Lochner’s legacy: the real reason we can’t have a graduated income tax in Massachusetts

Bumped from a couple of months ago, for this morning's report that Governor Patrick is likely to seek an increase in the income tax to pay for transportation and other improvements. It is worth at least asking the SJC if they are inclined to correct their 90-year-old mistake so that an increase in the income tax, if we are to have one, could be accomplished in the most equitable way possible. - promoted by david

The conventional wisdom for years in Massachusetts has been that, in 1915, the people adopted Amendment Article 44 of the state Constitution which bars a graduated income tax.  Therefore, if you want to implement such a tax, you have to amend the state Constitution.

I’m pretty sure that’s not the whole story.  What I think actually happened is that, in 1915, the people adopted Article 44 as a way of clamping down on tax avoidance schemes that were crippling the Commonwealth’s ability to enforce its tax laws and hence costing it a lot of money.  Unfortunately, some of Article 44′s wording is on the opaque side, so inevitably it ended up in the Supreme Judicial Court.  When it did, in 1921, the SJC relied on the Lochner era’s then-popular but now discredited understanding of the nature of contracts and property to rule that earned income was “income derived from property.”  And, because Article 44 requires that the tax rates on income derived from property must be uniform, it follows that we can’t have a graduated income tax.

In my view, this result was intended neither by the people who drafted Article 44, nor, most likely, by the people who voted for it at the ballot box.  Article 44, correctly understood, simply says nothing at all about a graduated income tax – doesn’t require it, but surely doesn’t bar it either.  So it wasn’t the people who drafted or voted for Article 44 who prevented us from having a graduated income tax.  Rather, it was five misguided Justices of the Supreme Judicial Court.  The constitutional doctrine on which they relied, which was the centerpiece of the period now known as the Lochner era, has long since been relegated to the dustbin of history.  But its detritus remains in the form of a judicial mistake that to this day hampers our ability to have a progressive tax structure in Massachusetts.

Details on the flip. #longreads

Let’s start, as always with inquiries like this one, with the text of the provision at issue.  Here it is, in full.

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. Any class of property the income from which is taxed under the provisions of this article may be exempted from the imposition and levying of proportional and reasonable assessments, rates and taxes as at present authorized by the constitution. This article shall not be construed to limit the power of the general court to impose and levy reasonable duties and excises.

The key sentences are the second and third, which talk about income “derived from property” and “not derived from property.”  Here’s the crux of the matter: if earned income (by which we normally mean salaries and wages) is “income derived from property,” then it must be taxed at a uniform rate.  But if it’s not, then Article 44 places no restriction on how it may be taxed.

So, is a salary “income derived from property”?  Not in what I would take to be the ordinary meaning of those words.  ”Income derived from property” seems to me most naturally to apply to, for example, rents obtained from real estate, or dividends obtained from stocks, or gains realized by selling something whose value has increased over time, or other means by which one generates cash from something that one owns.  But one has to get pretty esoteric to stretch “income derived from property” to include a salary or a wage.

Unfortunately, that is exactly what the SJC did in 1921.  In a case called Raymer v. Tax Commissioner, helpfully called to my attention by BMGer Hester Prynne, a Harvard professor, one George Raymer, complained that his salary from Harvard was being taxed at a higher rate than income derived from annuities – unquestionably “income derived from property.”  Raymer argued that his salary was not “income derived from property,” and therefore that under the language of Article 44 (which says that “the general court may tax income not derived from property at a lower rate than income derived from property”), the tax on his salary was unconstitutional.

The SJC rejected Raymer’s argument by concluding that Raymer’s salary was “income derived from property.”  What sort of “property” might that be, you might well ask?  Here’s the SJC’s reasoning:

“Property” is a word of large import. It has been interpreted as including the right to make contracts for labor and for personal service. Decisions to that effect had been rendered by courts of the highest authority before the adoption of the Forty-fourth Amendment. It was said in Coppage v. Kansas, 236 U. S. 1, at page 14 (affirming earlier decisions in this particular), “Included in the right of personal liberty and the right of private property partaking of the nature of each – is the right to make contracts for the acquisition of property. Chief among such contracts is that of personal employment, by which labor and other services are exchanged for money or other forms of property.” This was but a redeclaration of the principle of Adair v. United States, 208 U. S. 161. Cases to this point are collected and reviewed, in Bogni v. Perotti, 224 Mass. 152, 154, 155, where the same conclusion was reached. It is not open to question that contracts for labor and service are “property” within the meaning of that word in both the Federal and State Constitutions, and as such they are entitled to the protection of the numerous guarantees thereby afforded. It would be a strained and unnatural construction to hold that that which was “property” for the purposes of the protections afforded by the Constitution was not “property” for the purposes of the taxation of income “derived from property” authorized by an amendment to this same instrument.

Got that?  What the SJC is saying here is that a contract by which one agrees to perform some sort of labor in exchange for being paid is “property,” and therefore that the income you derive from that contract is “income derived from property.”

The lawyers and legal historians out there have probably just heard a loud bell going off in their heads.  Why?  Because the notion that a contract for labor or service in exchange for money is a form of “property” is a key feature of the Lochner line of U.S. Supreme Court cases.  That notorious line of cases held that, because contracts of that kind were “property,” state or federal regulations designed to protect workers – e.g., that limited the number of hours a baker could work, or that barred railroads or other employers from firing workers for joining a union – were unconstitutional because they impinged on both the employers’ and the employees’ constitutional right to enter into whatever contract they wished.  Thus, they violated the 14th Amendment’s guarantee that the government may not deprive individuals of life, liberty, or property without due process of law.

The SJC’s Raymer opinion is singularly unconvincing for a couple of reasons.  First, the Lochner line of cases was repudiated by the Supreme Court in 1934, and today nobody takes seriously the notion that there is a constitutional right to enter into contracts free of any state oversight.  One can’t expect the SJC to have anticipated a doctrinal shift that was at that point 20 years in the future, but at the same time, one might have expected the SJC to think for itself rather than adopt wholesale an unconvincing line of cases that were decided in a context quite different than that presented in Raymer.

Second, and perhaps more damningly, the SJC’s adoption of Lochner-style views on contracts rendered an important clause of Article 44 almost entirely meaningless.  The third sentence of Article 44 says that “[t]he general court may tax income not derived from property at a lower rate than income derived from property.”  Thus, the drafters of Article 44 thought that “income not derived from property” was an important enough species of “income” that it warranted special constitutional treatment.

But under the rule of Raymer, what sort of income would qualify as “income not derived from property”?  If every contract designed to generate some sort of income is “property” – and that’s basically what Raymer says – one is hard-pressed to come up with anything at all that would qualify.  Our resident tax whiz, power wheels, suggested that inter vivos gifts or money found in the street would qualify, and that’s fair enough.  But it’s hard to imagine that those trivial sources of income were deemed sufficiently important to receive a special constitutional provision.  Rather, one imagines that the drafters of Article 44 had something significant in mind when carving out a special rule for “income not derived from property,” and the most obvious candidate would be earned income.  It’s a cardinal rule of judging that one is supposed to avoid interpretations that render portions of the text being interpreted meaningless, yet that is precisely what the Raymer Court did.

The SJC itself has acknowledged this problem.  In a footnote to a 1981 Opinion of the Justices, the Justices observed as follows (emphasis mine):

The third sentence of art. 44 provides that the General Court may tax “income not derived from property” at a lower rate than “income derived from property.” This may have been intended to allow for a lower rate of taxation for earned income. See P. Nichols, Taxation in Massachusetts 471 (3d ed. 1938). But in Raymer v. Tax Comm’r, 239 Mass. 410, 413 (1921), the court held that the salary of a university professor was “income derived from property” within the meaning of art. 44, making the significance of the third sentence of the amendment unclear. What is important for our purposes here, however, is that it is generally agreed that the requirement of uniform rates of taxation in art. 44 applies to both earned and unearned income.

The Justices in that opinion had evidently not been asked, and thus were not prepared, to reconsider Raymer‘s interpretation of Article 44.  But I find it interesting that they went out of their way to point out its obvious deficiencies.

From all of this, it is clear to me that the Raymer Court’s interpretation of Article 44 was an unfortunate by-product of a misguided and now-discarded legal doctrine, and that earned income should never have been deemed to be “income derived from property.”  But what about the uniformity requirement for “income derived from property” – is there a good explanation for that, absent any consideration about a graduated income tax?

Yes there is – a very good explanation, actually.  I talked about this a bit in my last post on this general topic.  To summarize briefly, the original state Constitution conferred upon the state and municipalities the power to tax, as long as the taxes were “proportional.”  To again quote from Justice Cordy, who explored this question in a 2004 opinion, this rule

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.  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.

The problems began when wealth, which previously had generally taken fairly tangible and thus easily-assessed forms (such as land), began increasingly to assume intangible, easily-moved and -concealed forms (such as stocks and bonds).  That development made it much easier for wealthy Massachusetts residents to move their assets from municipalities with higher tax rates and more efficient tax collectors (generally the large cities like Boston) to those with lower rates and less effective collectors, or to find ways of shielding them from municipal collectors all together.  It seems to have been an early 20th-century equivalent of sheltering your assets in the Cayman Islands.  According to a 1938 book on the subject (as quoted by Justice Cordy), this practice led to “hardly a fifth of the personal property in the commonwealth” being properly taxed.

So along comes Article 44.  And it solves this problem in one fell swoop: by (a) explicitly conferring on the state legislature the power to tax income of any sort, and (b) requiring that income derived from any particular class of property must be taxed at the same rate “throughout the commonwealth,” the drafters seem clearly to have been intending to end the practice of moving assets (“property”) around the state to obtain more favorable tax treatment.  The use of the phrase “throughout the commonwealth,” which seems mainly to be geographical, supports the interpretation that Article 44 was, essentially, a response to the increasingly creative and agressive use within Massachusetts of what we would now call tax shelters.

Now, what about the fact that the drafters of Article 44 apparently considered and rejected a version that would have expressly adopted some sort of graduated income tax?  I agree that that’s interesting, and I would like to know more about it.  In particular, I would like to know whether the rejected proposal involved graduated rates on earned income, or “income not derived from property,” or whether it focused on “income derived from property.”  If the focus was on “income derived from property” (and frankly I suspect that’s the case), then it’s simply not relevant to a discussion of whether Article 44 says anything about a graduated income tax on earned income.  And even if not, we still are faced with the fact – and I believe it is a fact, the SJC’s unfortunate mistake notwithstanding – that Article 44 simply does not say anything about a graduated income tax on earned income.  It doesn’t impose it, but it doesn’t bar it either.  It seems to me entirely reasonable to conclude that the drafters chose to leave to subsequent legislatures the decision whether or not to adopt such a tax structure.

Law geek that I am, I cannot resist making one further observation: Oliver Wendell Holmes is generally acknowledged to be one of the greatest Justices ever to sit on the Supreme Court of the United States.  Before he got that job, he was Chief Justice of the Supreme Judicial Court of Massachusetts.  Holmes dissented vigorously from the Lochner line of cases, including from the Coppage and Adair decisions upon which the Raymer Court unfortunately relied.  So the folks sitting on the Court that Holmes used to lead relied on cases that Holmes himself had rejected.  And in one of those cases (Coppage), Holmes looked back home, citing a couple of dissenting opinions he had authored on the SJC, and stating that “I still entertain the opinions expressed by me in Massachusetts.”  Sometimes, when you’re right, you’re right, even though nobody agrees with you at the time.  Good for Holmes for sticking to his guns for all those years.

So, where does all of this leave us?  Is it worth asking the SJC to reconsider Raymer?  Maybe … but it also must be acknowledged that Raymer has been the settled interpretation of Article 44 for a long time, and that in a couple of instances the people have been asked to change it via a ballot question, and they have declined the invitation.  Ninety years later, it does not seem unreasonable to conclude that, even if the original interpretation was wrong, it’s now generally understood, and it should be the people rather than the judiciary that makes a change.

Still, I think it’s worth understanding that the SJC’s original interpretation of Article 44 really was incorrect.  It was a result of the SJC’s unfortunate decision to apply an incredibly activist and anti-progressive line of Supreme Court cases, that have long since been abandoned, in a context where they simply made no sense.  Anyone who wants to argue that a flat income tax is good policy is free to do so, but in my view, they must do so without the history of Article 44′s genesis on their side.


12 Comments . Leave a comment below.
  1. Pretty easy test...

    Just have the lege pass a graduated income tax, and deliver the text directly to Barbara Anderson’s front door. The courts will have to settle it then, methinks.

    Note: the graduated income tax need not be revenue positive, or even revenue neutral. The lege could *lower* the income tax from 5.3% to 5% on the first $40k of income or somesuch. Of course, that would result in less money to perform government services, but you catch the drift…

  2. Even though the amendment says...

    …income not from property MAY be taxed at a lower rate, it does not say SHALL be nor do I see anything that prohibits it from being taxed at a higher rate. Raymer, therefore, had no case IMO.

    Yes, of course precedent can be over turned decades later, for example Plessy v. Ferguson by Brown v. Board of Ed.

    • Indeed,

      that’s another irony of the Raymer case – that it could have been decided on different and less damaging grounds. It’s possible to argue that the specific grant of permission to tax “income not derived from property” at a lower rate should be read to preclude taxing such income at a higher rate than “income derived from property,” but it’s certainly not a slam-dunk.

      And yes, precedent can be overturned decades later. But in this case, I wouldn’t hold my breath.

      • Citizens United overturned 100 years of precedent, right?

        I mean, I am not a lawyer, but Roberts and Alito opened a door there. If it benefits the people of Massachusetts (and a progressive income tax would), then let’s walk through it.

  3. Very interesting

    I had a quick thought about the Lochner conception of “property” when reading the post yesterday. I agree that the SJC’s interpretation leaves little in the category of “income not derived from property.”

    To Christopher’s point above, I agree that the amendment does not preclude a higher rate. Furthermore, the amendment clearly envisions different rates on income derived from different classes of property. Wouldn’t the clear import of Raymer’s argument be that the tax rate on “income not derived from property” could not exceed the lowest of those rates?

    Time for Raymer to go.

  4. Really Interesting

    Thank you for a fascinating article. I learned a lot about this tax amendment. I have a question about Art. 44: Even with the current interpretation, is it possible to use exemptions and abatements to achieve a progressive income tax? For example, could you tax all income at 7.3%, but then give an automatic 2% abatement for all income below $500,000?

    • Something like that has been tried, and it failed.

      Several years back, a series of exemptions was passed that wasn’t exactly a graduated income tax, but had a somewhat similar effect because the size of the exemption varied depending on the taxpayer’s gross income. In a divided (5-2) opinion, the SJC threw it out, concluding that it was in effect a graduated (non-uniform) income tax and therefore barred by Article 44.

      • There's a story to go along with that one, too

        It seems to me that art. 44 is so ambiguously drafted that controversies cling to it like velcro.

        As David says, the SJC ruled against a law that had tried to use the “reasonable exemptions and abatements” power to make the income tax structure more progressive.

        The wrinkle here is that three years earlier, in 1982, the House of Representatives had asked the Justices for their opinion of the constitutionality of a very similar bill the House was considering.
        Four of the Justices thought the proposed law would satisfy art. 44 (Hennessey, Wilkins, Nolan and O’Connor), while three (Liacos, Abrams and Lynch) thought it would not.

        After the law was enacted (with some minor changes but the same general design) and was challenged as a violation of art. 44, the SJC ruled the other way, this time 5 to 2, that the law violated art. 44′s uniformity requirement. (If you’re keeping score, the two Justices whose opinions changed from “yes” to “no” were Justices Nolan and O’Connor.)

        The progressive income tax bill that was the subject of a BMG post and comments a couple weeks ago does not tie the exemption amounts to income, so one would assume that it’s OK on uniformity grounds. If it becomes law, we may have a chance to find out if even that assumption is safe.

  5. Can you still blog

    After you get appointed to the SJC?

    • As far as I can tell,

      the current Chief Justice is blogging as EB3, so I’d say yes, as long as I use a pseudonym.


  6. It's even worse than that...

    But under the rule of Raymer, what sort of income would qualify as “income not derived from property”? If every contract designed to generate some sort of income is “property” – and that’s basically what Raymer says – one is hard-pressed to come up with anything at all that would qualify. Our resident tax whiz, power wheels, suggested that inter vivos gifts or money found in the street would qualify, and that’s fair enough. But it’s hard to imagine that those trivial sources of income were deemed sufficiently important to receive a special constitutional provision.

    … even if one were inclined to be generous and accept the clearly flawed reasoning herein, namely that there are different classes of property one of which might be wages (if you squint and look at it sideways…), the statute is pretty darn clear about the permissibility of differing rates on “income derived from different classes of property”…. it’s pretty neigh impossible to, with a straight face, make the claim that income derived from the sale of a house is not a different class of property than whatever it is they mean about wages as property.

    So, even if they were right about any old income being property it’s STILL flawed to elide the difference in properties… an elision the statute clearly, one might even say definitively, takes note of…

  7. Also, the Neo-Lochner of Citizens United & First Nat'l Bank of Boston v. Bellotti

    Great piece, Dave. An additional interesting angle on our progressive income tax history is the 1978 First Nat’l Bank of Boston v. Bellotti case, an early 5-4 Supreme Court “corporate speech” decision that in some ways is the Godfather of Citizens United. Why did Bank of Boston, Gillette, and Digital Equipment Corporation sue AG Bellotti and Massachusetts to claim a right of corporations to spend money in citizens referendum? Because its executives wanted to use corporate cash to defeat a citizens referendum that would have paved the way to a progressive tax. The corporations lost in the SJC, and then took the case to the Supreme Court, where Justice Lewis Powell– former US Chamber advisor– was looking for opportunities to use “an activist minded court” (his words) to strengthen corporate power. He wrote a 5-4 decision in Bellotti striking down the Massachusetts law prohibiting corporate spending in citizens referenda. The referendum at issue was to permit the adoption of a progressive personal income tax (note: not a corporate tax) in Massachusetts.
    The decision generated powerful dissents not only from the left of the Court but from the conservative Justice William Rehnquist (“Fourteenth Amendment does not require a State to endow a business corporation with the power of political speech….”).
    Powell went on to write three more 5-4 decisions solidifying the corporate speech doctrine, paving the way to Citizens United. This bogus doctrine of Constitutional rights (including “speech”) for corporations has been used by the courts at least as much as Lochner, and maybe more so, to strike down laws deemed insufficiently de-regulatory. Shameless self promotion alert- the full story’s in my 2012 book, Corporations Are Not People.

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