Note: This was originally a four-part series published at the leading constitutional law website, “The Volokh Conspiracy,” which is affiliated with the Washington Post.
This succession of four parts discusses such questions as why the Supreme Court was wrong to characterize the Obamacare insurance penalty as a “tax,” why the apportionment requirement was adopted and why the notorious 3/5 rule was not really about racism.
The different parts are subtitled below.
* * * *
Part I: Taxes vs. Other Financial Exactions
The Constitution authorizes Congress to “lay and collect Taxes, Duties, Imposts and Excises” (Art. I, § 8, cl. 1), but requires that “direct Taxes” be apportioned among the states by population (Art. I, § 2, cl. 3 & Art. I, § 9, cl. 4).
The Supreme Court’s decision in NFIB v. Sebelius, the Court’s first Affordable Care Act case, was the latest in a long line of cases and commentary that have construed the constitutional term “Taxes” too broadly — and defined the constitutional phrase “direct Taxes” much too narrowly.
In this series of four posts, I discuss the original legal force of those and other financial terms in the Constitution. The “original legal force” is how Founding-Era courts would have applied the Constitution, under the interpretive rules of the time. The original legal force is closely related to, but not always the same, as the original public meaning. This series is based, for the most part, on my forthcoming article in Case Western Reserve Law Review: What the Constitution Means by “Duties, Imposts, and Excises” — and “Taxes” (Direct or Otherwise).
The founding generation often referred to government financial exactions collectively as “impositions.” The subject was a prominent feature of public discussion throughout the Founding Era (1763-1791).
The subject of impositions owed its prominence to several causes. First, before the American Revolution, the British Parliament and colonial legislatures levied impositions on their citizens. So also did the American states during time between Independence and the final ratification of the Constitution. Legislation of this kind was often resented and sparked heated public debate.
Second, impositions were central to the conflict with Great Britain. Although American colonists usually conceded the power of Parliament to levy impositions on America for the purpose of regulating commerce among units of the British Empire, the colonists strongly objected to parliamentary “taxes.” In a series of widely-popular pamphlets, colonial lawyers such as John Dickinson and Richard Bland defined the difference. “Taxes,” in their view, were exactions imposed, not to regulate, but for the sole purpose of raising a general revenue. Other impositions, even if they incidentally raised revenue, were not taxes. This was not necessarily the line drawn in British dictionaries, but it became the understanding in America.
Third, after the Revolution, impositions remained central to public debate because of controversy over Congress’s inability to levy them, and congressional efforts to obtain such a power. The congressional journals from those years are filled with material discussing the subject.
Finally, impositions were an important component of the debates over the drafting and ratification of the Constitution. By the Constitution’s Taxation Clause, the framers proposed that Congress be authorized “to lay and collect Taxes.” By other provisions, such as the Commerce Clause, they proposed that Congress receive powers understood to include regulatory impositions. Their continuing recognition of a line between revenue-raising and regulatory exactions was reflected in such constitutional phrases as “Regulation of Commerce or Revenue” (Art. I, § 9, cl. 6). It also was reflected in the compromise embodied in the Origination Clause (Art. I, § 7, cl. 1), which required initial passage in the lower house of Congress for “Bills for Raising Revenue” but stopped short of adopting the rule, prevailing in Great Britain and some American states, that regulatory impositions arise in the lower house as well.
All of these constitutional issues commanded significant public attention during the ratification process (1787-90).
The historical record thus offers a rich store of material elucidating the Founding-Era definitions of the Constitution’s financial terms. The quality of the record is enhanced by the fact that, with one significant exception and a few isolated deviations, it shows a consistent understanding of all those terms.
The one exception pertained to the definition of “taxes.” Pre-Revolutionary pamphleteers referred to them as impositions for the sole purpose of raising a general revenue. By the time the Constitution was adopted, however, taxes generally were defined as impositions for the principal purpose of raising a general revenue. People recognized that if a “tax” was adopted primarily for revenue-raising purposes, it remained a tax if it incidentally affected behavior. Thus, a revenue-raising tariff might have the incidental effect of favoring domestic farmers and manufacturers, but still qualify as a tax.
On the other hand, a levy adopted to fund a program of regulation or primarily to influence behavior (such as the Affordable Care Act’s penalty for not carrying individual health insurance) was not considered a tax and therefore was not authorized by the Constitution’s Taxation Clause. Such an imposition was outside Congress’s power to enact, unless some other enumerated power could be found to support it.
Part II: Duties, Imposts, Excises, and Tonnage
Several provisions in the Constitution contain terms referring to financial exactions. For example, Article I, § 8, cl. 1 authorizes Congress to “lay and collect Taxes, Duties, Imposts and Excises.” Article I, § 9, cl. 5 states that “No Tax or Duty shall be laid on Articles exported from any State.” Section 10, cl. 3 of the same Article refers to “any Duty of Tonnage.”
All of these terms appear widely in written materials published before or contemporaneously with the Constitution. They show that the American meaning of each had crystalized well before the document was ratified, although American usage was not always reflected in British dictionaries. Those materials also show that none of these terms was purely repetitive of any other, although all of them overlapped others.
Tonnage (originally “tunnage”) had begun as a medieval import fee on “tuns” (casks) of wine. By the time of the Founding, the term had broadened into a charge levied on the carrying capacity of ships. Tonnage could be imposed on ships either importing or exporting. In 1787, for example, Virginia imposed a tonnage fee of six shillings per ton on all vessels entering and clearing the harbors of that state. Tonnage could be imposed to raise revenue, in which case it was considered an indirect tax. Tonnage also could be imposed to regulate or facilitate commerce or to fund harbor maintenance or an inspection program, in which case it was not considered a tax.
An impost was an exaction on imports. Thus, a tonnage fee levied on ships entering harbor was a kind of impost, but a tonnage fee levied on ships leaving harbor was not. An impost designed to raise money was a form of indirect tax. For example, a ten-cent impost on each French dress imported was a tax, because such an impost would raise revenue. A one-thousand dollar impost on each French dress, however, would act as a prohibitory tariff and raise no revenue. It was, therefore, a regulation of commerce rather than a tax.
From an originalist point of view, Justice Cardozo’s opinion in Charles C. Steward Machine Co. v. Davis holding that the Social Security tax on employers was an “excise” is constitutional nonsense. To the founding generation (and in this respect American and British usage are in full accord) an excise was a domestic tax on the consumption of commodities, especially manufactured goods. Excises sometimes were referred to as “inland impositions,” because they were the domestic equivalent of imposts and other duties on goods entering and leaving the country.
An excise might be imposed on all goods of a particular character, or only on foreign goods of that character, such as foreign watches or clocks. What rendered the latter an excise rather than an impost was that it was not levied at the time of import, but upon consumption within the levying jurisdiction. If the product was re-exported rather than consumed within the jurisdiction, no excise was imposed.
Excises were most commonly laid at the point of sale, but this was not invariably true. Excises on certain large, luxury goods, such as carriages, typically were levied on an annual basis. In England, a cider excise was imposed before sale.
Although an excise might be enacted either to regulate commerce or to raise revenue, usually the primary motivation was to raise revenue. An excise adopted to raise money was an indirect tax. Often, however, the legislature had a subsidiary interest in discouraging consumption of the items excised.
Duties. American usage defined a “duty” as any financial exaction that did not qualify as a direct tax. In other words, the term included all regulatory impositions and all indirect taxes. The Constitution’s Taxation Clause authorized duties imposed principally to raise revenue. Other provisions, such as the Commerce and Post Office clauses authorized regulatory duties.
Full understanding of the “duty” concept must await Part III’s discussion of direct and indirect taxes. Suffice to say at this point that duties generally fell on consumption and on certain special transactions. Tonnage, imposts, and excises — whether revenue-raising indirect taxes or regulatory impositions — were all duties. The historical record contains copious examples of phrases like “impost duty” and “excise duty.” The Constitution itself employs the phrase “Duty of Tonnage.”
Some specialized levies that did not qualify as tonnage, imposts, or excises did qualify as duties. Examples were fees laid on items exported, fees imposed on goods brought into a military fort, fees on vessels for using public wharves, fees on auction sales, fees on legal proceedings, and charges on certain written documents. The notorious pre-Revolution Stamp Tax was a kind of duty. It was imposed on court orders, ship clearances, deeds, mortgages, licenses, pamphlets, newspapers, gambling supplies, and college diplomas.
Part III: Direct and Indirect Taxes
A succession of courts and commentators, culminating in Chief Justice Roberts’ opinion in NFIB v. Sebelius, has expressed confusion about the scope of the constitutional term “direct Tax.” Courts and commentators usually end up defining it narrowly to include only capitations and property taxes, and sometimes only real property taxes. The Sebelius opinion, for example, stated:
Even when the Direct Tax Clause was written it was unclear what else, other than a capitation . . . might be a direct tax . . . A tax on going without health insurance does not fall within any recognized category of direct tax. It is not a capitation. Capitations are taxes paid by every person, “without [as Justice Samuel Chase once suggested] regard to property, profession, or any other circumstance.” . . . The payment is also plainly not a tax on the ownership of land or personal property. The shared responsibility payment is thus not a direct tax that must be apportioned among the several States.
Yet the future Chief Justice John Marshall, speaking at the Virginia ratification convention, did not consider the term “direct tax” at all unclear. He told his audience, apparently without losing credibility, that “The objects of direct taxes are well understood.”
Who was right?
John Marshall was right. The historical record leaves little doubt as to the objects of direct taxation.
The Constitution’s text designates capitations (head or poll taxes) as “direct.” But Justice Samuel Chase erred when he suggested in Hylton v. United States that capitations were paid “without regard to property, profession, or any other circumstance.” To be sure, capitations often were fixed initially at sum of money per head, and they therefore could be more regressive than other levies. But legislatures commonly graded or lifted capitations for all sorts of reasons.
For example, legislatures frequently reduced and eliminated the poll tax due from the poor. They also granted complete or partial exemptions to persons who lived in particular places, who had reached (or not reached) a stated age, who were married, or who pursued particular occupations. The Massachusetts legislature, for example, exempted soldiers and the staff of Harvard College and “settled Ministers of the Gospel [and] Grammar School-Masters.” The Connecticut legislature exempted the president of Yale University.
In fact, when such practices are taken into account, the Affordable Care Act’s insurance penalty, if it be considered a tax at all, is best classified as a capitation. The income and other criteria for determining its size and scope are fully consistent with categorizing it as such.
I am uncertain where the notion arose that, in addition to capitations, only land or property taxes were “direct.” One possible explanation is that the British Parliament and some American state legislatures referred to their respective direct tax statutes as “the land tax.” But that title was a misnomer. Those statutes were not limited to land. They were omnibus laws that imposed specified rates on a wide range of items.
For example, the British Parliament’s “land tax” imposed rates, not only on real property and associated hereditments, but on (1) debts due to the taxpayer, (2) business and personal chattels, and (3) earnings, pensions, and annuities sourced from public funds. Similarly, Pennsylvania’s “land tax” levied not only on land, but on livestock, slaves, and indentured servants.
In fact, most American direct tax statutes imposed their rates on all sorts of items. For example, a 1779 Connecticut direct tax law levied on polls and real estate, but also on:
* all individual net wealth exceeding £50;
* several kinds of livestock;
* instrumentalities of transportation, including ships and other vessels, and coaches and other vehicles;
* clocks and watches;
* silver plate;
* income from interest received on loans;
* traders’ and shopkeepers’ inventory;
* the profits of ironworks and other enterprises; and
* the businesses of attorneys at law and speculators.
Admittedly, the line between direct and indirect taxes was not always crystalline. One might argue that a particular Massachusetts “excise” levied on cider mill production was really a direct tax rather than an excise. As in Hylton v. United States, one might quarrel over whether an annually-imposed levy on consumer-owned carriages was direct or indirect. Nevertheless, contemporaneous tax statutes, public discussion, newspapers, treatises, and governmental publications render rather clear the fundamental difference between the categories: A tax was direct if laid on one’s status or on one’s living or livelihood — that is, if it was levied on heads, on the ordinary effects of daily life, or on production. Taxes on wealth, property, businesses, and income were all direct. Taxes were indirect (and was therefore duties) if imposed on the consumption or on certain specific transactions, such as importing, exporting, and issuing legal documents.
As I explain in my article, the distinction between direct and indirect levies was primarily political and moral rather than economic.
Part IV: The Apportionment Rule
The apportionment rule appears twice in the Constitution. Article I, § 1, cl. 3 originally provided that
Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three-fifths of all other Persons [i.e., slaves].
Article I, § 9, cl. 4 stated that “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.”
The Constitution’s apportionment rule has spawned commentary suggesting that the rule was an endorsement of slavery. My investigation did not find that to be the case.
Behind the apportionment requirement was this unifying principle: At least in the lower legislative chamber, taxation should be coupled with representation. This principle had been a justification for the Revolution and no one active in the debates over the Constitution seems to have overtly disagreed with it. The framers saw the practical application of this principle in an apportionment rule that tailored each state’s tax burden to its congressional representation.
In addition to the taxation/representation principle, there were at least two other considerations behind the decision to apportion direct taxes. First, apportionment was the prevailing custom: England apportioned direct taxes by counties and other localities, and most, if not all, states similarly allocated them among local units. The Articles of Confederation allocated requisitions among states according to their respective land values.
Second, the Founders generally subscribed to the view that government was a public trust and should be conducted on fiduciary principles. They particularly emphasized the duty of impartiality—that is, in equal circumstances, equal treatment of those served. The apportionment rule is one of several constitutional provisions designed to assure impartial federal treatment of the several states. Without the apportionment rule, a congressional majority from one group of states might vote to extract a disproportionate share of revenue from the rest.
Yet apportionment could be administratively clumsy. It also might work injustice among similarly-situated individuals who happened to reside in different states. So there was an argument for limiting its scope. The manner in which the framers did so was to apply the apportionment rule to direct taxes only. For indirect taxes, the framers substituted a ban on federal taxation of exports and a requirement that indirect taxes and “Regulations of Commerce or Revenue” be uniform throughout the nation.
There were at least three reasons for limiting apportionment to direct taxes:
* The apportionment rule was problematic when applied to import and export duties because accidents of geography resulted in much higher import and export activity in some states than in others.
* The protection offered by apportionment was more crucial for direct than for indirect levies, since more direct than indirect taxes were imposed on status rather than on transactions, which could render it difficult for a citizen to raise the funds to pay the tax collector.
* Limiting apportionment to direct taxes likely would restrict it to taxes rarely imposed. The framers expected the new federal government to rely, at least in times of peace, almost exclusively on indirect levies. One reason was that direct taxes were profoundly unpopular in every part of the country (and not just in the South).
What of the specific apportionment formula? Was the decision to count five slaves for every three free persons an expression of racism and an endorsement of slavery? Not really.
The framers needed to find a new way to apportion direct taxes because the Confederation system of allocating requisitions by state land values had proved impractical. Apportionment by actual taxes paid likewise seemed unworkable.
In arriving at the apportionment formula, the starting point was collective agreement that each state’s contribution in federal taxes should be a function of (1) the state’s population (2) and its wealth. Experience strongly suggested that, for the most part, wealth followed population. In other words, population usually was a good proxy for wealth.
What was usually true, however, was not true always. Slavery created a valuation problem. The conundrum was this:
* Slaves contributed to a state’s wealth, so if one of two similar states with the same free population also contained slaves, then the state containing slaves would produce more tax revenue, but
* although slaves produced wealth, they did not produce as much wealth as an equal number of free people. This was because slaves could not sell their labor or talents in the free market, where incentives for production were strongest and labor and talents fully valued. Thus, given two similar and equally-populous states, one entirely free and the other slaveholding, the state entirely free would produce more tax revenue.
To attune state representation to projected tax contributions, therefore, the framers needed to calculate the tax productivity of each slave as some fraction of the tax productivity of each free person. As it happened, the Confederation Congress already had estimated this fraction as three-fifths.
Madison’s summary of the 1783 congressional debates that produced the formula show that the considerations leading to it were purely economic. They included the respective imports and exports from states relying, or not relying, on slavery; the effect of climatic differences on productivity; the levels of consumption of free and unfree persons; and, most importantly, the fact that slaves did not have the same positive incentives to produce that motivated free people. During the deliberations, moreover, the term “free white inhabitants” was altered to drop the word “white,” thereby including with full parity the 60,000 free African Americans then living in the United States. Also included at full parity were Indians who paid taxes — i.e., those subject to direct state rather than tribal authority.
American slavery was the product of racism (among other causes), but the apportionment formula was not. It was an acknowledgment that people — of any race — produce more wealth, and therefore more tax revenue, when they operate in free markets rather than under conditions of command and control.
The framers adopted the apportionment rule unanimously and the three-fifths formula with equal votes from the North and South.