THE CONSTITUTIONALITY OF THE PROPOSED TENNESSEE INCOME TAX

By Maclin P. Davis, Jr.

In spite of the tremendous volume of publicity about proposals by Gov. Ned McWherter in 1991 and 1992, and Gov. Don Sundquist and Democrat senators in 1999, 2000 and 2001, for a state income tax, significant facts pertaining to that tax have not been mentioned in the press. The most significant of these unmentioned facts is that the proposed income tax is unconstitutional. The way to tell if a proposed income tax is constitutional is to see what the Supreme Court has ruled as to its constitutionality.

When the Tennessee Constitution was adopted in 1870, Article II, Section 28, contained the sentence,

"The Legislature shall have power to levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem."

In 1932, in Evans v. McCabe, 52 S.W.2d 159, the Tennessee Supreme Court held that that sentence "conferred upon the Legislature the power to tax only one class of incomes", and "necessarily denied to the Legislature the power to tax incomes of other classes", and, therefore, that a tax on personal income enacted by the Legislature was unconstitutional.

The Attorney General had given an opinion that the tax was constitutional, but the five Supreme Court judges unanimously ruled that he was wrong.

In 1960, in Jack Cole Co. v. MacFarland, 337 S.W.2d 453, and in 1964, in Gallagher v. Butler, 378 S.W.2d 161, in unanimous opinions by the five judges, the Supreme Court quoted with approval and followed the ruling of the Supreme Court in Evans v. McCabe. Thus, in those three cases, the Tennessee Supreme Court unanimously ruled that a tax on any class of income other than the income from stocks and bonds is prohibited by the Tennessee Constitution.

The Tennessee Supreme Court is the highest authority on the meaning of the Tennessee Constitution, and those decisions by the Supreme Court have never been overruled. Furthermore, the sentence quoted from Article II, Section 28, of the Constitution has never been amended. Therefore, those decisions are binding on the Governor and the Legislature and cannot be changed by the Governor, the Legislature, or an opinion of the Attorney General. Those decisions can be changed only by a constitutional amendment, or by being overruled by a subsequent Supreme Court decision.

Tennessee Attorney General Paul Summers wrote opinion no. 99-217, dated October 28, 1999, to the effect that the Constitution of Tennessee does not prohibit a state income tax. That opinion cites no decision of the Tennessee Supreme Court and no provision in the Constitution as supporting the opinion. That opinion does refer to the cases of Evans v. McCabe and Jack Cole Co. v. MacFarland, in both of which the Tennessee Supreme Court held that a personal income tax statute was unconstitutional.

As a result of the 1971 Constitutional Convention, the Constitution was amended; but the key provision relied on in Evans v. McCabe was left unchanged. That key provision is the sentence in Article II, Section 28, which is still in the Constitution today unchanged, and which states, "The Legislature shall have power to levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem." In fact, the call to the 1971 Constitutional Convention expressly prohibited the Convention from considering a personal income tax.

After the Constitutional Convention of 1971, the Attorney General's office issued an opinion on May 14, 1975, stating, "It is our opinion that realizing and receiving income or earnings is not a privilege that can be constitutionally taxed," citing Evans v. McCabe and Jack Cole Co. v. MacFarland.

That opinion specifically stated that the call of the 1971 Constitutional Convention contained an express prohibition against consideration of a personal income tax.

The Attorney General's office issued another opinion on October 27, 1977, stating that under Article II, Section 28, of the Constitution, "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 v. McCabe, Jack Cole Co. v. MacFarland and Gallagher v. Butler. The opinion pointed out that, "Although these cases dealt with the provisions of Article II, Section 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 Summers' opinion is not only in direct conflict with three unanimous decisions of the Tennessee Supreme Court, it also conflicts with two prior opinions of the Tennessee Attorney General's office.

It is settled law in Tennessee at this time that an income tax on any income other than incomes from stocks and bonds is unconstitutional. Since there is no plan to change this by constitutional amendment, this rule cannot be changed by the Legislature or an opinion of the Attorney General. It can be changed only by a Supreme Court decision overruling all three prior decisions of the Supreme Court on this point.

No one can know how the present judges of the Supreme Court would vote if another case involving the constitutionality of an income tax comes before the Court, since none of those five judges has been called upon to rule on a prior case involving that question. However, the Tennessee Supreme Court rarely overrules a prior decision. There is no justification for the belief that the Court would overrule the three prior decisions which held that a state income tax is unconstitutional.

Maclin P. Davis, Jr. is a partner in the law firm of Waller Lansden Dortch & Davis.. He was the lawyer for the taxpayer in the case of Jack Cole Co. v. MacFarland, the 1960 case that is one of three cases in which the Tennessee Supreme Court unanimously held an income tax to be unconstitutional.