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By Tom Humphrey February 9, 2012

House majority leader says Tennessee constitution “clearly” does not allow state income tax

Under Senate Joint Resolution 221, given final approval by the Legislature in January, Tennessee voters will decide in a 2014 referendum whether to insert language into the state constitution that explicitly prohibits a tax on personal income. Supporters of the amendment say it’s needed because of disagreements over what the Tennessee Constitution says now.

But in House floor debate on Jan. 19, 2012, Majority Leader Gerald McCormick had a different take. With a booklet-sized copy of the state constitution in his hand, the Chattanooga Republican declared:

"I’ve got my state constitution out and, even though it clearly says there’s not to be a state income tax in Tennessee, we know we don’t have to go very far to find a judge who will say it doesn’t say what it says. And that’s what has happened before, and the member (sponsor of SJR221) doesn’t want that to happen again."

We wondered: If the constitution "clearly says there’s not to be a state income tax," then why the need for a constitutional amendment? Wasn’t it just a decade ago that a Republican governor thought there was enough uncertainty over the issue to push for a state tax on income?

The constitution in Article II, Section 28 grants the General Assembly broad authority to levy taxes on all property, real and personal, and to tax "merchants, peddlers, and privileges." There is no mention, one way or the other, on taxing income until the final sentence of the section, which declares, "The Legislature shall have power to levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem."

The state Supreme Court has interpreted Article 28 as it relates to personal income in three notable cases.

In 1929, the court upheld the Hall income tax on stock and bond dividends in the case of Shields vs. Williams, basing its decision in large part on that final sentence.

In 1932, the court struck down a graduated income tax, enacted by the General Assembly a year earlier, in the case of Evans v. McCabe. The decision rested again on that final sentence, as interpreted in the Shields case. By specifically mentioning a tax on income from stocks and bonds, the court reasoned, framers of the constitution implied an intention that other types of income should not be taxed.

In 1960, in a complicated corporate taxation case not directly involving personal income, the court nonetheless included some observations on the subject. An often-quoted line: "Realizing and receiving income or earnings is not a privilege that can be taxed."

Against this backdrop of seemingly inconsistent Supreme Court decisions, several state attorneys general have issued a series of formal opinions on the validity of proposals to tax payrolls or income. At least since 1981, the opinions have at least questioned the validity of the past Supreme Court rulings and most, including the most recent opinion by then-Attorney General Paul Summers in 1999, have said that an income tax would be constitutional.

Summers concluded: "Upon this analysis, it seems clear that the General Assembly does have the power to levy a properly-structured income tax as a privilege tax imposed on income-producing activities and measured by earnings, as a tax on income as a species of intangible personal property, and possibly as a direct and uncategorized tax imposed under the legislature’s inherent authority."

The idea is that, if the Legislature passed a bill deeming the right to earn income a "privilege" or income itself as "property," justices on the high court would rethink the precedents and declare income taxable.

Perhaps the most scholarly review of all this comes from the current state attorney general, Bob  Cooper, who wrote a treatise on constitutionality of an income tax for the Tennessee Bar Journal in 1992 (he was then in private practice). He concluded that the Supreme Court decision upholding the Hall income tax was "wrongly decided" and that a state income tax would, indeed, violate the state constitution – though the Supreme Court got its reasoning wrong while reaching the right conclusion in the Evans decision.

He has not issued a formal opinion on the matter since he has been AG.

It seems to us that the constitution is clearly unclear on the taxing of personal income, as attorneys general past and present have declared while reaching different conclusions.

Asked for comment about this, McCormick said the constitutionality of a state income tax "is a matter of opinion" and that, "in my opinion, I think it (the constitution) is very clear." But, he added, "We’ve got a lot of legal geniuses who think it’s not."

The whole point of amending the constitution is to make things clear. Indeed, the amendment’s preamble states its purpose is "to clarify the language" of the existing ban on a state income tax as interpreted by the Supreme Court.

Our ruling

The upshot of all this – and we’ve only scratched the surface here of the arguments by lawyers and laymen on both sides -- is that McCormick had things backwards in his statement that the constitution "clearly" says there should be no state income tax. The conflicting court decisions, the wide range of interpretations and the drive for an amendment actually make it very clear that the constitution is not clear. We rate his statement False.

Our Sources

Tennessee Constitution:

Tennessee Senate Joint Resolution 221, "A RESOLUTION to amend Article II, Section 28 of the Constitution of Tennessee, to prohibit taxation upon payroll  or earned personal income."

Richard Locker, "Tennessee income tax ban jumps legislative hurdle" in The Commercial Appeal, Jan. 19, 2012.

Tennessee Supreme Court, Shields v. Williams, 159 Tenn. 349 (1929).

Tennessee Supreme Court, Evans v. McCabe, 164 Tenn. 672 (1932).

Tennessee Supreme Court, Jack Cole Co. v. MacFarland 206 Tenn. 694, 337 S.W. 2nd 453, 455 (1960).

Robert Cooper, "Re-Examining the Constitutionality of an Income Tax in Tennessee," in Tennessee Bar Journal, January/February 1992.

Paul Summers, Attorney General for the State of Tennessee, "Opinion No. 99-217," October 28, 1999.

Tennesseans for Fair Taxation webpage, "The income tax IS constitutional".

Maclin P. Davis, Jr. in Tennessee Tax Revolt, "The constitutionality of the proposed Tennessee income tax."

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House majority leader says Tennessee constitution “clearly” does not allow state income tax

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