This article first appeared in the July 16, 2024 Federalist Society Blog.

Our Constitution distinguishes between direct and indirect taxes. Indirect tax rates must be uniform throughout the United States. With the exception inserted by the Sixteenth Amendment for the income tax, direct tax rates must vary (be “apportioned”) among the states. Direct tax rates must be set within each state so that each state produces the same per capita revenue.

Despite the centrality of the direct/indirect distinction, it continues to be a matter of great uncertainty—both among commentators and at the Supreme Court. That uncertainty surfaced again in two opinions issued in last month’s ruling in Moore v. United States.

The Supreme Court’s Uncertainty

The Court’s recurrent treatment of the subject dates to Justice Samuel Chase’s opinion in Hylton v. United States in 1796. In that case, Justice Chase wrote:

“I am inclined to think, but of this I do not give a judicial opinion, that the direct taxes contemplated by the Constitution, are only two, to wit, a capitation, or poll tax, simply, without regard to property, profession, or any other circumstance; and a tax on LAND. I doubt whether a tax, by a general assessment of personal property, within the United States, is included within the term direct tax.”

If you re-read this statement, you may see at least one reason for not relying on it: Chase admitted that he was only guessing about the line between direct and indirect levies: “I am inclined to think, but of this I do not give a judicial opinion.”

There are other reasons to doubt Chase’s tentative conclusion as well. First, Hylton posed a particularly difficult issue, because the levy being litigated—a tax on carriages—could be classified fairly as either an excise (indirect) or as a personal property tax (direct). Moreover, if Chase was saying that capitations were uniform exactions “without regard to property, profession, or any other circumstance,” then what he said was flatly untrue. During the Founding Era, capitations frequently were scaled for such circumstances, and when so scaled, they were still denominated as capitations. The Constitution would, therefore, classify them as direct (Article I, Section 9, Clause 4).

Finally, in 18th century usage, the term “land tax” often referred to direct levies on much more than land. A “land tax statute” might well include impositions on personal property, income, businesses, occupations, and other subjects.

Despite the weaknesses in the Chase dictum, the Supreme Court relied on it in Springer v. United States in 1880. So did Justice Ketanji Brown Jackson in her Moore concurrence.

In the ensuing years, a lack of clarity on the division between the direct and indirect categories has surfaced in other forms. In Steward Machine Co. v. Davis, the court oddly classified a levy on wages as an “excise” and therefore indirect. In NFIB v. Sebelius (the 2012 Obamacare case), the Court said:

“Even when the Direct Tax Clause was written it was unclear what else, other than a capitation (also known as a “head tax” or a “poll tax”), might be a direct tax. . . . [In] Hylton v. United States . . . (opinion of Chase, J.) . . . those Justices who wrote opinions either directly asserted or strongly suggested that only two forms of taxation were direct: capitations and land taxes.”

This passage led to the Court’s holding that the Affordable Care Act’s penalty for not purchasing health insurance was an indirect tax, and therefore constitutional without apportionment among the states.

In Moore, Justice Brett Kavanaugh attempted to cabin the direct/indirect distinction as one between (1) impositions on persons or property (direct), and (2) impositions on transactions, including income taxes (indirect). As explained below, this was not quite correct either.

The Founding-Era Background

As the quoted language from Sebelius suggests, there is a widespread belief that the Founders themselves were uncertain about the boundaries between direct and indirect taxes. Advocates of this position frequently cite an episode from the Constitutional Convention proceedings of August 20, 1787. According to James Madison’s notes, “Mr [Rufus] King asked what was the precise meaning of direct taxation? No one answd.”

There might, of course, have been reasons for the silence other than uncertainty. Much more telling—but, unfortunately, much less frequently cited—are statements by the future Chief Justices Oliver Ellsworth and John Marshall during the ratification debates. Both offered examples of direct or indirect taxes and indicated that the direct/indirect distinction was widely understood.

As indeed it was. A thorough search of ratification-era literature, including the constitutional debates, reveals numerous explanations of the direct/indirect distinction.

Also revealing are Founding-era British and American tax laws. (I have collected five such measures here; another appears here.) They show that legislatures generally enacted direct taxes through wide-ranging statutes that imposed rates on assessed values. These were the measures sometimes referred to as “land tax” laws. Direct taxes included levies on:

• persons (head taxes), often adjusted for the person’s wealth, age, sex, or status;
• real and personal property—in fact, wealth generally;
• income from investments, occupations, wages, and other sources; and
• businesses and occupations (often called “faculties”).

By contrast, indirect taxes, which Americans often called “duties,” usually were imposed by more targeted laws. Indirect taxes were levies imposed on:

• consumption (“excises”);
• imports (“imposts”) and exports—together referred to as “customs;”
• border crossings; and
• certain other transactions, such as the legal conveyances and other incidents burdened by the infamous Stamp Act of 1765.

The direct/indirect distinction certainly did not depend on the breadth of the measures adopting them, but that distinction wasn’t entirely economic either. Morality also played a role. Direct taxes were those that burdened living and productivity, for which reason they were often assailed and widely unpopular. Indirect taxes included impositions on consumption and vice, and they were favored as inducements to thrift and virtue.

The Cost of Confusion

The line between direct and indirect taxes is of far more than historical interest. The result in Sebelius was dictated by the erroneous conclusion that the penalty imposed on individuals was an indirect tax. (It actually was a capitation, if—as is doubtful—it was a tax at all.) And while Justice Kavanaugh’s classification of the income tax as “indirect” probably did not affect the result in Moore, misclassification of this sort may very well determine the outcomes of future cases.

Here is one example: Recent years have witnessed considerable discussion about the possibility of a federal wealth tax. Some commentators have been building on the prevailing uncertainty to argue that wealth taxes are indirect and therefore need not be apportioned. In a case testing the constitutionality of an unapportioned wealth tax, correctly or incorrectly defining the classification could determine the result.