Academic journal article The University of Memphis Law Review

The Constitutionality of an Income Tax in Tennessee

Academic journal article The University of Memphis Law Review

The Constitutionality of an Income Tax in Tennessee

Article excerpt

The need for tax reform is a recurrent theme in Tennessee's history.' The disclosure that the state's 1999-2000 budget expected a $350 million shortfall precipitated the most recent revenue crisis.2 In order to solve this problem, the legislature expanded and revised the state's franchise and excise tax structure to include limited liability companies, limited partnerships, limited liability partnerships, and business trusts.3 Commentators, however, predict that the new business tax will not be enough to meet budget needs 4 One commentator notes that Tennessee has significant revenue concerns regarding education, TennCare, its correctional systems, the judicial branch, and state employees.s Not everyone agrees, however, that tax reform is the solution. Clinton R. Anderson of Morristown proposes "that we do not need tax reform as much as we need spending reform. There is no end to `felt' needs, nor to the spending that legislators will undertake in order to promote their re-elections, or reward friends. If they have more money to spend, it will be spent."6 If the legislature, however, is required to raise more revenue, one of the plausible courses will be the enactment of a state income tax. Therefore, the question of whether the legislature has the constitutional power to enact a state income tax has again become a concern.

This Note does not attempt to determine if a state income tax is the proper tool to rectify Tennessee's revenue concerns, but endeavors to determine if the legislature has the power to enact a state income tax despite the Tennessee Supreme Court's rulings that a personal income tax is unconstitutional. The legislature has four avenues from which it could choose to enact a state income tax: ( 1 ) amend the Tennessee Constitution; (2) classify the income tax as a property tax; (3) rely upon the inherent power of the legislature to enact legislation that is not expressly prohibited; or (4) classify the income tax as a privilege tax. In a constitutional challenge, all avenues, except for amending the state constitution, would require the Tennessee Supreme Court to overrule its prior decisions.

I. ARTICLE 2, SECTION 28 OF THE TENNESSEE CONSTITUTION

Article 2, section 28 of the Tennessee Constitution neither expressly permits nor prohibits the enactment of a state income tax.'

The Tennessee Supreme Court, however, has twice held that a personal income tax is unconstitutional.8 Article 2, section 28 of the Tennessee Constitution contains three main tax clauses: the property tax clause,9 the privilege tax clause,' and the income tax clause.11 The Tennessee Supreme Court has interpreted the constitution to expressly provide for only a property and privilege tax and has interpreted the income tax clause as an exception to either the property or privilege clauses.'2 Property and privilege taxes "cover the whole domain of taxation and beyond these the Legislature may not go in the imposition of taxes."13 Article 2, section 28 went through one relevant amendment in 1972.14 The 1972 amendment removed the uniformity requirement for all property taxes in the constitution of 1870 and established a classified property tax, taxing different classes of property at different rates but retaining the requirement that the tax be uniform within each class.15

II. HISTORY OF THE CONSTITUTIONALITY OF AN INCOME TAX

A. Case Law

The Tennessee Supreme Court first addressed the possibility of a state income tax in Shields v. Williams.16 In Shields, the supreme court sought to determine the constitutionality of the Hall income tax, which was a tax on five percent per annum of income derived from stocks and bonds not taxed ad valorem.17 To determine the validity of the Hall income tax, the court examined the income tax clause of article 2, section 28 of the Tennessee Constitution.18 The income tax clause states in pertinent part: "[t]he Legislature shall have the power to levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem. …

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