There aren’t that many constitutional issues to wrestle with in federal tax law today, primarily because Congress has been content to rely mainly on its broad power to tax income under the taxing power and 16th Amendment for over a century. As long as Congress adheres to the constitutional requirement of uniformity and stays within the bounds of mostly taxing income, things are usually relatively quiet as a constitutional matter.
But the search for new sources of revenue is ongoing for lawmakers and presidential candidates, and that means considering novel types of taxes. Should Congress venture outside the realm of “incomes, from whatever source derived,” there are possible constitutional hurdles that haven’t been a major concern for legislators for a while. The latent question is whether taxes that aren’t income taxes (or “duties, imposts and excises”) fall within the ambit of a “direct tax” under the Constitution.
There are two references to direct taxes in the Constitution. In Article I, section 2, the Founders explained that both representatives and direct taxes are to be “apportioned among the several States which may be included within the Union, according to their respective Numbers,” and section 9, clause 4 says that “no Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census of Enumeration herein before directed to be taken.” In 1913 the 16th Amendment eliminated any potential apportionment requirement for taxes on incomes, and Congress has essentially been relying on that provision — and rather assiduously avoiding the potential obstacles in Article I — ever since. (To illustrate the extent of the century-long hegemony of the income tax, note that many law students take only one class on tax law, and that class is almost always styled "Federal Income Taxation.")
Largely because Congress has been able to accomplish its revenue-raising ends without poking the direct tax dragon, determining what taxes might fall within the scope of a direct tax has been addressed by the Supreme Court and other federal courts only occasionally over the past few centuries, and the case law is far from conclusive. The panoply of options the Supreme Court has entertained include that direct taxes are limited to capitations and taxes on land, that direct taxes are defined as taxes that are capable of being apportioned, and that a federal tax on income is a direct tax. The latter is what prompted the 16th Amendment.
But the relative unimportance of the scope of direct taxes might soon change. The “ultra-millionaire tax" proposed by presidential candidate Sen. Elizabeth Warren, D-Mass., raises the question whether it could be an unapportioned direct tax, because, as outlined by her campaign, it’s not a tax on income but a tax on a portion of the value of an individual’s net worth.
Law professors are on the forefront of the direct tax debate and have been for many years. As professor Erik M. Jensen of Case Western Reserve University observed more than a decade ago, the issue of direct taxes is one that “neither constitutional lawyers nor tax lawyers seem to care very much about.” Jensen recently argued that “at best, the wealth tax would be constitutionally problematic” because it is likely to be considered a direct tax, and the Founders made it intentionally difficult for Congress to enact direct taxes by adding the apportionment requirement. Apportionment is “not a glitch, as some suggest; that was the point,” he wrote.
Professor Calvin H. Johnson of the University of Texas — who, like Jensen, has written extensively about the direct tax clauses — argued in a recent ABA Tax Times article that not only is a wealth tax constitutional, but as a historical matter, “the Founders believed in the wealth tax.” He noted that apportioning a wealth or land tax by population now would be unjust, because it would result in poorer states being saddled with higher tax rates. Johnson’s thesis is that the original purpose of apportionment was to allow Congress to tax wealth using the best measure of wealth available when the Constitution was drafted. He warns that “it is easy to misinterpret the language ‘apportionment by population’ as if it were forcing the same amount of tax per person and protecting wealth from mere numbers. That turns the original constitutional meaning upside down.”
In a 2018 article, Indiana University professor Dawn Johnsen and Walter Dellinger of O’Melveny & Myers LLP wrote that the functional approach of defining direct taxes as those to which apportionment could “justly and sensibly” apply is correct because it “allowed Congress the flexibility to meet the nation’s changing needs during the great economic and social changes of its first hundred years — and . . . should allow Congress the same important flexibility in meeting twenty-first century challenges.”
Even if Warren’s proposal doesn’t come to fruition, there’s an increasing likelihood that Congress will entertain legislative ideas that test the definition of direct taxes. It promises to be an exciting ride.