half cents on each of his slaves and two "white poles,"(his spelling) on himself and Samuel Donelson.(20) The Constitutional Convention of 1870 allowed the legislature to make payment of the poll tax a condition of voting; but the legislature did not do this in Tennessee until 1890. The effect was to frustrate African-American voters, as well as poor whites. It was effectively repealed in 1943 and consigned to history in 1953.(21)
To continue, there is a property tax. But what is "property?" The most obvious is a tax on real estate property, a primary funding source for local governments in Tennessee. But other kinds of "property" are taxed, namely personal property such as computers used by businesses. Tax language became especially corrupted in 1937 when Tennessee passed a property tax solely on corporations, and called it a franchise tax.(22) Assessment was (and is) based on either the net worth of the company or the book value of its assets. For good measure, the state also asserts a six percent corporation income tax, but calls it an excise tax. This usage is bizarre - precisely, an excise tax is tax on specific items for the privilege of owning them, for example, cigarettes and liquor. Tennessee taxes those as well, cigarettes beginning in 1925.(23)
Further, there is a state income tax on dividend income from stocks and certain interest earned. Passed in 1929 as a tax on the wealthy, it is the least known major tax in Tennessee.(24) It is also the most confusing because it derives from language in the Tennessee Constitution allowing an income tax on "stocks and bonds." In 1870, the phrase meant all long-term obligations, such as promissory notes, not merely what we consider a stock or bond today.(25)
Why is this understanding of the muddled vocabulary of taxation important to a discussion of a personal income tax in Tennessee? There are two reasons. First, the constitution itself speaks only about privilege taxes and property taxes; and only addresses an income tax obliquely. Second, the Tennessee Supreme Court has ruled that some taxes, such as the sales tax or the excise tax, are constitutional under the "inherent power of the legislature."(26) This rule is usually expressed in this manner: "the legislature has unlimited powers to enact laws except as expressly or impliedly restricted by the [Tennessee] Constitution."(27)
The Taxation Language of the Constitution as it Existed in 1870
The relevant taxation language of the Tennessee Constitution as it existed in 1870, and so much of the taxation language that is relevant today, is shown in Figure 1. The entire language is found in the long Section 28, and it was simply upgraded and carried over from the Tennessee Constitution of 1834.(28) The document does not label the paragraphs, but that will be done here for ease of reference. For example, (A) is the "all property shall be taxed" paragraph, (B) is the "equal value" paragraph; (C) is the "privileges" paragraph, (D) is the "income tax" paragraph; and (E) is the "poll tax" paragraph. Paragraphs (B) and (F) are irrelevant to a discussion of a personal income tax. Paragraph (B) was substantially modified in a limited constitutional convention in 1971, and paragraph (E) was erased by a limited constitutional convention in 1953.(29)
With the finger of one hand pointing to the language of the 1870 constitution, and the fingers of the other hand firmly grasping the strange vocabulary of taxation, it's time to look back at the year 1929, and the coming of the first state-imposed income tax in Tennessee.
(Figure 1)
1929: A Weak Governor, an Out-of-Control Legislature, and a Stock Market Crash
Tennessee governor Henry Horton (1866-1934) was the wrong person at the wrong place and time. He became governor on the sudden death of the popular Austin Peay in 1927 and narrowly won re-election in 1928. During the late 1920s the legislature borrowed and spent money lavishly, even over Peay's protest. But Horton had virtually no influence - in 1929 the legislature spent 31 percent more than the year before - and this was before the stock market crash of October 1929. The legislature's remedy was simply to raise the gasoline tax sixty-seven percent in one year (1929) and another forty percent for 1931.(30) And borrow money -- the state bonded debt increased 440 percent from 1926 to 1931.(31)
Among the welter of tax proposals in 1929 was a long-brewing idea for tax reform, namely a sales tax, which in turn would allow repeal of the state-wide property tax. Horton strongly wanted this reform, but business interests killed the sales tax. Horton was left with a tax he did not strongly support in order to get the property tax repealed, namely, an income tax on "stocks and bonds," named for its sponsor, Sen. Frank S. Hall, a Dickson Democrat. The tax had been specifically allowed by the constitution: "The Legislature shall have the power to levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem." These stocks, bonds (and notes) had been the subject of a property tax since at least 1895,(32) but it was largely unenforced. Few people came forward to pay the tax (30 cents per $100) and it was difficult to assess an asset that could be hidden in a mattress.(33)
The Hall Income Tax(34) remedied the old problem but looked curious - it broadened the number of people who would pay the tax, but actually lowered the rate to one-twelfth of the prior level. It was a tax-the-rich scheme - dwellers in the newly-fashionable Nashville neighborhood of Belle Meade were expected to pay the bulk of this tax. Most Tennesseans owned very little stock in corporations, including publicly-traded corporations, in 1929. Furthermore, the first one thousand dollars of such income was exempt from tax. The tax was passed on April 13, 1929, and the session adjourned the next day. The general appropriations bill was twenty percent over what the governor had recommended, no general revenue act had been passed (leaving the 1927 act still in effect) and the state faced a multi-million dollar deficit - all this five months before the Stock Market crash of October 1929.
Governor Horton brought the General Assembly back into extra session on December 2, 1929. Both branches worked together, but the remedy was more borrowing, and even greater spending increases, fully fifty-six percent more in 1930 than in 1928. The Hall Income tax produced barely one percent of what state government spent in 1930.(35)
A Narrow Income Tax and an Obscure Supreme Court Decision
With extraordinary speed, the Tennessee Supreme Court heard a challenge to the Hall Income Tax only three months after its passage. In Shields v. Williams(36) the tax was upheld. The opinion is important in only one respect -- it discusses the apparent intent of the members of the 1870 Constitutional Convention. The court cited the Journal of the Convention of the State of Tennessee(37) to support answering an important question - what did the language "not taxed ad valorem" mean? Even then, constitutional scholars were not sure. One opined that the language was "apparently intended to draw revenue from the holders of federal government bonds."(38)
Placed before the court were two choices. The first, asserted by the tax opponents, was that the convention meant only to allow taxation of railroad bonds (which were "not taxed ad valorem" because of special language in the bonds themselves), but that non-railroad bonds and stocks could not be taxed. To buttress their argument, the tax opponents insisted that the "equal value" paragraph [see Figure 1, paragraph (B)] still applied. This part of the tax opponents' argument is not explained in the opinion, but apparently the opponents were trying to string together an argument something like this: "All property is to be taxed. . .according to its value. . . equal[ly] and uniform[ily] throughout the state." By implication, only property taxes could be assessed and this was not a tax equal to other kinds of property. The second view, asserted by the attorney general's office was simple - the constitution says what it means, namely, any stocks or bonds not taxed by value can be taxed by income.
The court adopted the state's position. The journal showed the convention had first proposed this language, "The Legislature shall have power to levy a special tax upon incomes derived from stocks and bonds exempted by the laws of the United States from taxation." But debate arose whether the state could tax federal government bonds, and Delegate Kennedy proposed the change, "The Legislature shall have power to levy a special tax upon incomes derived from stocks and bonds that are not taxed ad valorem."(39) The language helped settle the matter, at least in Justice Green's mind. The delegates surely knew, he reasoned, that the United States Supreme Court had ruled in Westen v. City Council of Charleston (1829)(40) that the states could not tax the income on federal bonds. He asked rhetorically, "Can we be asked to believe that so many learned jurists included in the Convention of 1870 were all unaware or unmindful of this notable decision made forty years earlier?"(41)
The decision in Shields v. Williams tantalized supporters of a general personal income tax. Would the state Supreme Court uphold such a tax? Green had written, "There is much conflict in the decisions [of other courts] as to whether an income tax is a property tax or an excise tax." The inquiry was necessary, he wrote, because only a property tax "is subject to the equality and uniformity provisions contained in the Constitutions of the many states."(42) He wrote confidently, "Such requirement is not imposed with respect to privilege taxes authorized in the next clause [see Figure 1, paragraph (C)], nor is such requirement imposed in the following clause on the authorized "tax on incomes derived from stocks and bonds not taxed ad valorem." Both the privilege tax clause and the income tax clause are special provisions, exceptions to the ad valorem tax clause, clear of the restrictions contained in the ad valorem tax clause."(43) Anyone reading this would conclude that the door was open for a true personal income tax. No one would imagine, however, how things would change is the next two years.
Tennessee Turned Upside Down: Depression and Financial Collapse
"When I came into office in 1927 we were at the height of the most prosperous period our country has ever known. But for the past three years we have been undergoing the greatest depression our country has ever witnessed," Gov. Horton told the legislature on January 3, 1933, in his last full message before his term expired ten days later.(44) Indeed, the world had turned upside down.
Within days of Horton's re-election in November 1930, the state was plunged into a financial disaster with the collapse of the Rogers Caldwell banking empire. At least $3,418,000 in state funds deposited in Caldwell-affiliated banks had disappeared - this amounted to about ten percent of the state's budgeted expenditures for the year, and virtually all the cash on hand.(45) In Knoxville, the University of Tennessee lost its checking account overnight, some $409,644. By October 1931, some public schools were closing for lack of state funds, professors at Memphis State College were being paid in script, and there was no money to pay the salaries of state government employees.
By November 1931, Horton had dodged impeachment, but the state's fiscal condition was desperate - the Wall Street bond market refused to loan Tennessee anymore money. Special legislative sessions on November 16 and 30, 1931, were called to put together a patchwork of tax and borrowing schemes, cutbacks and money transfers. The desperate Governor endorsed a personal income tax which he had publicly rejected a year before.(46) Called the Durham Bill, it provided for a flat five percent tax on net earnings of every "gainful occupation, profession or employment."(47)
It was a tax on the rich. Explained the governor, "The lawyers, doctors, railroad, insurance, power, and industrial officials receiving salaries from twelve to fifty thousand dollars year, who now contribute nothing out of earnings to maintain the State Government, will be required to contribute from their net earnings 5 per cent of each dollar earned; whereas, their cooks, chauffeurs, footmen, laundrymen, office girls and janitors will not be required to contribute."(48)
"A wage earner who works every working day in the year, six days a week, and receives a daily wage of $3.30, pays no tax," Horton explained - and he was close to the mark. The typical highway construction worker earned only $1.80 per day. (The federal minimum wage of twenty-five cents per hour was still seven years in the future.) Most working men and women in Tennessee would pay little or no tax under this scheme. Indeed, most paid no federal personal income tax until wages improved ten years later. At that time, employers had to instruct their workers on how to fill out a federal income tax return, a novelty for most Tennesseans.
Even those who favored a state income tax had misgivings. They were concerned that it would not raise enough revenue. A University of Tennessee economist, who favored the tax, said, "But, if we tax income derived from business, why exempt wages and salaries? Thus the case is presented for the income tax. The main objection raised is that exemptions are usually placed so high that the bulk of the population go untaxed."(49)
In Nashville, it was clear to most citizens who should pay an income tax - anyone named Cheek. In 1928, Joel O. Cheek had sold his coffee company, and its famous brand "Maxwell House" for the staggering sum of $25 million in cash and stock. He left behind ten children. A cousin, C. T. Cheek, had prospered in the wholesale grocery business; his son Leslie was soon building a fabulous home "Cheekwood" on the outskirts of Nashville. Another son of C. T. was Will T. Cheek, who shared ownership in the company - which became casualty of the Depression in 1935.
The tax, now called the Anderson Bill, was passed on December 19, 1931, amid concern about whether it was constitutional because it was a graduated, not flat tax as the Durham Bill.(50) The personal exemption was $1,500 for a single taxpayer, $2,500 for the head of a family, and $300 for each dependent. The tax was little noticed -- average annual farm income was $639.(51) A professor at Tennessee Wesleyan College earned $1,718. The minister of the Presbyterian church in Athens earned $2,100.(52) Factory workers in Bradley County's Debonair Hosiery mill earned $1,000 a year.(53) Clearly, the tax fell almost exclusively on the wealthy, chauffeur-driven landed gentry and the high salaried. The tax rate itself was low; one percent on the first $2,500 of net taxable income, one and one-half percent on the second $2,500, and up to a five percent maximum on all taxable income above $150,000 per year.
Virtually no one in Tennessee regularly earned more than $5,000 year in Tennessee in 1931. The president of the University of Tennessee earned $12,000. President Morgan took a voluntary pay cut to $7,500 in 1931 and the trustees raised it back to $9,000 in 1932.(54) The chancellor of Vanderbilt University accepted $13,400 -- and constantly reminded everyone that the trustees had set his salary at $18,000.
Death of the Personal Income Tax in Tennessee: 1932
Again with dispatch, the Tennessee Supreme Court heard another income tax-related case. One of the plaintiffs was Will T. Cheek -- later he would run for Congress as "a grocerman, not a politician." On July 23, 1932, the Anderson Bill was declared unconstitutional in the case of Evans v. McCabe.(55) The decision in Evans, again unanimous, was almost perfunctory. It contained no references to the convention's journal, contemporaneous events, or even decisions of other state supreme courts which were passing on similar state income taxes at that time.
The court ruled that the Anderson Bill was either an invalid property tax, or if denominated a privilege tax, was unconstitutional because the constitution, by permitting stock and bond income to the taxed, "necessarily denied the legislature the power to tax incomes of other classes."(56) The court did not specifically hold that the income tax was either a property tax or a privilege tax because the state had conceded the invalidity of the tax as a property tax under the uniformity and equality provisions in Article II, Section 8 [Figure 1, paragraph (B)].(57)
The method of interpreting the constitution in this manner is called exclusion by affirmation. To support its method, the court looked at the ordinal placement of the various paragraphs. Because the provision for an income tax on stocks and bonds [Figure 1, paragraph D] was located in the document after the provision allowing the legislature to tax "merchants, peddlers, and privileges," the court stated that it was an exception to the prior clause. Said the court, "The clause [income tax on stocks and bonds] was certainly not designed to confer an additional power of privilege taxation."(58) The court concluded firmly, "[The] intent was that only the incomes mentioned should be taxed."(59)
The Tennessee Supreme Court's use of such a crude method to decide an important question, coupled with its failure to look at the convention's journal and other states' case law, has baffled legal scholars and political scientists for decades. Since the decision in Evans, proponents of a personal income tax have suggested either a constitutional amendment,(60) or a non-graduated ("flat") personal income tax.(61) With an amendment considered politically impossible, all current efforts by tax supporters focus on passage of a "flat" or "flatter" tax.(62)
The question remains: Will such a tax withstand constitutional scrutiny in the face of Evans and its progeny?(63) A turn to history, especially the discussion of taxation by the convention delegates from January 24 through February 11, 1870, will answer these questions - (1)Why was the stock and bond income tax provision included? (2)What accounts for its position, that is, location, in the constitution? (3)What were the group's understanding and experience with income taxes generally? (4)Finally, did they view an income tax as coming under the power to tax privileges? Collectively, the answers to these questions will demonstrate that a personal income tax is constitutional in Tennessee.
"Greenbacks," Taxing Government Bonds, and Mr. Williamson
Ignoring yet another cholera epidemic in Nashville, the Constitutional Convention began its tax deliberations on January 22, 1870, with receipt of a report of the Finance Committee which was turned over to the Legislative Committee and submitted to the full convention two days later. The report contains most of the provisions found in Article II, section 28 in its final form (Figure 1.) A side-by-side comparison (Figure 2) is illuminating - it shows that the court was wrong in Evans - there was no intent to limit the legislature's power by placing the stock and bond provision following the privilege tax provision. Rather, this was merely the most logical place to put this new form of taxation in the document. Clearly, rather than limiting legislature's power, it increased it, and placing the one-sentence provision anywhere else would have looked like sloppy draftsmanship.
(Figure 2)
Still, the important issue in determining what the delegates intended turns on what they said and knew, not the happenstance of ordinal placement of words in a report or final draft. Here, some Civil War history tells the story.
To finance the war, the federal government issued legal tender notes which were generally referred to as "greenbacks" in the amount of several hundred million dollars.(64) They were exempt from state taxation by federal law, but, because these notes became the accepted medium of exchange, it was thought at the state level that they were in reality taxable on a par with coin-backed currency. In other words, while the states could not single out these notes for taxation, if a state passed an "equal and uniform" tax on all types of notes (private or state-issued notes as well) these could be taxed too.
Moreover, as another war measure, the National Bank Act was passed which provided for nationally-chartered banks. The banks were created to serve as a market for federal government bonds, but the act also allowed these national banks to issue their own non-coin-backed notes. The states attempted to tax both the greenbacks and the national banks' notes as personal property. In 1868 the United States Supreme Court ruled that greenbacks were exempt from state taxes because they were federal obligations.(65)
However, the taxability of the national bank notes, which were rapidly being substituted for state bank notes as currency,(66) remained an open question since the act itself contained no specific exemption as it did with greenbacks. Everyone was confused - even the Indiana Supreme Court in 1869 said these notes were taxable at the state level - and among those confused were the delegates to the 1870 Constitutional Convention. How could the state tax such "stocks and bonds" which included these federal bank notes? Furthermore, could the state tax the stock of the new national banks? The federal law (1868) seemed to say yes, provided the rate was the same as other forms of "moneyed capital."(67)
The Finance Committee proposed giving the legislature the power to "levy a special tax upon incomes derived from stocks and bonds exempted by the laws of the United States from taxation."(68) One delegate said the language was wrong because the United States Supreme Court had ruled "fifty years ago that States could not tax incomes derived from United States securities," - an obvious reference to the Westen case. Two delegates said the state could tax the income from such bonds, but not the bonds themselves. Another declared there was no point in discussing the matter, just include it and let the courts decide. A fourth delegate asserted the state had the power, but opposed the language because it would be "considered by the [federal courts] as an "intended insult."(69)
Delegate James J. Turner said he had researched the matter, thought the provision was alright and was in "favor of making the experiment and testing the rights of the State in this particular." Delegate William Henry Williamson, who had lost an arm at Gettysburg, was frustrated with the whole debate and didn't want any experiments. Either put the provision in or leave it out, he insisted. Another delegate, George W. Jones, said he could not see the distinction between the right to tax the income and the bonds themselves. Finally, delegate D. N. Kennedy spoke in favor of revised language, explaining that the "object of his wording was to render liable to taxation derived from certain bonds, which he understood had been issued by the State and declared not taxable." This argument, which suggested the state could tax the income from the dreaded railroad bonds, struck a chord. Kennedy's amendment dropped the word "special" and replaced the last clause with "that are not taxed ad valorem." The amended language was approved 67 to 2, with the confused Mr. Jones and the frustrated Mr. Williamson voting no.
The Federal Income Tax: Financing Mr. Lincoln's Army
What did the delegates know about a personal income tax? No one seems to have asked this question. A few pages of history would have been worth a volume of logic.
The first federal personal income tax was enacted as a war time measure on July 1, 1862. It provided a tax of three percent on incomes above $600.(70) The tax remained in force for ten years, but was generally evaded. In 1868 only 250,000 returns were filed out of a total population of nearly 40 million. Likewise, the Confederate States of America had adopted an personal income tax in 1863, but it raised virtually nothing.
A "faculty tax," which was an income tax of colonial origin, had been levied by the states themselves. For example, North Carolina had adopted a state income tax in 1849 which in modified form was still in force at the time of the 1870 Constitutional Convention. Similar taxes existed in both Alabama and South Carolina. The rates were so low the taxes were a failure, however.(71)
There is nothing in the journal to suggest that the convention delegates said anything about a personal income tax. Common experience showed the tax had been a failure. In a primarily agricultural economy, such a tax was both inefficient and insufficient.
What is a "Privilege?": Merchants, Peddlers and All That
In time, the Tennessee Supreme Court would assert that the right to receive money was not a privilege that could be taxed.(72) Did the delegates to the 1870 Constitutional Convention think or say anything to support that notion? No. To the contrary, the convention saw the receiving of income as constituting a privilege within the meaning of the taxing article [Figure 1, paragraph (C)]. The journal says as much.
On February 10, delegate Neill S. Brown (1810-1886), former governor, 1847-1849, proposed that the word "privileges" be stricken from [paragraph (C)] and replaced with "such occupations as are not permanent in their character, or special in their nature."(73) This language would have precluded a general personal income tax. The matter was deferred until the next day at which time Brown withdrew his amendment, substituting a more specific provision to the effect that, "the business of farming, mechanical and manufacturing pursuits and the learned professions shall not be considered privileges under this Constitution."(74) This would have gutted any personal income tax, if the language had been adopted. The amendment was rejected by a vote of 45 to 18 that day.(75)
None of this information was placed before the Davidson County chancery court when the Income Tax Act of 1931 was challenged decades later.
Advocacy in Evans v. McCabe - The Historical Picture Unseen
On May 14, 1932, Davidson County chancellor R.B.C. Howell ruled, "The income from property when received, is property. . .[and] the Constitution must be construed as prohibiting any income tax other than that especially provided for."(76) Chancellor Howell also found fault with the Income Tax Act's draftsmanship. The new law allowed the commissioner of finance and taxation to use "such other basis as is best suited" to tax corporate income if assessment based on tangible personal property could not be made. This allowed the state too much flexibility. The constitution required uniformity, he ruled.
Framed in this manner, the dispute took on an ideological cast -- the sacred right of property versus an over-reaching, almost socialist government, eager to redistribute private property. Appeal to the Tennessee Supreme Court was next, and the challenge was real. The court had already ruled that if a security is exempt from taxation, the interest on the security was also exempt.(77) The ruling was not on point, but a close enough analogy to convince a fence-sitter.
A powerful brief, akin to cannonading by the Kentucky Confederates at Murfreesboro, followed by a strong argument, like the 1st and 12th Tennessee charging from the cedar forest, would carry the day. Neither happened.
The state's prolix brief offered a complicated argument. The law was unsettled but tripartite it asserted. One view: "It is a tax on property when property is the source of income." Next view: "Income itself is property, and a tax thereon is a tax on property." Third view: "It is neither a tax on income as property, nor a tax on the property from which the income is derived, but is a subjective tax on the power in the name of an excise or privilege tax." The supreme court must have been perplexed.
The state's concession that two theories agreed that an income tax was a tax on property was its undoing. Instead of forcefully asserting the last theory alone, the 116-page brief plowed through cases, treatises, committee reports, law reviews and included Montesquieu and John Stuart Mill. The brief was written by Miles P. O'Connor, a sometime professor at Vanderbilt Law School.(78)
The state put its strongest argument last, namely, that all other state supreme courts were upholding newly-enacted income tax laws. Since 1920, no state income tax law had been struck down.(79) By the end of 1932, sixteen states were collecting a personal income tax.(80)
The state's brief disparaged the delegates to the 1870 convention by reminding the court of the oft-told statement that the delegates assumed their work was temporary, and would have to be done again in ten years.(81) The brief said awkwardly, "It cannot be said, therefore, that the provisions of the Constitution represented the deliberate judgment of probably the ablest body of men ever gathered together in Tennessee, and it cannot be argued that their failure to give specific authorization for other theories of taxation was an intentional limitation of the legislature to existing theories."(82)
Whatever the brief writer meant was probably lost to the judges of the Tennessee Supreme Court, who were literally closer to the Civil War survivors than the New Deal. Judge William L. Cook, who had served on the supreme court since 1923 was born in 1869. His father had lost an arm at the Battle of Murfreesboro.
Oral argument before the Tennessee Supreme Court included questions about what the 1870 delegates thought, according to the state's reply brief. Here again, the state used its last ammunition poorly. The reply brief recited the Journal debate showing how little the constitution had been changed from the 1834 Tennessee Constitution. The inference was that the delegates didn't care about the future.
The state's attempt to limber the constitution by dismissing its framers misfired. Not surprisingly, the Tennessee Supreme Court decision in Evans v. McCabe made no mention of the 1870 convention in its opinion, nor did it mention any case or theory cited by the state.
The decision in Evans v. McCabe contained so little intellectual weight and was so narrowly drawn that no law student chose to make it the subject of comment in the Tennessee Law Review. Seven years would pass before anyone thought it worthy of scholarly mention, and then only a few paragraphs.(83) In Knoxville, the same professor who had urged a personal income tax in 1930 was still doing so thirty-nine years later.(84)
Despite the low intellectual rigor of Evans v. McCabe, it shut the door to an income tax (except as a constitutional amendment) and a UT-Knoxville law professor proposed a new method for doing that, namely a limited constitutional convention.(85) (He specifically mentioned an income tax-related limited convention.) Scholars and reformers now turned their attention to what has been called "reverse income tax," namely the sales tax.(86)
Then another lawsuit arose in 1959 that seemed to nail shut the income tax door that had been firmly closed by Evans v. McCabe. In the meantime, Tennesseans would pass through three wars, two hot and one cold.
The "Natural Right" to Receive Income
In the three decades following Evans v. McCabe (1932), the Tennessee landscape literally changed beyond anything imaginable by the delegates who arrived in Nashville in the winter of 1870. Massive hydroelectric dams, rivers of hard-surfaced highways, thousands (then almost a million) of automobiles, publicly-supported colleges - even one for descendants of slaves - grew such that even the battlefield at Murfreesboro, once cold, remote and forested, became crowded by homes and city noises.But the Tennessee Constitution stayed the same until 1953, the oldest unamended constitution in the nation's history. And even then, the taxation provisions were untouched until 1971. From the beginning, Tennessee had a regressive tax system. The first constitution (1796) intentionally favored the land speculators like Andrew Jackson who helped write it. Even the 1870 delegates ignored the pleas of merchants in Memphis and Clarksville that the document provided no safeguards against effective double taxation (on themselves and on their inventory).
But the post-World War II recovery, fueled by new industry attracted by cheap electrical power, covered the structural unfairness in Tennessee's tax system. The "new" sales tax (1947) seemed to work, at least for the first fifty years. Meanwhile, lawmakers looked for loopholes to fill in the endless quest to shift tax burdens to others, especially corporations - and particularly out-of-state corporations. An opportunity arrived in the form of a dispute over a tax bill of exactly $427.92 that a trucking company from Alabama refused to pay.
The issue was important only to trucking companies -- and to Tennessee -- which is always in the way of trucks heading north or south, like a clambering army. As in 1861, the United States Constitution frustrated Tennessee's will to have its lands respected, or at least its highways partially subsidized by outsiders who regularly used them. Only this time it was a southern foe.
Jack Cole Company, a Birmingham-based trucking company, had no depots or offices in Tennessee and paid no corporation taxes to Tennessee. The law was clear; it didn't have to. But it used the roads. The Ellington administration sponsored a law to tax out-of-state companies, particularly those already forced to give their tax addresses to Tennessee officials (trucking companies). However, the law had to be written to avoid a United States Supreme Court decision that forbade the states from taxing solely interstate business(87) under the rubric that these companies were being taxed on the "privilege of doing business."
To comply with the U.S. Supreme Court decision, the new law clearly denied it was levied on the privilege of doing business, rather it was imposed on the privilege of "being in receipt of or realizing net earnings in Tennessee." The language seemed to work, but the law did not.
A young Nashville lawyer, Maclin P. Davis, Jr., brought the matter to the Tennessee Supreme Court in early 1960. Despite a line of cases saying the legislature could call virtually anything a privilege in order to tax it, this was going too far. "If the [state's] contention in this case is sustained and the Act held valid, then the Legislature could impose an income tax on all citizens merely by declaring the receiving of income to be a privilege."(88) Davis continued, "We submit that the Constitution never intended that the Legislature could enact an income tax under any guise."(89)
Lawyer rhetoric aside, the act had revealed the true meaning of a privilege tax, namely, that a privilege tax is a tax on the privilege of doing something and earning income in the process. If the law flatly says the first part is not taxable, as the act said, then the only basis left was the latter. Governor Ellington's bill drafters had forgotten Tennessee history. For decades the state had levied a tax on the privilege of doing just about everything. Want to tell fortunes? $10. Sell fruit? $5. Operate a wild west show? $150 per night in a big county, half for a small one. The tax scheme had to be equal and uniform, not based on income. It was archaic and evadeable. For example, for the privilege of moving other people's household goods ("transfer business for hire"), the tax was one dollar a year per horse.(90) What if the business used a truck, not horses? No tax!
Once again, the state allowed its opponent to set the plan of battle - the better course would have been to retreat and redraft the law.(91) Instead it lost both the battle and probably the war. In language it didn't need to use, the supreme court said, "Realizing and receiving income or earnings is not a privilege that can be taxed."(92) The court continued, "Since the right to receive income or earnings is a right belonging to every person, this right cannot be taxed as a privilege."(93)
The Tennessee Supreme Court had fallen victim to Cold War rhetoric: The moral difference between the Soviet Union and the United States is that in America a person (always a man) is entitled to keep the fruits of his labor, not so under godless Communism.
Since 1960, the pronouncement in Cole has taken a life of its own; some calling it a "natural right." Actually, this concept of natural law has no support in the United States Constitution. If it did, no one would have to pay federal income tax. Rather, the federal government has trampled "the right to receive income," because it has taxed incomes from "professions, trades, employments, or vocations," both during and after the War for Southern Independence.(94) At the state level, no other state supreme court has ever followed Tennessee's concept of earning income as a natural right - but then, no other state guarantees its citizens "free navigation of the Mississippi [River]."(95)
One of those who remain certain that an income tax is unconstitutional is Maclin P. Davis, Jr., still in active law practice in Nashville in 2001.(96) The office of the attorney general steadfastly disagrees, and an elaborate opinion in 1999 soundly criticizes the Shields-Evans-Jack Cole trilogy.(97)
Proposals for an Income Tax Since 1971
In 1971, when Governor Winfield Dunn proposed a sales tax increase, seventeen members of the House of Representatives responded by sponsoring a bill which called for a three and one-half percent flat rate on gross incomes.(98) The next year, a Tax Modernization and Reform Commission was formed and issued a report in 1974 calling for an income tax. Governor Dunn asked the legislature to consider the commission's recommendations, becoming the first chief executive in post-war history to appear to support an income tax.
Burgeoning inflation forced Governor Blanton to urge a progressive income tax in his budget message of January 13, 1976.(99) The matter was derailed by two developments. First, the attorney general opined against the constitutionality of the bill, and financial interests were distracted by the need to amend the constitution to raise interest rates to competitive levels. Various interest groups coalesced to support a limited constitutional convention for 1977. To gain support, the campaign made it clear that the convention was forbidden to consider an income tax.(100) The constitution forbade another convention for at least six years, but by 1982 another income tax bill was introduced by Sen. John Ford - the present attorney general had issued an opinion saying an income tax was constitutional, after all.(101)
Speaker of the House Ned Ray McWherter explained the need for tax reform (the commonly understood euphemism for an income tax coupled with removal of the tax on groceries) as early as 1981, suggesting it would be needed in the mid to late 1980's.(102) As governor, he opposed an income tax in his first term, but offered a tax reform package in 1991 and 1992 that called for a three percent personal income tax.(103)
But an income tax was not solely a Democratic idea, despite the fact that Cordell Hull is considered the father of the federal income tax. Chattanooga representative David Copeland, a Republican, had struggled for ten years to get an income tax measure before the legislature and this bore some fruit in 1992 when the house approved a vote on a constitutional convention to address the issue. But a differing version of the bill in the senate caused a joint committee to balk. The measure failed. Copeland gave up his house seat and sought his party's gubernatorial nomination in 1994. Anti-tax candidate Don Sundquist was instead nominated and elected. But by 2000, he too, had concluded that an income tax was necessary. But is such a tax constitutional?
Conclusion
By January, 1933, at the end of Gov. Horton's last term, Col. Garesche had been dead fifty-nine years. He had been forgotten, despite having been the first West Point graduate to die in the Civil War - and had been killed in his first battle. Likewise, his foes at Murfreesboro who drafted the constitution had all crossed the river.
Still, the Tennessee Supreme Court could have been persuaded that an income tax was constitutional the year before, provided the history of the 1870 Constitutional Convention had been made clear. Evidence of that history surrounded the court, if it had been used. In 1930 alone the State of Tennessee paid Civil War veterans (and widows) pensions of $1,100,994.50. This was twice what the state paid for public health and slightly more than the cost of operating state government itself, exclusive of penal and charitable institutions. Education at all levels took forty-five percent of the budget, but the Civil War and its relicts still took seven percent.(104) The generation that had drafted the constitution, and its language on taxes, were still there to be asked in 1930. Today we have only to look at the convention's journal to understand their intent.
Endnotes
1. William M. Lamers, The Edge of Glory: A Biography of General William S. Rosecrans, U.S.A. (Baton Rouge, 1961, 1999), 193.
2. A mythical "perpetual fund,"shamefacedly called the "Common School Fund," was established to support schools, its funding coming from the sale of public lands. By the time this was done (1838) all the valuable public lands were gone. The law said these "funds" were part of the capital of the Bank of Tennessee, which supposedly had a fund of $1.5 million in 1858. The collapse of this funding source is well described in Robert H. White, Development of the Tennessee State Educational Organization, 1796-1929, (Kingsport, 1929). When the entire gold assets of the Bank of Tennessee were captured in Augusta, Georgia in 1865, they amounted to $446,000 and the bank was liquidated in 1866. White,192.
3. See Furman v. Nichol, 75 U.S. (8 Wall.) 44 (1868); see also Watson, Trustee v. President and Directors, 64 Tenn. 1 (Tenn. 1875).
4. Tennessee's defining fiscal problem until 1883 was this "railroad debt," usually referred to simply as the "State Debt Controversy." See Robert L. Jones, Tennessee at the Crossroads: The State Debt Controversy, 1870-1883, (Knoxville, 1977).
5. Roving officials, literally called "Tax Collectors," who were later assisted by "Back Tax Attorneys," appeared at county courthouses and "struck off"(sold) both personal and real property for unpaid state taxes and the inevitable costs. The opportunity for political patronage and mischief was irresistible and the coming of the sales tax was seen as a blessing to rid the state of this system. See James E. Thorogood, A Financial History of Tennessee Since 1870 (Nashville, 1949), 35-39. See also Claude O. Brannen, Taxation in Tennessee (Louisville, 1920).
6. Jones, Tennessee at the Crossroads, 6.
7. These are two of the most famous gubernatorial quotes in Tennessee history and are enshrined in the Senate Journals. See Thorogood, 74. There were only forty-six states in 1911.
8. See Robert H. White, ed., Messages of the Governors of Tennessee, 1869-1883, Vol. VI (Nashville, 1963), 395-405. Davis was one of the few leaders who wrote about the War of Northern Aggression, including the Battle of Murfreesboro. See James D. Porter, Confederate Military History, Vol. 8. (Secaucus, 1976, Rpt.). For a vastly different view of the battle, see, Samuel R. Watkins, "Co. Aytch," Maury Grays, First Tennessee Regiment; or, A Side Show of the Big Show, intro. Bell I. Wiley (Jackson, 1952; rpt. New York, 1962). Some of the same people Porter describes as "gallant" were drunk during the fighting, said Watkins!
9. Ann York Franklin, comp., The Civil War Diaries of Capt. Alfred Tyler Fielder, 12th Tennessee Regiment Infantry, Company B, 1861-1865 (Louisville, 1996), 98. The diaries are part of the collections of the Tennessee Historical Society.
10. Ibid., 98-99.
11. Ibid, 110. Capt. Fielder was badly wounded at Missionary Ridge (1863) and Peachtree Creek (1864). Paroled at High Point, North Carolina, he returned to farming in Dyer County. He was one of the commissioners who organized Crockett County, and represented the county in the state House, 1883-1887. He and his wife had no children; he died at age 84 in 1896. Ibid., 248.
12. Article II, section 28 (Tenn. Const. 1870).
13. Walter P. Armstrong, Jr., "Constitutional Limitations on Income Taxes in Tennessee," 27 Vanderbilt Law Review 475 (1974); Lewis R. Donelson, "Tax Reform in Tennessee," 5 Memphis State University Law Review 201 (1974); T. M. Simpson, III, "The Tennessee Constitution and the Income Tax," Tennessee Bar Journal (February, 1974) 24; Lewis L. Laska, "A Legal and Constitutional History of Tennessee, 1772-1972," 6 Memphis State University Law Review 563, 646-653 (1976); John J. Harrington, Comment, "A Review of the Struggle for Tennessee Tax Reform", 60 Tennessee Law Review 431 (1993). A contemporary argument against the constitutionality of the tax is Robert E. Cooper, Jr., "Re-examining the Constitutionality of an Income Tax in Tennessee," Tennessee Bar Journal (January-February, 1992):14. The most recent summary of the issue is Alice Marie Pettigrew, "The Constitutionality of an Income Tax in Tennessee," 10 University of Memphis Law Review 337 (2000).
14. Brannen, Taxation in Tennessee, 249.
15. These included Austin Peay in 1923; Hill McAlister (1935) (constitutional amendment); Gordon Browning (1937) (initiated legislative move for constitutional amendment); Prentice Cooper (1939) (constitutional amendment). For a valuable overview of tax history see T.M. Simpson, "Tennessee Tax Politics," in Dorothy F. Olshfski and T. M. Simpson, III, The Volunteer State: Readings in Tennessee Politics (Knoxville, 1985). Governor Lamar Alexander rejected an income tax which had been narrowly endorsed by a Legislative Task Force in 1984.
16. The sales tax was first passed in January 1947 and the rate was 2 percent. It was estimated to bring in $20 to $25 million. In fact, due to the booming economy it produced a startling $41 million in 1948, the excess came to be called "overage." A tax revision commission report opposed a personal income tax for three reasons. First, federal income taxes were steeply progressive, second, that state income taxes would hamper investment and industrialization, and third, that such a tax was unconstitutional. Report of the Tax Revision Commission of the State of Tennessee (Nashville, 1948), 69-71.
17. To prevent persons from avoiding the sales tax, the state imposes a use tax on out-of-state goods recently purchased and brought into the state. This is technically a tax on the privilege of using items that have not been taxed at a rate equal to the sales tax.
18. Bradford N. Forrister and Bill Buechler, 2000 Tennessee Tax Guide: A Comprehensive Survey of Major Tennessee State and Local Taxes (Nashville, 2000), 31.
19. The most famous poll tax is described in this manner: "And it came to pass in those days, that there went out a decree from Caesar Augustus, that all the world should be taxed. And all went to be taxed, everyone into his own city." Luke 2:1-3.
20. Sam B. Smith and Harriett C. Owsley, The Papers of Andrew Jackson, Volume 1, 1770-1803 (Knoxville, 1980), 34.
21. Laska, "A Legal and Constitutional History of Tennessee." It was removed from the Tennessee Constitution in 1953.
22. Forrister and Buechler, 2000 Tennessee Tax Guide, 35.
23. The tax on cigarettes was originally a privilege tax but officially became a consumer (excise) tax in 1947. Research Section, Tennessee Department of Revenue, History of Tennessee Taxes (Nashville, 1983), 30-32.
24. Forrister and Buechler, 2000 Tennessee Tax Guide, 46.
25. By 1907, the distinction was made, but the rates were the same, namely fifty cents per each one hundred dollars of value. The county could levy another thirty cents. Both real and personal property were taxed equally. See General Assessment Law, Chapter 602, Act of April 15, 1907, in Robert T. Shannon, Digest of the Tax Laws of Tax Laws of Tennessee (Nashville, 1907), 7, 122.
26. See,Op. Att'y Gen. No. 99-217 (October 28, 1999), 25. The support comes from language in Vertrees v. State Board of Education, 141 Tenn. 645, 214 S.W.737 (Tenn.1919).
27. Dennis v. Sears, Roebuck & Co., 446 S.W.2d 260, 266 (Tenn. 1969).
28. While technically the Constitution of 1835, most writers refer to it as the 1834 Constitution because of the year of the convention, not the year of ratification. See Laska, "A Legal and Constitutional History of Tennessee," 563, 599-615. For a side-by-side comparison of the 1796, 1834, and 1870 Tennessee constitutions, see Wallace McClure, State Constitution-Making, With Especial Reference to Tennessee (Nashville, 1916), 377-460.
29. Laska, "A Legal and Constitutional History of Tennessee," 563, 653, 667.
30. By today's standards, the numbers seem small. The tax went from 3 cents a gallon to 7 cents a gallon in 1931. The legislature met biannually until 1968, but in practice met virtually every year because of the called special sessions.
31. Thorogood, A Financial History of Tennessee, 225. A contemporary account Tennessee's fiscal health in 1930 is Charles E. White, "Some Aspects of Taxation in Tennessee," 8 Tennessee Law Review 170 (1930).
32. Acts of 1895, Chapter 120, section 9. See also Revenue Law of 1895, Extra Session, Chapter 4, Section 3. See Robert T. Shannon, Digest of the Tax Laws of Tennessee (Nashville, 1907), 122.
33. One writer suggests the tax evasion problem was one of rate, namely the rate was three percent, the same as real property and this would take one-half or more of the income, citing briefs in Shields v. Williams. See Cooper, Re-examining the Constitutionality of an Income Tax in Tennessee,14, 15.
34. Acts of 1929, Chapter 86 and 116. See T. O. Trotter, Jr., "The Tennessee Income Tax Law of 1929," 8 Tennessee Law Review 106 (1930).
35. Thorogood, 12, 124; Stephen V. Ash, Messages of the Governors of Tennessee, 1921-1933, Vol 10 (Nashville, 1990), 305, 309.
36. 159 Tenn. 349, 19 S.W.2d 261 (Tenn. 1929). The opinion was written by the highly respected Grafton Green, and was unanimous.
37. Journal of the Convention of the State of Tennessee (Nashville, 1870). The journal is not a verbatim record, but akin to minutes of a meeting, containing resolutions, amendments, and votes.
38. Wallace McClure, State Constitution-Making, With Especial Reference to Tennessee (Nashville, 1916), 60; McClure's reason was adopted verbatim in Claude O. Brannen, Taxation in Tennessee, 16.
39. Shields v. Williams, 19 S.W.2d 260, 264, 265 (Tenn. 1929).
40. 27 U.S. (2 Pet.) 449 (1829). It had been cited by the Tennessee Supreme Court in Mosely v. State, 115 Tenn. 52, 86 S.W. 714 (Tenn. 1905) which held that the interest on federal bonds could not be taxed by the state.
41. Shields v. Williams, 19 S.W.2d 260, 264 (Tenn. 1929).
42. Ibid., 267.
43. Ibid.
44. Ash, Messages of the Governors, 323.
45. Precisely, the state got a judgment against Rogers Caldwell personally on 21 November 1938 for $4,354,702 which amounted to the lost deposits plus interest minus $490,000 from liquidation of his Bank of Tennessee. John B. McFerrin, Caldwell and Company, A Southern Financial Empire (Nashville, 1939, 1969), 226.
46. Gov. Horton had made this statement on 5 October 1930 during his re-election campaign. Knoxville Journal, 5 October 1930, 1.
47. Ash, Messages of the Governors, 428, 432, 433.
48. Ibid., 433.
49. Charles P. White, Recent Developments in Taxation in Tennessee, East Tennessee Historical Society Publications (1931): 78, 86.
50. Public Acts of 1931, 2nd Extra Session, chapter 21. See T. M. Simpson, The Making of Tennessee Tax Policy (Nashville, 1975).
51. Daniel Schaffer, "Environment and TVA: Toward a Regional Plan for the Tennessee Valley," Tennessee Historical Quarterly (Winter 1984): 336.
52. Bill Akins and Genevieve Wiggins, eds., Hard Times Remembered: A Study of the Depression in McMinn County (Athens TN, 1983), 114, 128.
53. William R. Snell, ed., Hard Times Remembered: Bradley County and the Great Depression (Cleveland TN, 1983), 20.
54. James R. Montgomery, Threshold of a New Day: The University of Tennessee, 1919-1946 (Knoxville, 1971), 171.
55. 164 Tenn. 672, 52 S.W.2d 159 (Tenn. 1932).
56. 164 Tenn. at 680, 52 S.W.2d at 161.
57. 164 Tenn. at 681, 52 S.W.2d at 162.
58. 164 Tenn. at 682, 52 S.W.2d at 162.
59. Ibid.
60. C. White, W. Combs, W. Cole & A. Mueller, Constitutional Problems in Tennessee (University of Tennessee Record Extension Ser., vol 13, no. 2, 1937). See Charles P. White, "The Case for a Comprehensive Income Tax in Tennessee," Tennessee Survey of Business, Vol. 4 (1969): 1. See note 11, supra.
61. See Donelson, note 11 supra, 214. As discussed below, the attorney general has opined that such a tax is valid.
62. Commonly called "The Revenue Act of 2001," or the "Modified Flatter Tax Reform Plan," it would impose at two-bracket tax rate of 4 percent and 5 percent with exemptions of $18,000 for a single taxpayer and $36,000 for married couples filing jointly.
63. The Evans rule was affirmed in Jack Cole Company v. MacFarland, 206 Tenn. 694, 337 S.W.2d 453 (Tenn. 1960).
64. It is important to understand that this was not gold or coin-back money, the standard at the time. Rather, it was a promise by the federal government and as such the value of these bills rose and fell with the fortunes of war. See Walter Mitchell, A History of the Greenbacks (Boston, 1903) and Michael Myers, A Financial History of the United States (New York, 1970).
65. Bank v. Supervisors, 74 U.S. 26 (1868). The case was decided on 16 January 1868, the same year as Furman v. Nichol, 75 U.S. 44 (1868). Following the decision, taxpayers could adopt a clever tax dodge - at assessment time a taxpayer simply escaped a property tax by exchanging gold-backed currency for greenbacks. Ogden v. Walker, 59 Ind. 460 (1877).
66. The reason had nothing to do with pride in the national government. The National Bank Act had levied a two to ten percent tax on state bank obligations, driving them from the market.
67. The Tennessee Supreme Court itself said yes, construing state and federal statutes passed in 1868, 1869 and 1870. McLaughlin v. Chadwell, 54 Tenn 389 (Tenn. 1872).
68. Journal of the Constitutional Convention, 133.
69. The first person to reconstruct this discussion was a young Nashville lawyer whose law firm had attacked the tax in 1929. See Cooper, Re-examining the Constitutionality of an Income Tax in Tennessee,14, 17-18. Cooper concludes that because Shields is wrong, Evans is wrong - yet says a constitutional amendment is "the proper starting point to adopt an income tax in Tennessee," 22.
70. On 6 October 1862, Mr. Lincoln received a monthly salary warrant for $2,022.33 which was $61 under the previous warrant as a result of the three percent income tax deduction. The tax was increased on 30 June 1864 and Mr. Lincoln's July 1864 warrant was only $1,981.67 because $101.66 had been deducted. See Harry E. Pratt, The Personal Finances of Abraham Lincoln. (Springfield, 1943), 89, 109.
71. See John Kinsman, The Income Tax in the Commonwealths of the United States, 4 American Economic Association Publications (3d. series, 1903), 1, 13.
72. Jack Cole Company v. MacFarland, 337 S.W. 2d 453 (Tenn. 1960).
73. Journal of 1870, 284.
74. Ibid, 287.
75. Ibid, 653.
76. Opinion of the Chancellor, 14 May 1932, L. C. Evans, et al. vs. Charles M. McCabe, Davidson County Chancery No. 44859, 3.
77. Mosely v. State, 115 Tenn. 52, 86 S.W. 714 (1905).
78. O'Connor had received three degrees from Vanderbilt, including his law degree (1902), and had been a Founder's Medalist as well as quarterback and captain of the football team. Miles P. O'Connor, Attorney, Dies, Nashville Tennessean, 26 October 1948.
79. These included Idaho (1932); Arkansas (1931); Georgia (1930), Oregon (1924), and Mississippi (1921). By year's end Illinois would fall in line.
80. See Clara Penniman, State Income Taxation (Baltimore, 1980).
81. Assignments of Error and Brief on Behalf of Defendant, Evans v. McCabe, 38, citing, Joshua W. Caldwell, Constitutional History of Tennessee. (Knoxville, 1898), 150.
82. Ibid., 39.
83. George C. Anderson, The Constitutional Basis for Taxation in Tennessee, 15 Tennessee Law Review 280-287 (1930).
84. See White, "Some Aspects of Taxation in Tennessee,"170-83. Here was White's comment in 1930, "But, if we tax income derived from business, why exempt wages and salaries? Thus the case is presented for the income tax. The main objection raised is that exemptions are usually placed so high that the bulk of the population go untaxed," 86. White, "Recent Developments in Taxation in Tennessee," 78-88. White, "The Case for a Comprehensive Personal Income Tax," 1.
85. Henry A. Witham, "On Amending the Constitution of Tennessee," 11 Tennessee Law Review (1933): 174.
86. Anderson, "The Constitutional Basis of Taxation in Tennessee", 280; C. H. McCorkle, "Taxation in Tennessee" (unpublished master's thesis, Vanderbilt University, 1936); M. P. O'Connor, "The Availability of a Sales Tax in Tennessee," 11 Tennessee Law Review 249 (1933) ("In effect, it tends to be an income tax in reverse."), 252. Eugene L. White, Jr., "Tax Problems Presented by the Tennessee Constitution," 4 Vanderbilt Law Review 116 (1950).
87. Without any depots, etc, in Tennessee, the company was exclusively engaged in interstate, as opposed to intrastate commerce. The Commerce Clause of the U.S. Constitution forbids the states from discriminating or burdening interstate commerce. The concept is simple - to prevent the "Europeanization" of the United States. The case the state sought to get around was Spector Motor v.O'Connor, 340 U.S. 602 (1951). Ironically, Spector was itself wholly rejected in Complete Auto Transit v. Brady, 430 U.S. 274 (1977). All of these cases involve trucking companies.
88. Reply Brief of Jack Cole Company, Appellee, Jack Cole Company v. Alfred T. MacFarland, 3 May 1960, 15.
89. Ibid.
90. Robert T. Shannon, Digest of the Tax Laws of Tennessee and Criminal Costs, With Annotations (Nashville, 1907), 65.
91. Poorly written laws produce poorly written court decisions. The drafters should have put forth the "Uniform Division of Income for Tax Purposes Act," a model law crafted in 1957. See 7A Uniform Laws Annotated 361 (St. Paul, 1999).
92. Jack Cole Company v. MacFarland, 206 Tenn. 694, 337 S.W.2d 453 (Tenn. 1960).
93. Ibid., 699.
94. Although the federal income tax was held unconstitutional Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895); 158 U.S. 601 (1895) the Court took pains to say that the income tax was a valid excise tax (a privilege tax, in today's parlance.) And Mr. Lincoln's income tax law had been upheld too. Springer v. United States, 102 U.S. 586 (1881).
95. "That an equal participation in the free navigation of the Mississippi, is one of the inherent rights of the citizens of this State; it cannot, therefore, be condeded to any prince, potentate, power, person or persons whatever." Article 1, Section 29, Constitution of Tennessee.
96. Maclin P. Davis, Jr., "Is This Tax Constitutional?" Newport Plain Talk, 11 March 1992. See Maclin P. Davis, Jr., The Constitutionality of the Proposed Tennessee Income Tax, (unpublished memorandum, 19 July 2001.) Davis is the long-time general counsel for the Tennessee Republican Party.
97. Op. Att'y Gen. No. 99-217 (28 October 1999), Constitutionality of a General Personal Income in Tennessee. The opinion was researched and drafted by Charles L. Lewis, deputy attorney general, at the request of state treasurer Steve Adams and comptroller John G. Morgan.
98. H.B. 932, 87th Tenn. Gen'l Assembly (1971). See Penny Harrington, "When Will the State of Tennessee Adopt a Personal Income Tax?"(unpublished student paper, Vanderbilt University School of Law, 12 April 1982), 9. [Copy in State Library and Archives.]
99. See, The Tennessean, 14 January 1976, 1. The law, called "Uniform Personal Income Tax Statute," was offered in March 1976.
100. Lewis L. Laska, "The 1977 Limited Constitutional Convention," 61 Tennessee Law Review (1994) 485, 491, 534. Governor Blanton maintained his support for an income tax, ultimately opposing the call for a convention.
101. S. B. 1536, 92nd Tenn. Gen'l Assembly (1982). William M. Leech, Jr., was attorney general at the time. See, Op. Tenn. Atty. Gen. No. 81-497 (2 September 1981). See generally Sharon Fossett Fischer, "Taxation in Tennessee in the Southeastern States During an Economically Exigent Decade: 1975-1984."(unpublished dissertation, University of Tennessee,1987).
102. The Tennessean, 9 October 1981, 24.
103. Harrington, Comment, "A Review of the Struggle for Tennessee Tax Reform."
104. Ash, Messages of the Governors of Tennessee, 379; Thorogood, A Financial History of Tennessee, 193.