The Public Forum Resources - Forrest Shoaf on Income Tax Constitutionality

No. When, in the last session of the General Assembly, the subject of an individual income tax arose, public debate centered on whether lawmakers had the political will to enact such a tax. Conspicuously absent from the debate was the basic question of whether an income tax is constitutional in Tennessee. If the question arose at all, it was generally brought up by advocates of the tax who cited a 1991 opinion by Attorney General Charles Burson that it is permissible. I argue, however, that if a broad-based income tax is enacted without an enabling constitutional amendment, the Tennessee Supreme Court could uphold its validity only by overturning a significant body of law that holds that the Tennessee Constitution prohibits such a tax.

When the current Tennessee Constitution was adopted in 1870, Article II, §28, contained the sentence "the Legislature shall have the power to levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem." In 1929, the General Assembly imposed a tax on the income from certain securities. The validity of that tax, now known as the Hall income tax, was upheld by the Tennessee Supreme Court in Shields v. Williams, 159 Tenn. 349 (1929). Two years later, the General Assembly, in extra session, levied a graduated tax on all income. This act, however, did not fare as well as Sen. Hall's. In Evans v. McCabe, 164 Tenn. 672 (1932), the court struck down the tax on the principle of "exclusion by affirmation," i.e., that §28's enumeration of a permissible tax on one form of income (from securities) made impermissible a tax on all other forms of income. "When the Constitution conferred upon the Legislature the power to tax only one class of incomes, that instrument necessarily denied to the Legislature the power to tax incomes of other classes." Evans, at 680.

In 1960, in Jack Cole Co. v. MacFarland, 206 Tenn. 694 and in 1964, and in Gallagher v. Butler, 214 Tenn. 129, the Supreme Court quoted with approval and followed Evans in deciding two other tax cases. Evans and its progeny have never been overruled, and that part of Article II, §28, which informed the cases, has never been amended. Therefore, opponents of a general income tax contend that the tax cannot be imposed without a constitutional amendment or a subsequent Supreme Court decision overturning Evans.

The narrow logic of Evans has been criticized by some commentators, who argue that the court should have considered whether a general income tax can be wedged into either the "privilege" or "property" categories (both subject to the taxing power of the General Assembly under §28), rather than deciding the issue on a principle of construction. See "Constitutional Limitation on Income Taxes in Tennessee," W. Armstrong 27 Vand. L. Rev., 475 (1974) and R. Cooper "Re-examining the Constitutionality of an Income Tax in Tennessee," Jan./Feb. 1992 Tenn. Bar J. 14. But even these writers concede that the court has subsequently ruled (in Jack Cole) that the receipt of income is not a "privilege" that can be taxed, and one critic has concluded that fitting an income tax into the "property" category will require such judicial gymnastics that the constitution should be amended before an income tax could be enacted. Cooper, at 22. Proponents of an income tax also make much of former Attorney General Burson's opinion, issued in 1991 during Gov. McWherter's attempt to enact an income tax, that the Tennessee Constitution does not prohibit a general personal income tax. That opinion, however, will not bear close scrutiny. The opinion relies on General Burson's unsupported assertion that Evans is invalid because the "key provisions" of the constitution upon which Evans was based were "modified or removed" when the constitution was amended in 1971.

General Burson is correct that the constitution was amended in 1971, but he errs in saying that the "key provisions" that informed Evans were modified. Those "provisions" are embodied in the sentence quoted above from Article II, §28, which remains unchanged from 1870. Moreover, General Burson ignores, without comment, two opinions by his predecessors, both authored after the 1971 Constitutional Convention, to the effect that, even after the convention amended Article II, §28, an income tax violates the constitution. In May 1975, the attorney general's office issued an opinion reaffirming that "realizing and receiving income or earnings is not a privilege that can be constitutionally taxed,"1 and in October 1977, the attorney general opined that "the General Assembly is without power to impose an income tax on any income other than on incomes derived from stocks and bonds that are not taxed ad valorem." Citing Evans, Jack Cole Co. and Gallagher as good law, the 1977 opinion specifically states that, "although these cases dealt with the provisions of Article II, §28, before its amendment in 1972, the income tax provisions in the amended section were adopted verbatim from the former provisions interpreted by these cases." Thus, General Burson's opinion that Evans and its progeny are not good law is not only in direct conflict with three decisions of the Tennessee Supreme Court, it also conflicts with two prior opinions of the Tennessee Attorney General's office.

I conclude, therefore, that those who oppose an income tax on constitutional grounds have the better argument. For more than 70 years, the settled law in Tennessee is that an income tax on any income other than that from stocks and bonds is unconstitutional. This rule can be changed only by an amendment of Article II, §28 or by a Supreme Court decision overruling all three prior decisions of the Supreme Court.

Of course, no one can know how the present court would vote if another case involving the constitutionality of a general income tax comes before it, but if the court does validate such a tax, it will have to resort to creative avoidance of stare decisis.

1. This opinion also noted that the call to the 1971 Convention forbade it from considering an income tax.

This article is reprinted with permission, from the September 1999 Tennessee Bar Journal, a publication of the Tennessee Bar Association.