The 44th Article of Amendment to the Massachusetts Constitution, ratified by the people in 1915, is the reason we can’t have a graduated income tax in Massachusetts. It reads, in pertinent part:
Full power and authority are hereby given and granted to the general court to impose and levy a tax on income in the manner hereinafter provided. Such tax may be at different rates upon income derived from different classes of property, but shall be levied at a uniform rate throughout the commonwealth upon incomes derived from the same class of property. The general court may tax income not derived from property at a lower rate than income derived from property, and may grant reasonable exemptions and abatements.
I got into a modest back-and-forth on Twitter with Rep. Dan Winslow (R-Norfolk) as to why Article 44 is in the Constitution in the first place. Dan’s thesis, apparently, is that a graduated income tax constitutes “divide/conquer of electorate based on income,” and was barred because Article 44’s drafters objected to “[p]laying classes against each other and dividing Americans by elevating personal interest over common good.” I was dubious that this was really what was in the drafters’ mind at the time, so I looked to see if someone might have investigated this question.
And, indeed, someone has, namely, Justice Cordy of the Supreme Judicial Court. In a dissenting opinion in a case called Peterson v. Commissioner of Revenue (441 Mass. 420 (2004), if you’re keeping score), Cordy felt that the majority’s conclusion wasn’t consistent with what Article 44 was all about, so he dug into its history a bit. Here’s what he found (warning: some legalese ahead):
Before art. 44 was ratified in 1915, the Legislature derived its authority to levy taxes solely from the enumeration of the powers of the General Court in Part II, c. 1, § 1, art. 4, of the Constitution of the Commonwealth (art. 4). That article provides that: “full power and authority are hereby given and granted to the said general court, from time to time . . . to impose and levy proportional and reasonable assessments, rates and taxes, upon all the inhabitants of, and persons resident, and estates lying, within the said Commonwealth.” This provision was repeatedly construed to require that municipalities (the principal collectors of taxes levied at the time) must apply a single rate of taxation to the total value of the property of all taxpayers in their respective communities, thereby ensuring that each taxpayer paid a share of the municipal burden proportional to his share of the wealth in the municipality. See Opinion of the Justices, 208 Mass. 616 , 618 (1911). While each municipality could apply a different rate of taxation on property in its community, the rate applied was required to be uniform for all property throughout that municipality. See id.
Until the late 1800’s, the requirements of art. 4 posed no real problems for the Legislature or municipalities: because “all the personal property of each individual was tangible and visible and kept in the town in which he dwelt . . . it was an easy matter to assess such property.” P. Nichols, Taxation in Massachusetts 463 (3d ed. 1938). However, as intangible property (stocks, bonds, and other financial instruments) became a more common and important component of wealth, the taxation of all property at a single rate that varied from municipality to municipality posed two related problems: First, because some intangible property constituted indirect ownership of tangible property (i.e., a corporate bond of a corporation that owned real estate), taxation of the value of intangible property and taxation of the value of the underlying asset was thought to amount to double taxation. See id. at 463-465. Accord First Report of the Special Commission to Develop a Master Plan Relative to Constitutional Limits on the Tax Power, 1969 Senate Doc. No. 126, at 33. Second, because tax rates were different in each municipality, and the rates of the property tax in larger cities (with the greatest financial needs) were higher, “the burden of the tax on intangibles alone furnished strong motive for concealment of intangible property, and also for transfers of domicile from Boston and other cities to smaller communities having lower tax rates and less efficient assessors.” Id. As a result of concealment and domicil shifting, [Note 3: Because intangible property was taxed at its owner’s domicil, the wealthy could lower their tax burden by shifting their domicils from cities, with high tax rates and sophisticated assessors, to homes in rural communities with low tax rates and less aggressive and knowledgeable assessors. As a consequence, tax rates in the cities where resources were needed grew even higher (to make up for the lost wealth), and tax rates in rural communities moved artificially lower, magnifying the differences in municipal revenues. P. Nichols, Taxation in Massachusetts 464-465 (3d ed. 1938).] “hardly a fifth of the personal property in [the] commonwealth was subjected to taxation.” P. Nichols, Taxation in Massachusetts, supra at 465.
By the early 1900’s, the Legislature was actively exploring a number of alternative proposals to address the growing problems occasioned by the taxation of intangible property, including: exempting some or all intangible property from the property tax and levying a Statewide special “excise” on intangible property; taxing personal property at a single rate uniform throughout the Commonwealth based on the average local tax rate; and requiring that intangible property be assessed based on the income it generated, rather than on its asset value. It sought advisory opinions from this court evaluating the constitutionality of these legislative proposals, and the court found each of them to be in excess of the taxing authority granted by art. 4. See Opinion of the Justices, 195 Mass. 607(1908); Opinion of the Justices, 208 Mass. 616 (1911); Opinion of the Justices, 220 Mass. 613 (1915).
Article 44 was adopted by the Legislature and ratified by the people in this context. [Note 4: Before it adopted the ultimate text of art. 44 of the Amendments to the Massachusetts Constitution (art. 44), the Legislature also considered other amendments that might solve these problems, including: amendments that would have eliminated the proportionality requirement entirely, 1914 House Doc. No. 729 and 1914 House Doc. No. 1052; and an amendment that would have authorized a single Commonwealth-wide tax rate for intangible property, 1914 House Doc. No. 1560.] Its adoption came “after prolonged study by successive Legislatures of the legal and practical aspects of income taxes, and after the proposal and consideration of numerous plans.” Opinion of the Justices, 266 Mass. 583, 587-588 (1929). Among the plans considered at length but rejected was an amendment to the Constitution explicitly authorizing a graduated tax on income. See 1914 Senate J. 1613-1614. “The Legislatures of the political years 1914 and 1915 [being] not unfamiliar with taxes graded as to rates and progressively increasing in proportion to the amount of property involved,” id. at 587, adopted language that rejected this approach.
The purpose of art. 44 was “not so much to produce additional revenue for public use, as to provide a more satisfactory system for the taxation of intangible personal property than that which had been in use since intangible property had come into existence.” P. Nichols, Taxation in Massachusetts, supra at 463. To accomplish this purpose, art. 44 gave the Legislature greater power and flexibility to structure a system of taxation, including the power to tax income and the ability to set different rates for the taxation of income derived from different classes of property. [Note 5: In the year following the amendment, the Legislature enacted the first income tax law. It “was intended to enable the state to impose a tax on intangible securities which was capable of enforcement with some degree of equality and without driving capital out of the state. So far as it applied to income from property it affected only the classes of intangible property which were previously taxable on their capital value at the local rate, and as to such property it reduced the tax from a variable local rate, which amounted frequently to from 30 to 50 per cent of the income, to a fixed rate of 6 per cent, but provided means for the strict and impartial enforcement of the tax.” P. Nichols, Taxation in Massachusetts, supra at 467.] It also eliminated the requirement of proportionality for the taxation of income, requiring instead that a single rate of taxation be set for each type of income that would not vary from municipality to municipality, but would be the same throughout the Commonwealth. See, e.g., Knights v. Treasurer & Receiver Gen., 237 Mass. 493 , 495 (1921), aff’d sub nom. Knights v. Jackson, 260 U.S. 12 (1922) (“Under this amendment plainly income taxes are not required to be proportional or equal as between different validly established classes. They need only be reasonable and uniform . . .”).
Interesting, no? So, on the one hand, the drafters of Article 44 considered and rejected a proposal that would have explicitly authorized a graduated income tax. But, on the other, they dramatically expanded the legislature’s overall power to tax, and they did so because clever tax avoidance schemes by people who could afford them had gotten things to the point where barely 20% of the wealth that should have been taxed actually was taxed. Cordy’s description of how “the wealthy could lower their tax burden by shifting their domicils from cities, with high tax rates and sophisticated assessors, to homes in rural communities with low tax rates and less aggressive and knowledgeable assessors” suggests that moving property out of the cities and into rural areas was the 1915 equivalent of moving your assets to the Cayman Islands. Article 44 was an aggressive effort to clamp down hard on that practice.
What seems to be distinctly lacking is any major concern about how non-uniform tax rates might constitute some sort of class warfare where the wealthy and less-well-off are pitted against each other. I’d be interested in knowing more about the consideration given to the graduated tax plan, and the reason for its rejection, but my suspicion is that the kind of “class warfare” rhetoric that meets any present-day suggestion that the wealthy should pay a higher rate than the less well-off is a recent invention. Rather, it strikes me as plausible that the “uniform rate” requirement was instituted precisely to prevent the kind of tax avoidance schemes that wealthy people had been engaging in prior to Article 44’s ratification in which they moved property “to smaller communities having lower tax rates and less efficient assessors.” Of course, I’d be happy to be proven wrong, and I welcome further discussion and elaboration on this interesting topic.