U.S.
Supreme Court
Colgate v. Harvey, 296 U.S. 404
(1935)
No. 8. Argued October 14, 15, 1935
Decided December 16, 1935
APPEAL FROM THE SUPREME COURT OF
VERMONT
Syllabus
1. A state tax upon income is not to
be deemed an interference with interstate commerce merely because the income is
derived from a source in another State. P. 296 U. S. 419.
2. A state tax is not invalid as an
interference with interstate commerce when its effect upon such commerce is
merely collateral and incidental. Id.
3. A Vermont law laying a general
income tax of 4% upon the dividends received by residents from corporations,
exempts dividends from corporation business done in the State, measuring the
exemption by the ratio of the net income of the corporation earned within the
State to its entire net income. Corporations, on the other hand, are subjected
to an annual franchise or privilege tax of 2% of the net income attributable to
their local business, in addition to taxes upon their local tangible property.
Held:
(1) That the exemption does not
produce unconstitutional discrimination against recipients of dividends earned
outside of the State. P. 296 U. S. 419.
(2) The evident intent and general
operation of the legislation are to adjust with a reasonable degree of equality
the tax burdens it imposes on shareholders, the exemption of locally earned
dividends being the practical equivalent of the burden which the shareholders
receiving them must bear indirectly because of the local taxes laid on their
corporations. P. 296 U. S. 420.
4. Conceding the power of a State to
impose double or multiple taxation, the avoidance of that result cannot be
condemned as an arbitrary basis for apportioning tax burdens. P. 296 U. S. 420.
5. In testing whether the taxes
imposed by a State on its residents discriminate unduly, in violation of the
equality clause of the Fourteenth Amendment, the tax burdens imposed upon them
by other States are irrelevant. P. 296 U. S. 420.
6. Absolute equality in taxation is
not required by the Fourteenth Amendment; the boundary between permissible and
forbidden inequalities depends upon the material circumstances in each case. P.
296 U. S.
422.
7. A Vermont law taxing income from
interest-bearing securities exempts interest received on account of money
loaned within the State at a rate of interest not exceeding 5% per annum,
evidenced by promissory notes, mortgages on real estate, or bonds for deeds.
Residents whose income is from like loans made outside of the State are not
allowed the exemption.
Held:
(1) That, on the face of the
statute, the discrimination is purely arbitrary, being based entirely upon a
fortuitous circumstance- the place where the loan is made, which has no
substantial or fair relation to the object of the Act, namely, the raising of
revenue. Pp. 296
U. S. 422, 296 U. S. 424.
(2) Assuming that the classification
would be valid under the equality clause of the Fourteenth Amendment if the
exemption were made to depend not only upon the making of the loan within the
State, but also upon the investment of the money loaned in property having its
situs within the State, the Court is not at liberty to read such additional
condition into the statute. P. 296 U. S. 424.
(3) The proposition that money
loaned within the State will generally be invested there is a pure speculation,
without warrant in the record or in the judicial knowledge of the Court. P. 296 U. S. 425.
8. A statutory discrimination which
on its face is arbitrary cannot be upheld by simply surmising that it subserves some unnamed public interest. P. 296 U. S. 425.
9. Classification for the purposes
of taxation, to comply with the equal protection clause, must be founded upon
pertinent and real differences, as distinguished from the irrelevant and
artificial. The test is whether the taxing statute, arbitrarily and without
genuine reason, imposes a burden upon one group of taxpayers from which it
exempts another, both of them occupying substantially the same relation toward
the subject matter of the legislation. P. 296 U. S. 423.
10. Even if beneficial to the State,
a discrimination whereby its citizens who lend money outside of the State are
taxed on the income, while those who make like loans in the State are not
taxed, violates the privileges and immunities clause of the Fourteenth
Amendment. Pp. 296 U. S. 426,
296 U. S.
433.
11. As citizens of the United
States, our people are members of a single great community consisting of all
the States united, and not of distinct communities consisting of the States
severally. No citizen of the United States is an alien of any the Union, and
the very status of national citizenship connotes equality of rights and
privileges, so far as they flow from such citizenship, everywhere within the
limits of the United States. P. 296 U. S. 426.
12. A citizen of the United States
is ipso facto and at the same time a citizen of the State in which he
resides. While the Fourteenth Amendment does not create a national citizenship,
it has the effect of making that citizenship "paramount and dominant"
instead of "derivative and dependent" upon state citizenship. P. 296 U. S. 427.
13. Whatever latitude of state power
might exist under Art. IV, § 2 of the Constitution, providing that "The
citizens of each State shall be entitled to all privileges and immunities of
citizens in the several States," a State cannot, in view of the privileges
and immunities clause of the Fourteenth Amendment, abridge the privileges of a
citizen of the United States, albeit he is at the same time a resident of the
State which undertakes to do so. P. 296 U. S. 428.
14. The same Act of a state
legislature may contravene more than one provision of the Constitution -- e.g.,
it may infringe the right of a citizen under the commerce clause and also his
privileges and immunities as a citizen of the United States. Cf. 73 U. S. Nevada,
6 Wall. 35. P. 296 U.S. 430.
15. The right of a citizen of the
United States to engage in business, to transact any lawful business, or to
make a lawful loan of money
in any State other than that in
which the citizen resides is a privilege attributable to his national
citizenship. A state law prohibiting the exercise of any of these rights in
another State would therefore be invalid under the Fourteenth Amendment; a
discriminating tax upon such activities is necessarily void even if the taxing
State will thereby help its domestic business. P. 296 U.S. 430.
16. As the Fourth Article of the
Constitution requires each State to accord equality of treatment to the citizens
of other States in respect of the privileges and immunities of state
citizenship, so the privileges and immunities clause of the Fourteenth
Amendment safeguards citizens of the United States against any legislation of
their own States having the effect of denying equality of treatment in respect
of the exercise of their privileges of national citizenship in other States. P.
296 U. S.
431.
17. The right of a citizen of the United
States resident in one State to contract in another may be a liberty
safeguarded by the due process clause and at the same time, nonetheless a
privilege protected by the privileges and immunities clause of the Fourteenth
Amendment. In such case, he may invoke either or both. P. 296 U. S. 433.
18. A state law which allows a
personal exemption from the taxable income derived from interest-bearing
securities but withholds it if the taxpayer receive also income of another
kind, and, in that event, gives to him a larger personal exemption in the
computation of his tax upon the latter kind of income is consistent with equal
protection of the laws, notwithstanding the fact that, in a particular tax
year, the taxpayer, because of allowable deductions from gross income, paid no
tax upon the latter kind of income and had no occasion to resort to the larger
exemption applicable to it. P. 296 U. S. 434.
19. The question of equal protection
must be decided in respect of the general classification, rather than by the
chance incidence of the tax in particular instances or with respect to
particular taxpayers. P. 296 U. S. 436.
107 Vt. 28, 175 A. 352, reversed.
Appeal from a judgment which
affirmed a judgment rendered by a county court in favor of Harvey, Tax
Commissioner, in a proceeding under the Income and Franchise Tax Law of Vermont
for the revision of an income tax assessment.
MR. JUSTICE SUTHERLAND delivered the
opinion of the Court.
The Vermont Income and Franchise Tax
Act of 1931, Public Laws of Vermont, 1933, § 872 et seq. (the pertinent
provisions of which are copied in the margin [Footnote 1]), imposes
individual income taxes as follows:
first, with respect to net income derived from salaries, wages, etc.,
denominated by the court below class A income at the rate of 2 percent; second,
with respect to income received on account of the ownership or use of or
interest in any interest bearing security, denominated class B income at the
rate of 4 percent, excluding, however, from such income (a) interest received
on account of money loaned within
the state at a rate of interest not exceeding 5 percent per annum, evidenced by
a promissory note, mortgage, or bond for a deed bearing a like rate of
interest; (b) dividends on stocks of corporations subject to taxation under §§
887, 888 of the statute. If the income taxed is derived wholly from
interest-bearing securities, there is allowed, in the case of a single
individual, a personal exemption of $400, and, in the case of a head of a
family or of a married individual living with husband or wife, a personal
exemption of $800. If, however, either husband or wife shall receive any income
other than that derived from such securities, then the personal exemption is
not allowed. A distinct and larger personal exemption is allowed in the case of
net income derived from salaries, wages, etc. (§ 880), namely, $1,000 in the
case of a single individual and $2,000 in the case of a head of a family or a
married individual living with husband or wife.
Appellant is a resident of Vermont,
married, and living with his wife. During the taxable year in question, he
received both class A and class B income, but his class A income, although
large, was absorbed by allowable deductions, so that there was no net income
from that source, and consequently nothing subject to taxation. His class B
income amounted to a larger sum, part of which consisted of interest on notes,
mortgages, etc., representing money loaned outside the state of Vermont at not
exceeding 5 percent per annum, and another part from taxable dividends received
from corporations other than Vermont corporations. Upon these two sums, a tax
was assessed against him at the rate of 4 percent. Under the statute, he was
allowed no personal exemption whatever.
The validity of the statute under
the Federal Constitution was properly challenged. The grounds of attack, so far
as necessary to be stated, are as follows: (1) the act imposes a tax upon
dividends earned outside the State of
Vermont, while exempting from the
tax dividends earned within the state, thereby denying petitioner the equal protection
of the laws in violation of the Fourteenth Amendment; (2) the act, in violation
of the same clause, discriminates in favor of money loaned within the state as
against money loaned outside the state; (3) the act arbitrarily denies
appellant the $800 exemption while giving it to other persons whose situation
differed from his only in that they had no income from business, and thereby
denies appellant the equal protection of the laws guaranteed by the Fourteenth
Amendment, and in each of these three particulars the act abridges the
privileges and immunities of appellant as a citizen of the United States in
contravention of the same amendment. [Footnote 2]
The court below denied the
contentions of appellant, and sustained the validity of the act in every
particular. 107 Vt. 28, 175 A. 352.
First. Does the imposition of a tax upon dividends earned outside
the state, from which tax dividends earned within the state are exempt, constitute,
under the Fourteenth Amendment, an allowable classification? The basis of the
classification rests in the consideration that, by §§ 887 and 888, a tax of 2
percent, measured by net income, is imposed upon every corporation for the
privilege of exercising
its franchise in the state and of
doing business therein. If the entire business of the corporation be transacted
within the state, the amount of the tax is fixed with regard to the entire net
income. If the entire business be not so transacted, the net income is
calculated with respect to that part of the business done within the state, to
be allocated so as fairly and justly to reflect such net income. Dividends upon
shares of corporations which are subjected to this tax are exempted from the
income tax. In addition to the 2 percent franchise tax, all tangible corporate
property lying within the state is subjected to a property tax. The evident aim
of the classification therefore is to produce equality and not inequality; and,
obviously, that aim will become effective in fact to a greater or less extent,
in the administration of the legislation.
The theory upon which the tax is
laid upon dividends realized from out-of-state business while leaving dividends
realized from domestic business untaxed, is that the 2 percent franchise tax,
especially with the property tax added, has the effect of indirectly imposing a
tax burden upon the latter measurably equivalent to that imposed directly upon
the former. Thus, the tendency of the plan is to avoid taxing twice what is, in
effect, the same thing. And conceding the power of the state to impose double
or even multiple taxation, legislation which is calculated to avoid that
undesirable result certainly cannot be condemned as arbitrary. Thus far, the
question is settled in favor of the validity of the tax by prior decisions of
this Court. Kidd v. Alabama, 188 U. S. 730; Darnell
v. Indiana, 226
U. S. 390, 226 U. S. 398;
Travelers' Ins. Co. v. Connecticut, 185 U. S. 364; Watson
v. State Comptroller, 254 U. S. 122, 254 U. S. 124-125;
Lawrence v. State Tax Comm'n, 286 U. S. 276, 286 U. S. 284.
True, it well may be assumed that similar franchise and property taxes are
imposed upon the outside corporations by other states; but the assumption is
immaterial
to the issue here involved. It is
enough that such taxes are not imposed by the State of Vermont. It was so
decided in Kidd v. Alabama, supra, where Mr. Justice Holmes, speaking
for the Court, said (p. 188 U. S. 732):
"The State of Alabama is not
bound to make its laws harmonize in principle with those of other states. If
property is untaxed by its laws, then, for the purpose of its laws, the
property is not taxed at all."
And see Bacon v. Board of State Tax
Comm'rs, 126 Mich. 22, 25, 26, 85 N.W. 307.
Appellant urges that the franchise
tax measured by the corporation's income is at the rate of 2 percent, while the
tax on dividends is at the rate of 4 percent, and concludes that this results
in putting a burden on dividends directly taxed twice as great as that imposed
indirectly by the franchise tax. But it is obvious that, since the 4 percent
tax is imposed only upon such part of the corporate net income as passes to the
shareholders in the form of dividends, and the 2 percent tax is measured by the
entire net income of the corporation, this conclusion is erroneous.
Corporations do not, at least as a general rule, pay out their entire net
income in dividends. Something is reserved for future contingencies, and it may
well result that a tax of 2 percent measured by the entire net income of the
corporation will roughly approximate the amount imposed by a 4 percent tax on
that part of the net income paid out as dividends. There is nothing in the
equality clause of the Constitution which requires that the two sums shall be
mathematically equivalent. Concordia Fire Ins. Co. v. Illinois, 292 U. S. 535, 292 U. S. 547.
In Klein v. Board of Supervisors, 282 U. S. 19,
this Court sustained an act exempting corporate shares from taxation where 75
percent of the total property of the corporation was taxable in the state and
the taxes thereon were paid. It was said that this was plainly a reasonable
effort to do justice to all in view of the way other assessments were made.
It is impossible to say from the
record before us that there is a greater disproportion here than was presented
in the Klein case, or to conclude that the disproportion is so great as
to stamp the classification as wholly arbitrary or capricious. Moreover, as a
general thing, a corporation subject to the 2 percent franchise tax will pay
also a tax upon property located within the state, with the effect of still
further narrowing, if not altogether extinguishing, the difference.
This Court has frequently said that
absolute equality in taxation cannot be obtained, and is not required under the
Fourteenth Amendment. This, of course, is not to say that, because some degree
of inequality from the nature of things must be permitted, gross inequality must
also be allowed. The boundary between what is permissible and what is forbidden
by the constitutional requirement has never been precisely fixed, and is
incapable of exact delimitation. In the great variety of cases which have
arisen, decisions may seem to be difficult of reconcilement; but investigation
will generally cause apparent conflicts to disappear when due weight is given
to material circumstances which distinguish the cases. If the evident intent
and general operation of the tax legislation is to adjust the burden with a
fair and reasonable degree of equality, the constitutional requirement is
satisfied. We think the provision now under consideration meets this test. Cf.
State Railroad Tax Cases, 92 U. S. 575, 92 U. S. 612;
Tappan v.
Merchants' National Bank, 19 Wall. 490, 86 U. S. 504;
Merchants' Bank v. Pennsylvania, 167 U. S. 461, 167 U. S. 464.
Second. It is settled beyond the admissibility of further inquiry
that the equal protection clause of the Fourteenth Amendment does not preclude
the states from resorting to classification for the purposes of legislation. Royster
Guano Co. v. Virginia, 253 U. S. 412, 253 U. S. 415.
And "the power of the state to classify for purposes of taxation is
of wide range and flexibility."
Louisville Gas & Electric Co. v. Coleman, 277 U. S. 32, 277 U. S. 37.
But the classification
"must be reasonable, not
arbitrary, and must rest upon some ground of difference having a fair and
substantial relation to the object of the legislation, so that all persons
similarly circumstanced shall be treated alike."
Royster Guano Co. v. Virginia,
supra; Air-Way Corp. v. Day, 266 U. S. 71, 266 U. S. 85; Schlesinger
v. Wisconsin, 270
U. S. 230, 270 U. S. 240.
The classification, in order to avoid the constitutional prohibition, must be
founded upon pertinent and real differences, as distinguished from irrelevant
and artificial ones. The test to be applied in such cases as the present one
is: does the statute arbitrarily and without genuine reason impose a burden
upon one group of taxpayers from which it exempts another group, both of them
occupying substantially the same relation toward the subject matter of the
legislation? "Mere difference is not enough. . . ."
Louisville Gas & Electric Co. v. Coleman, supra; Frost v. Corporation
Commission, 278
U. S. 515, 278 U. S. 522.
The question depends here upon
whether the income taxed and the income exempted from taxation reasonably can
be assigned to different classes. As the Supreme Court of Vermont itself has
pointed out, in all such cases it must appear not only that a classification
has been made, but that it is one based on some reasonable ground. State v.
Hoyt, 71 Vt. 59, 64-66, 42 A. 973. The decision in that case held invalid a
state statute the effect of which was to impose a tax upon sales of goods
manufactured in the state while leaving sales of goods manufactured in other
states free from taxation. It was held that the classification could not be
based on any difference in the goods, because there was none, nor on the fact
that they were made in different states, for that bore no just and proper
relation to the classification, but was purely arbitrary; nor on the difference
of residence of the manufacturers, for the same reason. And clearly the view of
the court was that
a like discrimination against the
products of another state would have been open to the same objections.
Let us apply these principles to the
statute creating the exemption now in question. Upon the face of the statute,
the classification is based upon a difference having no substantial or fair
relation to the object of the act, which, so far as this question is concerned,
simply is to secure revenue. The statute itself suggests no other public
purpose which will be served by the exemption. The language creating the
exemption is: "(a) Interest received on account of money loaned within
this state at a rate of interest not exceeding five percent per annum."
The naked and complete test afforded by the statute is that the money shall be
loaned within the state. What is to be done with the money, whether it is to be
invested in the state or elsewhere -- indeed, whether it is to be devoted to
any useful purpose -- are matters having nothing to do with the imposition of
the tax or the exemption therefrom. If the statute had provided that interest
on account of money so loaned when invested in property having a situs within
the state shall be free from the tax, a different question as to classification
might be presented. In that event, the actual wealth of the state would be
increased, and, in addition and as a consequence, opportunity to obtain
additional revenue through taxation would result. But this exempting provision,
we repeat, contains neither this qualification nor any other. Its terms are
positive and all-inclusive, and will be fully satisfied whenever it appears
that money has been loaned within the state. The Supreme Court of Vermont has
not read into the statute a qualification that loans shall be deemed to be made
within the state only if their proceeds be invested in the state. Obviously,
this Court cannot so read the provision, for that would be to amend, and not to
construe, it. We are unable to find in the provision any public purpose which
can be subserved by
making the taxation of income from
loans dependent merely upon the adventitious circumstance as to the place of
making the loan.
It is suggested, however, that,
aside from anything in the statute, money loaned within the state generally
will be invested therein. But there is nothing in the record to indicate that
this will result, and, for aught this Court can know judicially, there is no
warrant for saying either that it will or will not result. All we can say is
that money so loaned may be invested in Vermont, or may be invested in some
other state, for example, in property having a situs in New York, or may not be
invested at all. If there be circumstances which will justify the exemption of
any income derived from money loaned within the state while taxing the income
from that loaned outside, it is for the state Legislature to point them out and
limit the exemption accordingly. To import any such circumstances into the
present situation is to indulge in pure speculation. Compare Travis v. Yale
& Towne Mfg. Co., 252 U. S. 60, 252 U. S. 81.
To assume that some unnamed public
interest exists which will sustain the discrimination does not help the matter
here; because the assumption can rest only upon surmise, with nothing concrete
or explicit appearing to support it or to indicate a legislative intent to
relate the exemption to any public purpose or to anything else beyond the mere
fact that the favored loans are effected within the state. In principle, the
classification is quite as arbitrary as that dealt with by this Court in Louisville
Gas & Electric Co. v. Coleman, supra, pp. 277 U. S. 38-39.
If the exemption had been made to depend upon the time when the loan was made,
instead of upon the locality where it was made, as, for example, a tax upon all
income from loans except those made on Mondays, the arbitrary and capricious
nature of the classification would scarcely be doubted, although a minute
inspection of the field of
possibilities might persuade an
anxious mind, bent on sustaining the tax at all events, to the view that in
some far-fetched way a loan made on Monday would further some public purpose,
other than that of revenue, which a loan made on another day of the week would
not.
It is said that an exemption which
may have for its aim the advancement of local interests can hardly be condemned
under a Constitution which for a century has known a protective tariff.
Considering the suggestion categorically, a pertinent answer to it is that,
while the general government may, for the benefit of national interests, exact impost duties which discriminate against foreign interests,
one state, even for the advancement of its own interests, is not permitted to
exact taxes discriminating against goods brought from a sister state. See,
for example, Welton v. Missouri, 91 U. S. 275; cf.
Burnet v. Brooks, 288 U. S. 378, 288 U. S. 401,
et seq.
But, assuming that the State of
Vermont is benefited by the exemption, the complete answer is that appellant is
a citizen of the United States; and, quite apart from the equal protection of
the laws clause, the suggestion is effectively met and overcome, and the
fallacy of other attempts to sustain the validity of the exemption here under
review clearly demonstrated, by reference to the privileges and immunities
clause of the Fourteenth Amendment. "For all the great purposes for which
the Federal government was formed," this Court has said, "we are one
people, with one common country." Crandall v. Nevada,
6 Wall. 35, 73
U. S. 48-49. As citizens of the United States we are members of a single
great community consisting of all the states united, and not of distinct
communities consisting of the states severally. No citizen of the United States
is an alien in any state of the Union, and the very status of national
citizenship connotes equality of rights and privileges, so far as they flow
from such citizenship, everywhere within the limits of the
United States. This fact is obvious
and vital, and no elaboration is required to establish it.
Section 2 of Article IV of the
Constitution contains the provision, "The Citizens of each State shall be
entitled to all Privileges and Immunities of Citizens in the several
States." The Fourteenth Amendment, § 1, provides:
"All persons born or
naturalized in the United States, and subject to the jurisdiction thereof, are
citizens of the United States and of the State wherein they reside. No State
shall make or enforce any law which shall abridge the privileges or immunities
of citizens of the United States."
Thus, the dual character of our
citizenship is made plainly apparent. That is to say a citizen of the United
States is ipso facto and at the same time a citizen of the state in
which he resides. And, while the Fourteenth Amendment does not create a
national citizenship, it has the effect of making that citizenship
"paramount and dominant" instead of "derivative and dependent"
upon state citizenship. [Footnote 3] "In reviewing the subject," Chief
Justice White said, in the Selective Draft Law Cases, 245 U. S. 366, 245 U. S. 377,
245 U. S.
388-389:
"We have hitherto considered it
as it has been argued from the point of view of the Constitution as it stood
prior to the adoption of the Fourteenth Amendment. But, to avoid all
misapprehension, we briefly direct attention to that [the fourteenth] amendment
for the purpose of pointing out, as has been frequently done in the past, how
completely it broadened the national scope of the government under the
Constitution by causing citizenship of the United States to be paramount and
dominant, instead of being subordinate
and derivative, and therefore,
operating as it does upon all the powers conferred by the Constitution, leaves
no possible support for the contentions made if their want of merit was
otherwise not to clearly made manifest."
The result is that whatever latitude
may be thought to exist in respect of state power under the Fourth Article, a
state cannot, under the Fourteenth Amendment, abridge the privileges of a
citizen of the United States, albeit he is at the same time a resident of the
state which undertakes to do so. This is pointed out by Mr. Justice Bradley in
the Slaughter House Case, 1 Woods, 21, 28:
"The 'privileges and immunities'
secured by the original Constitution were only such as each state gave to its
own citizens. Each was prohibited from discriminating in favor of its own
citizens, and against the citizens of other states."
"But the fourteenth amendment
prohibits any state from abridging the privileges or immunities of the citizens
of the United States, whether its own citizens or any others. It not merely
requires equality of privileges; but it demands that the privileges and
immunities of all citizens shall be absolutely unabridged, unimpaired."
The same distinction is made by this
Court in Bradwell
v. Illinois, 16 Wall. 130, 83 U. S. 138,
where, speaking of the privileges and immunities provision of the Fourth
Article, it was said:
"The protection designed by
that clause, as has been repeatedly held, has no application to a citizen of
the State whose laws are complained of. If the plaintiff was a citizen of the
Illinois, that provision of the Constitution gave her no protection against its
courts or its legislation. [Footnote 4] "
But the Court added that with
respect to the Fourteenth Amendment
"there are certain privileges
and immunities which belong to a citizen of the United States as such;
otherwise, it would be nonsense for the fourteenth amendment to prohibit a
State from abridging them. . . . We agree . . . that
there are privileges and immunities belonging to citizens of the United States,
in that relation and character, and that it is these and these alone which a
State is forbidden to abridge."
The governments of the United States
and of each of the several states are distinct from one another. The rights of
a citizen under one may be quite different from those which he has under the
other. To each he owes an allegiance; and, in turn, he is entitled to the
protection of each in respect of such rights as fall within its jurisdiction. United
States v. Cruikshank, 92 U. S. 542, 92 U. S. 549.
Under the Fourteenth Amendment
therefore the simple inquiry is whether the privilege claimed is one which
arises in virtue of national citizenship. If the privilege be of that
character, no state can abridge it. No attempt has been made by the courts
comprehensively to define or enumerate the privileges and immunities which the
Fourteenth Amendment thus protects. [Footnote 5] Among those privileges, however, undoubtedly is the
right to pass freely from one state to another. Crandall v. Nevada, supra;
Williams v. Fears, 179 U. S. 270, 179 U. S. 274. And that privilege, obviously, is as immune from
abridgment by the state from which the citizen departs as it is from abridgment
by the state which he seeks to enter. This results from the essential character
of national citizenship. Cf. In re Kemmler, 136 U. S. 436, 136 U. S. 448; Duncan v. Missouri, 152 U. S. 377, 152 U. S. 382; In re Quarles and Butler,
158 U. S. 532, 158 U. S. 536; United States v. Cruikshank, supra, p. 92 U. S. 552.
In the Crandall
case, while the Court at least gravely doubted whether a capitation tax imposed
by the State of Nevada upon persons leaving the state by railroad or stagecoach
violated the commerce clause (p. 73 U. S. 43), it was distinctly held that the tax did affect the rights
of citizens under the federal government so as to invalidate the act imposing
the tax. The doubt as to the first point has been resolved in later cases
against the power of the state (Helson and
Randolph v. Kentucky, 279 U. S. 245, 279 U. S. 251); but the ruling on the second point has never been
doubted, and was definitely approved in the Slaughter House Cases, 16 Wall. 36, 83 U. S. 79, and the right described in the Crandall case placed
among the partially enumerated privileges and immunities "which owe their
existence to the federal government, its national character, its Constitution,
or its laws." The opinions in both cases were delivered by the same
eminent Justice, and it is not without significance that, while the first
opinion was delivered before the adoption of the Fourteenth Amendment, the
second one was delivered afterwards and with direct reference to the privileges
and immunities clause of that amendment. The fact that we have since decided,
and should now hold, that the Nevada act was in violation of the commerce
clause in no way detracts from the view that it also violates the privileges
and immunities clause, but simply demonstrates that the same act of state
legislation may contravene more than one provision of the federal Constitution.
The right of a
citizen of the United States to engage in business, to transact any lawful
business, or to make a lawful loan of money in any state other than that in
which the citizen resides is a privilege equally attributable to his national
citizenship. A state law prohibiting the exercise of any of these rights in
another state would
therefore be invalid under the Fourteenth
Amendment. The imposition by one state of a discriminating tax upon a citizen
resident in another state for trading in the territory of the former has been
held invalid. Ward v. Maryland, 12 Wall. 418, 79 U. S. 430. And, of course, conversely, a tax of that description is
likewise void if imposed by one state upon a resident citizen of the United
States for trading or doing business in the territory of another state. And
such a tax is not justified because the taxing state will thereby help its
domestic business.
The purpose of
the pertinent clause in the Fourth Article was to require each state to accord
equality of treatment to the citizens of other states in respect of the
privileges and immunities of state citizenship. It has always been so
interpreted. One purpose and effect of the privileges and immunities clause of
the Fourteenth Amendment, read in the light of this interpretation, was to
bridge the gap left by that article so as also to safeguard citizens of the United
States against any legislation of their own states having the effect of denying
equality of treatment in respect of the exercise of their privileges of
national citizenship in other states. A provision which thus extended and
completed the shield of national protection between the citizen and hostile and
discriminating state legislation cannot be lightly dismissed as a mere
duplication, or of subordinate or no value, or as an almost forgotten clause of
the Constitution.
Reference has
been made to numerous cases in which this Court has rejected or ignored
specific claims under the privileges and immunities clause; but, since none of
them relates to state legislation even remotely resembling the Vermont law here
challenged, their collection and citation is without useful result unless, as
it seems to be thought, these numerous unsuccessful efforts to give the clause
applications which fall outside its meaning show or tend to show that the
clause itself has become a dead
letter. Such a conclusion
is, of course, inadmissible; for, as we have already said, referring to the Bradwell
case, there are privileges and immunities which belong to a citizen of the
United States as such; otherwise it would be nonsense to prohibit a state from
abridging them. Some of these privileges and immunities we have already pointed
out; others are enumerated in the cases cited under note 5
To these illustrations we may add
another, which here is peculiarly pertinent. The business of insurance has
grown to vast proportions. Insurance companies issuing policies are found in
every state, and the activities of the larger companies overflow state lines
and extend into every part of the country. But insurance is not commerce, and
the right of a citizen to take out a policy in one state, insuring property in
another where he resides, cannot be protected under the commerce clause.
National protection, when appropriate, must be found in the Fourteenth
Amendment. It well cannot be doubted that a citizen of the United States,
residing and having property in Vermont, exercises a privilege of national
citizenship when he negotiates and takes out in another state a policy insuring
that property, or takes out in another state a policy insuring his life. There
may be very cogent reasons, resting in the strength of the company, terms of
the policy, and otherwise, making it desirable that he should do so. And it
well cannot be doubted that legislation of one state denying the privilege or
taxing the transaction when it occurs in another state, while leaving the
transaction wholly free from taxation when it takes place in the former state,
would abridge that privilege of citizenship. It would be no answer to say that
thereby the former state was building up her local insurance companies and
adding to the wealth of the state. Nor is it any answer to say that the citizen
may resort to other clauses of the Fourteenth Amendment which will afford
protection. The right of a citizen
of the United States resident in one state to contract in another may be a
liberty safeguarded by the due process of law clause, and at the same time
nonetheless a privilege protected by the privileges and immunities clause of
the Fourteenth Amendment. In such case, he may invoke either or both. This
seems to be recognized in Allgeyer v.
Louisiana, 165
U. S. 578, 165 U. S. 589-592,
where the Court evidently thought that, under circumstances not unlike those
just suggested, the words "liberty" and "privilege" were
interchangeable terms.
It follows from what has been said
that, when a citizen of the United States residing in Vermont goes into New
Hampshire, he does not enter foreign territory, but passes from one field into
another field of the same national domain. When he trades, buys, or sells,
contracts, or negotiates across the state line, when he loans money, or takes
out insurance in New Hampshire, whether, in doing so he remains in Vermont or
not, he exercises rights of national citizenship which the law of neither state
can abridge without coming into conflict with the supreme authority of the
federal Constitution.
The statute, as here applied, says
that, if a citizen resident in Vermont loan his money at 5 percent or less in
another state, he must pay a tax upon the income; but if he loan
money in Vermont at the same rate, no tax whatever shall be imposed. The power
to tax income here asserted by Vermont is, in the final analysis, the power to
tax so heavily as to preclude loans outside the state altogether. It reasonably
is not open to doubt that the discriminatory tax here imposed abridges the
privilege of a citizen of the United States to loan his money and make
contracts with respect thereto in any part of the United States.
The tax on dividends, already
discussed and upheld, rests in a different situation. Although dividends from
outside investments are taxed, and those from state investments
in terms are exempt, they are, as
already appears, in substance and effect treated alike, the one by a tax
falling directly upon the income of the individual stockholders and the other
falling indirectly but no less definitely upon that income in the form of a tax
which is first imposed upon the corporation as a franchise tax measured by
income, but the burden of which ultimately is borne by the stockholders. The
effect is the same as though the tax were imposed generally upon corporate
dividends without exception or discrimination. Travelers' Ins. Co. v.
Connecticut, 185
U. S. 364, 185 U. S. 369
et seq. The same would be true of the tax on income from loans if it had
been imposed in respect of all loans wherever made, or if there had been some
form of equalizing tax which would have compensated for the burden cast upon
loans made in other states. But such is not the case. Income from loans made
outside the state is taxed directly, while income from loans made within the
state is not taxed directly or in any indirect way so as to equalize the
burden. Woodruff
v. Parham, 8 Wall. 123, 75 U. S. 140,
dealt with a sales tax imposed upon all sales, whether made by a citizen of the
state where the tax was imposed or a citizen of another state, and whether the
goods sold were the product of the state enacting the law or of some other
state. This Court upheld the tax upon the ground that it did not discriminate
against the products of other state or affect the privileges or immunities of
their citizens, but the Court clearly stated that, if it had done so, it would
be an infringement of the provisions of the Constitution relating to those
subjects. The principle of that case is applicable here, and has the effect of
sustaining the tax in respect of loans. Compare Travis v. Yale & Towne
Mfg. Co., supra.
Third. The statute, so far as it applies to appellant, provides
that, if the income taxed be derived wholly from ownership of or interest in
interest-bearing securities, there shall be allowed an exemption of $800. If
the income
be derived from other enumerated
sources, an exemption is allowed of $2,000 against the "aggregate net
income."
It is manifest that, if the
legislation had provided that, where the taxpayer shall have income from both
of these general sources, he shall not be entitled to both exemptions, the
provision would have been open to no constitutional objection. Such legislation
might properly permit him, in that contingency, to select which of the
exemptions he will take, or, on the other hand, might properly specify which of
the two exemptions shall be accorded him. In effect, though not in terms, it is
the latter alternative which the statute adopts. In terms, the statute provides
that, if the taxpayer receive any income other than
that derived from interest-bearing securities, the personal exemption
applicable to the latter class of income shall not be allowed. But the right to
the $2,000 exemption allowed in respect of class A income remains unaffected.
The taxpayer who receives both classes of income, while thus compelled to forego
the smaller exemption, is accorded the larger one, and it is impossible
reasonably to find in this situation anything arbitrary or capricious. It is
true that, during the taxable year in question, appellant had no net income
because his gross income derived from salaries, etc., amounting to about
$70,000, was entirely absorbed by allowable deductions; but this was an
incident of the particular year in question, and might never happen again. He
failed to obtain the advantage of the exemption not because of any hostile
statutory intent or hostile enforcement of the tax, but because of the
collateral circumstance, peculiar, perhaps, to him alone and to the taxable
year in question, that his entire gross income was absorbed by deductions,
allowed by the statute as a matter of grace as is the exemption itself, so that
nothing remained from which the amount of the exemption or any part of it could
be subtracted.
The question of equal protection
must be decided in respect of the general classification, rather than by the
chance incidence of the tax in particular instances or with respect to
particular taxpayers.
"And inequalities that result
not from hostile discrimination, but occasionally and incidentally in the
application of a system that is not arbitrary in its classification, are not
sufficient to defeat the law."
Maxwell v. Bugbee, 250 U. S. 525, 250 U. S. 543.
"The operation of a general
rule will seldom be the same for everyone. If the accidents of trade lead to
inequality or hardship, the consequences must be accepted as inherent in
government by law, instead of government by edict."
Fox v. Standard Oil Co., 294 U. S. 87, 294 U. S. 102.
Cf. Packard v. Banton, 264 U. S. 140, 264 U. S. 145;
Gant v. Oklahoma City, 289 U. S. 98, 289 U. S. 102;
Storaasli v. Minnesota, 283 U. S. 57, 283 U. S. 62.
The general classification --
namely, that the right to a partial exemption from a tax upon one class of
income will depend upon whether the taxpayer is in receipt of income of another
class with respect to which a different exemption applies -- does not seem to
us to be open to the objection that it is arbitrary or capricious simply
because, like any other general rule of taxation, its administration may
involve incidental instances of inequality.
We conclude that the taxing act is
valid in respect of the first and third points which we have discussed, but
invalid in respect of the second.
Reversed and remanded for further
proceedings not inconsistent with the foregoing opinion.
"Chapter 39"
"Sec. 873. Rate; Exemptions;
Amount. -- A tax is hereby imposed upon every resident of the state, which
tax shall be levied, collected and paid annually, with respect to;"
"I. His net income as herein
defined, after deducting the exemptions provided in this chapter at the rate of
two percent; and"
"II. To the income received by
him on account of the ownership or use of or interest in any stock, bond, note,
agreement or other interest bearing security at the rate of four percent; but
the words 'income received by him on account of the ownership or use of or
interest in any stock, bond, note, agreement or other interest bearing
security' shall not include the following items, which shall be exempt from taxation
under this chapter:"
"(a) Interest received on
account of money loaned within this state at a rate of interest not exceeding
five percent per annum evidenced by a promissory note, mortgage on real estate
or a bond for a deed, including credits representing the purchase price, or any
part thereof, of real estate within this state, sold or transferred, evidenced
by a promissory note, mortgage or bond for a deed bearing a rate of interest
not exceeding five percent per annum."
"* * * *"
"(e) Dividends on stocks of
those corporations which are subject to taxation under chapter 40, but if a
corporate franchise tax is not measured by the entire net income of such
corporation, then a portion of the dividends paid by such corporation shall be
taxable under this chapter, and such taxable portion shall be that proportion
of the dividend as the income earned by the corporation from business done
without the state of Vermont bears to the entire income of the
corporation;"
"(f). In case the income taxed
in this section is derived wholly from ownership of or interest in any stock,
bond, note or other interest bearing security, there
shall be deducted from such income the following exemptions:"
"1. In case of a single
individual a personal exemption of four hundred dollars;"
"2. In the case of the head of
a family, or a married individual living with husband or wife, a personal
exemption of eight hundred dollars; but if either a husband or wife shall
receive any income other than that derived from the ownership of or interest in
any stock, bond, note or other interest bearing security, then such personal
exemption shall not be allowed. A husband and wife, living together, shall
receive but one personal exemption of eight hundred dollars against their
aggregate net income, and in case they make separate returns, the personal
exemption of eight hundred dollars may be taken by either or divided between
them. . . ."
"Chapter 40."
"Sec. 887. Rate. -- For
the privilege of exercising its franchise in this state in a corporate or
organized capacity, every domestic corporation, and for the privilege of doing
business in this state, every foreign corporation, liable to tax under this
chapter shall annually pay to this state a franchise tax to be measured by its
net income to be computed in the manner hereinafter provided at the rate of two
percent upon the basis of its net income as herein computed, for the next
preceding fiscal or calendar year."
"Sec. 888. Basis on business
within the state. If the entire business of the corporation be transacted
within the state, the tax imposed shall be based upon the entire net income of
such corporation for such fiscal or calendar year. If the entire business of
the corporation be not transacted within the state and its gross income derived
from business done both within and without the state, the determination of its
net income shall be based upon the business done within the state and for the
purpose of computing such net income the commissioner shall adopt such
recommendations and regulations for the allocation of net income as will fairly
and justly reflect the net income of that portion of the business done within
the state."
The further point is made that the
discrimination in respect of dividends and interest upon loans is a regulation
of interstate commerce, and therefore void under the commerce clause of the
Federal Constitution. But we mention this latter claim only to reject it as
without merit, since clearly a tax upon income is not an interference with
interstate commerce simply because the income is derived from a source within
another state; and, moreover, if there be any tendency to interfere with such
commerce, it is purely collateral and incidental. Nathan v. Louisiana,
8 How. 73, 49
U. S. 82; Williams v. Fears, 179 U. S. 270, 179 U. S. 276;
Diamond Glue Co. v. United States Glue Co., 187 U. S. 611, 187 U. S. 616;
Anderson v. United States, 171 U. S. 604, 171 U. S. 616;
Engel v. O'Malley, 219 U. S. 128, 219 U. S. 138;
Moore v. N.Y. Cotton Exchange, 270 U. S. 593, 270 U. S. 604.
In United States v. Hall,
Case No. 15,282, Fed.Cas. 79, 81, Judge Woods said:
"By the original Constitution,
citizenship in the United States was a consequence of citizenship in a state.
By this clause, this order of things is reversed, . . . and citizenship in a
state is a result of citizenship in the United States."
This does not mean that a state has
unlimited power by law to abridge the privileges of its own citizens. It only
means that in such case we must look elsewhere than to the language of the
privileges and immunities clause of the Fourth Article of the Constitution for
the constitutional infirmity of the statute, if it have
any.
For examples, however, see
Corfield v. Coryell, 4 Wash.C.C. 371, 380, 381; Slaughter House Cases,
16 Wall. 36, 83
U. S. 79-80; Twining v. New Jersey, 211 U. S. 78, 211 U. S. 97;
Ward v.
Maryland, 12 Wall. 418, 79 U. S. 430;
Blake v. McClung, 172 U. S. 239, 172 U. S. 248,
172 U. S.
252; United States v. Wheeler, 254 U. S. 281; Paul v. Virginia,
8 Wall. 168, 75
U. S. 180.
MR. JUSTICE STONE, dissenting in
part.
I think that the exemption from the
tax of net income from money loaned within the state at not more than 5
percent, like the exemption of income from dividends of
corporations earned within the
state, does not deny equal protection or infringe any privilege or immunity of
citizens of the United States, and that the judgment should be affirmed in its
entirety. Unless the constitutional validity of the exemptions is to turn upon
the ground that we approve laws enacted to avoid taxing the same economic
interest twice, but disapprove those to encourage residents to invest their
funds at home, it would seem that the considerations which have led to
upholding the one exemption would not admit of condemning the other. See
Southwestern Oil Co. v. Texas, 217 U. S. 114, 217 U. S. 127.
1. It is not denied that the effect
of both exemptions is to place a burden on income derived from sources or
investments made without the state which they do not place on income derived
from like sources or investments made within it. But that affords no ground for
saying that either is invalid. The equal protection clause does not forbid
inequalities in state taxation. A state may select the objects to be taxed, and
selection, which is but the converse of exemption, involves the imposition of a
tax burden on some which is not placed on others. As this Court has repeatedly
held, inequalities resulting from the singling out of one particular class for
taxation or exemption, regardless of the reason for the choice, or even if
there is no discernible reason, are not to be pronounced invalid where there is
no clear indication that the purpose or effect is a hostile or oppressive
discrimination against particular persons or classes. American Sugar
Refining Co. v. Louisiana, 179 U. S. 89; Board
of Education v. Illinois, 203 U. S. 553; Beers
v. Glynn, 211
U. S. 477; Southwestern Oil Co. v. Texas, supra; Quong
Wing v. Kirkendall, 223 U. S. 59; Citizens'
Telephone Co. v. Fuller, 229 U. S. 322; Heisler
v. Thomas Colliery Co., 260 U. S. 245; Lawrence
v. State Tax Comm'n, 286 U. S. 276; Concordia
Fire Insurance Co. v. Illinois, 292 U. S. 535.
The end sought by the classification
is of significance in passing upon the constitutionality of the tax only
insofar as it serves to show that the discrimination is not invidious. If it
appears or may fairly be assumed that it is for the purpose of promoting a
permissible public aim, it cannot be condemned because one class must pay a tax
which another does not. Where the public interest is served, one business may
be left untaxed and another taxed in order to promote the one, American
Sugar Refining Co. v. Louisiana, supra;Heisler v.
Thomas Colliery Co., supra; Aero Mayflower Transit Co. v. Georgia Public
Service Comm'n, 295 U. S. 285,
or to restrict or suppress the other, Maganano
Co. v. Hamilton, 292 U. S. 40; Fox
v. Standard Oil Co., 294 U. S. 87; Quong Wing v. Kirkendall,
supra; Singer Sewing Machine Co. v. Brickell, 233 U. S. 304; Alaska
Fish Co. v. Smith, 255 U. S. 44, 255 U. S. 48.
But it is not necessary to go so far to support the present exemption. There is
no serious contention that its purpose or effect is to suppress the lending of
money without the state or to injure appellant or his fellow residents of
Vermont who may prefer to invest their funds elsewhere. Nor can it be said that
the exemption was not granted in furtherance of a permissible state policy,
which was the legislative objective, rather than an invidious discrimination
against appellant and others similarly situated.
It seems to be conceded that, if the
statute had placed upon the tax gatherers the burden of ascertaining whether
money loaned within the state is invested in property there, and had limited
the exemption to money so loaned and invested, the tax would be sustained
because of the benefit which would result from the increase of wealth in the
state and the enlarged opportunity to obtain additional revenue. The attack is
thus narrowed to the single objection that there are exempted loans, some of
which, although made within the state, are or may be withdrawn and used
elsewhere. It is assumed that money thus loaned
and withdrawn can be of no possible
benefit to the state, and it is declared that, since transactions may occur,
the Court cannot determine whether the exemption will have any beneficent
effect, and that it is therefore invalid.
But there are benefits other than
the increase of its taxable wealth which a state is at liberty to stimulate by
its taxing policy, and exemptions have been sustained on the broader ground
that they foster some form of domestic industry. New York v. Roberts, 171 U. S. 658; Magnano Co. v. Hamilton, supra; Fox v. Standard
Oil Co., supra; Aero Mayflower Transit Co. v. Georgia Public Service Commission,
supra. If Vermont chooses to encourage, by tax exemption, loans at
favorable rates of interest within the state because it believes that local
interests will be benefited, it can hardly be said for that reason to be
contravening a Constitution that has known a protective tariff for more than
100 years. See Alaska Fish Co. v. Smith, supra, 255 U. S. 48;
Rast v. Van Deman
& Lewis Co., 240 U. S. 342, 240 U. S. 347.
It is true that a state may not lay taxes on imports or burden interstate
commerce, Welton v. Missouri, 91 U. S. 275,
but it is too late for this Court to declare that a state may not favor
domestic interests by granting exemptions in the exercise of its taxing power.
It is not for us to say that the
Vermont Legislature was unmindful of these broader advantages, or to declare
that the presence within the state of investment funds offered at 5 percent or
less to borrowers there, including those who are carrying on the business and
industry of the state, is not beneficial; or that, if any loans made within the
state are used elsewhere, they are or ever would be more than negligible in
amount; or, if they were, that they could not have a favorable effect on
interest rates within the state, which is a matter of state concern. When the
Vermont Legislature adopted the present exemption, it had before it the reports
of two committees specially appointed to investigate
the tax system of the state, which
clearly indicate their judgment, based on a study of conditions in the state,
that the existing system was driving investment capital from the state or into
secured and noncommercial loans, and that a tax exemption embracing both
secured and commercial loans would tend to increase the supply of investment capital
for both and to reduce interest rates in the state. [Footnote 2/1] This Court has no basis for saying that
those committees were wrong and no authority to say it. The state supreme court
has stated in the present case that the legislature did have in mind these
broader advantages, for it rested its decision on the ground that the exemption
was made "in the interests of thrift and state development" and
"for the assistance of the agricultural and industrial interests of the
state." 107 Vt. 28, 175 A, 352, 357.
If, in the face of so much which is
persuasive of the legitimate purpose and effect of this legislation, we are to
declare that we cannot say whether the benefits intended either will or will
not result, it does not follow that the Vermont Legislature is similarly
uninformed. We must assume that it is not, unless we are to discard the
salutary principle of decision that, out of a decent respect to an independent
branch of the government, legislative acts must be taken to be based on facts
which support their constitutional validity unless the contrary reasonably
appears.
This Court, it is true, has held
discriminations invalid where, upon the facts disclosed by the record or within
the range of judicial notice, it has felt able to say that there could be no
state of facts which could rationally support them. Royster Guano Co. v.
Virginia, 253
U. S. 412; Heiner v. Donnan, 285 U. S. 312; Louisville
Gas & Electric Co. v. Coleman, 277 U. S. 32; Liggett
Co. v. Lee, 288
U. S. 517. But in no case has it rendered such a judgment where it has
declared that it is unable to say that consequences which would justify the
discrimination will not result. Erb v. Morasch, 177 U. S. 584, 177 U. S. 586;
Middleton v. Texas Power & Light Co., 249 U. S. 152, 249 U. S. 158;
Stebbins v. Riley, 268 U. S. 137, 268 U. S. 143;
Swiss Oil Corp. v. Shanks, 273 U. S. 407, 273 U. S. 413-414;
Fort Smith Light & Traction Co. v. Board of Improvement Paving Dist. No.
16, 274 U.
S. 387, 274
U. S. 391-392; Clarke v. Deckebach, 274 U. S. 392; Silver
v. Silver, 280
U. S. 117, 280 U. S. 123;
O'Gorman & Young, Inc. v. Hartford Fire Ins. Co., 282 U. S. 251, 282 U. S. 257-258;
State Board of Tax Commissioners v. Jackson, 283 U. S. 527, 283 U. S. 537-541;
Hardware Dealers Mut. Fire Insurance Co. v. Glidden Co., 284 U. S. 151, 284 U. S. 158;
Boston & Maine R. v. Armburg, 285 U. S. 234, 285 U. S. 240; Lawrence
v. State Tax Commission, supra, 286 U. S. 283;
Concordia Fire Insurance Co. v. Illinois, supra, 292 U. S. 547-548;
Metropolitan Casualty Insurance Co. v. Brownell, 292 U.S. 620; Fox v.
Standard Oil Co., supra. Unless, as we profess not to do, Standard Oil
Co. v. City of Marysville, 279 U. S. 582,
we are to sit as a superlegislature, or as triers of
the facts on which a Legislature is to say what shall and what shall not be
taxed, we are not free to say that the exemption will not induce residents to
offer to lend their funds within the state and at lower interest rates than
they otherwise would, or that opportunities thus afforded will not be availed
of by borrowers requiring funds for carrying on the commerce and industry of
the state.
Even if we are to assume, in the
absence of any actual knowledge, that money loaned in the state at favorable
rates would not benefit it if used
elsewhere, and, further, that in fact some money is so loaned and used, there
is no discernible reason why those circumstances should be deemed to invalidate
the tax, and none is stated by the Court. It is irrelevant that the state,
which has selected domestic loans for exemption in furtherance of a state
policy, has not excluded from the exemption every transaction which conceivably
might not advance its purpose. Whether the legislative object is completely
achieved is of no concern to this Court, once it appears that the exemption is
made for a permissible end and bears some reasonable relation to that end.
Purpose or motive of the selection of the objects of taxation and exemption is
material only so far as it is needful to ascertain whether the discrimination
is invidious. If the choice is not condemned for that reason, it has never been
held that an exemption must fail because it may benefit some who do not advance
the legislative purpose. A classification for a permissible end is not to be
condemned because it operates to prohibit transactions in themselves harmless,
or fails to reach others which are harmful. Powell v. Pennsylvania, 127 U. S. 678; Purity
Extract & Tonic Co. v. Lynch, 226 U. S. 192; Hebe
Co. v. Shaw, 248
U. S. 297; Jacob Ruppert v. Caffey, 251 U. S. 264; Miller
v. Wilson, 236
U. S. 373; Hawley v. Walker, 232 U.S. 718.
All taxes must of necessity be
levied by general rules capable of practical administration. In drawing the
line between the taxed and the untaxed, the equal protection clause does not
command the impossible or the impractical. Unless the line which the state
draws is so wide of the mark as palpably to have no reasonable relation to the
legitimate end, it is not for the judicial power to reject it and say that
another must be substituted. Citizens' Telephone Co. v. Fuller, supra, 229 U. S. 329;
Miller v. Wilson, 236 U. S. 373, 236 U. S. 384;
Clark v. Titusville, 184 U. S. 329, 184 U. S. 331;
Metropolis
Theater Co. v. Chicago, 228 U.S.
61, 228 U. S. 69-70;
see also Salomon v. State Tax Commission, 278 U. S. 484; McCray
v. United States, 195 U. S. 27; Quong Wing v. Kirkendall,
supra; Bell's Gap R. Co. v. Pennsylvania, 134 U. S. 232, 134 U. S. 237.
As the purpose of the exemption
appears to be to encourage the lending of money within Vermont by its residents
at low rates of interest, and as it appears reasonably calculated to have that
effect, and as we cannot say that such loans will not be of benefit to the
state by tending to establish the interest rate at 5 percent or less, and by
stimulating loans to borrowers for the purpose of carrying on business and
industry within the state, the conclusion seems inescapable that the equal
protection clause does not forbid it.
2. Feeble indeed is an attack on a
statute as denying equal protection which can gain any support from the almost
forgotten privileges and immunities clause of the Fourteenth Amendment. The
notion that that clause could have application to any but the privileges and
immunities peculiar to citizenship of the United States, as distinguished from
those of citizens of states, has long since been rejected. Slaughter House Cases,
16 Wall. 36. It created no new privileges and immunities of United States citizenship,
Bartemeyer v. Iowa, 18 Wall. 129, 85 U. S. 133,
and as they are derived exclusively from the Constitution and laws enacted
under it, the states were powerless to abridge them before the adoption of the
Fourteenth Amendment as well as after. See Crandall v. Nevada,
6 Wall. 35.
Before the amendment, the privilege
of passing from state to state for the purpose of approaching the seat of the
national government, of transacting business with it, and of gaining access to
its courts, its public offices, and its ports was declared in Crandall v.
Nevada, supra, 73 U. S. 44,
to be a right of national citizenship which could be exercised independently of
the will of the state. Upon this
ground was placed the decision in
that case that a state capitation tax on passengers transported out of the
state by railroad or stagecoach infringed the Constitution. No one could doubt
that, if the decision had been made at any time after Railroad Co. v.
Maryland, 21 Wall. 456, 88 U. S. 472,
and until the present moment, it would have been rested on the commerce clause.
This Court has many times pointed out that movements of persons across state
boundaries are a part of interstate commerce, subject to the regulation and
entitled to the protection of the national government under the commerce
clause. Caminetti v. United States, 242 U. S. 470; Hoke
v. United States, 227 U. S. 308; Mayor
of Vidalia v. McNeely, 274 U. S. 676; Gloucester
Ferry Co. v. Pennsylvania, 114 U. S. 196; cf.
48 U. S.
7 How. 283. And it has specifically pointed out that Crandall v. Nevada,
supra, is overruled so far as it referred the protection of such commerce
to the privileges and immunities clause, rather than to the commerce clause. Helson and Randolph v. Kentucky, 279 U. S. 245, 279 U. S. 251.
The privileges and immunities clause
has consistently been construed as protecting only
interests, growing out of the relationship between the citizen and the national
government, created by the Constitution and federal laws. In re Kemmler,
136 U. S. 436,
136 U. S.
448; McPherson v. Blacker, 146 U. S. 1, 146 U. S. 38; Giozza v. Tiernan, 148 U. S. 657, 148 U. S. 661;
Duncan v. Missouri, 152 U. S. 377, 152 U. S. 382.
Appeals to this Court to extend the clause beyond these limitations have
uniformly been rejected and even those basic privileges and immunities secured
against federal infringement by the first eight amendments have been held not
to be protected from state action by the privileges and immunities clause. Walker
v. Sauvinet, 92 U. S. 90; Presser
v. Illinois, 116
U. S. 252; O'Neil v. Vermont, 144 U. S. 323; Maxwell
v. Dow, 176
U. S. 581, 176 U. S. 606;
Twining v. New Jersey, 211 U. S. 78; cf.
Hurtado v. California, 110 U. S. 516; West v. Louisiana,
194 U. S. 258.
The protection and control of intercourse between the states, not carried on in
pursuance of the relationship between the citizen and the national government,
has been left to the interstate commerce clause, to the due process and equal protection
clauses of the Fourteenth Amendment, and to Article IV, § 2, guaranteeing to
the citizens of each state the privileges and immunities of citizens in the
several states. See Williams v. Fears, 179 U. S. 270.
In no case since the adoption of the Fourteenth Amendment has the privileges
and immunities clause been held to afford any protection to movements of
persons across state lines or other form of interstate transaction.
The reason for this reluctance to
enlarge the scope of the clause has been well understood since the decision of
the Slaughter House Cases, supra. If its restraint upon state action
were extended more than is needful to protect relationships between the citizen
and the national government, and it did more than duplicate the protection of
liberty and property secured to persons and citizens by the other provisions of
the Constitution, it would enlarge judicial control of state action and
multiply restrictions upon it to an extent difficult to define, but sufficient
to cause serious apprehension for the rightful independence of local
government. That was the issue fought out in the Slaughter House Cases,
supra, with the decision against the enlargement. Since the adoption of the
Fourteenth Amendment at least forty-four cases [Footnote 2/2] have been
brought to this Court in which state
statutes have been assailed as infringements of the privileges and immunities
clause. Until today, none has held that state legislation infringed that
clause.
If its sweep were now to be
broadened to include protection of every transaction across state lines,
regardless of its connection with any relationship between the citizen and the
national government, a step would be taken the gravity of which might well give
us concern. But it is necessary to go much further before the present tax can
be condemned. If protection of the freedom of the citizen to pass from state to
state were the object of our solicitude, that privilege is adequately protected
by the commerce clause, even though the purpose of his going be to effect
insurance or transact any other kind of business which is, in itself, not
commerce. But protection of the citizen's freedom of movement, whether by the
privileges and immunities clause or by the commerce clause, will afford
appellant no relief from the present tax. The record does not show that he was
ever outside the State of Vermont, and, for aught that appears, he acquired his
extra-state investments, which are in the form of negotiable
corporate securities, by gift or
purchase in Vermont. Nor does it appear that the physical securities or
payments of income of which appellant has had the benefit have crossed state
lines. He can be saved from the tax only by the extension of the immunity to
his income merely because the property from which it has been derived, or the
corporation paying it, is located in another state.
Such is the contention now made;
that the privilege of acquiring, owning, and receiving income from investments
without the state is a privilege of federal citizenship. And the suggestion is
that the privilege is infringed by taxing this income just as the commerce
clause is infringed by state taxation burdening the privilege of carrying on
commerce across state lines. In any case, the privileges and immunities clause is said to be infringed by taxing this income at a different
rate than income from investments made within the state.
The novel application thus given to
the clause, and the arguments used to support it, leave one in doubt whether it
is thought to preclude all differences of taxation of the two classes of
income, or only to forbid such inequality as is in some sense arbitrary and
unreasonable. If the former, the clause becomes an inexhaustible source of
immunities, incalculable in their benefit to taxpayers and in their harm to
local government, by imposing on the states the heavy burden of an exact
equality of taxation wherever transactions across state lines may be involved.
If the latter, it would seem to add nothing to the guarantee of the equal
protection clause, which extends to all "persons," including citizens
of the United States. In that case, discourse upon the privileges and
immunities clause would appear to be a gratuitous labor of supererogation.
If the privilege of making
investments without the state is one protected by the privileges and immunities
clause
and a tax upon the income derived
from them is analogous to a tax upon the privilege of carrying on interstate
commerce, we must not only accept the view that the privilege is infringed by
the present tax, but it would follow that any taxation of the income is
forbidden. The answer is, of course, that a state tax on net income derived
from interstate commerce has never been regarded as a burden on commerce or as
an infringement of the commerce clause. See United States Glue Co. v. Oak
Creek, 247
U. S. 321; Shaffer v. Carter, 252 U. S. 37; cf.
Peck & Co. v. Lowe, 247 U. S. 165; Wagner
v. Covington, 251
U. S. 95. Far less could it be thought that a tax on property, or income
from it, is an interference with commerce because the property had at some time
been, or might some time become, the subject of such
commerce. Cf. Heisler v. Thomas Colliery Co., supra. In applying the
privileges and immunities clause, as now interpreted, no ground is suggested,
or well could be, for regarding a tax on income from investments without the
state as infringing the privilege of carrying on interstate transactions, any
more than a tax on net income derived from interstate commerce or from property
which had at some time moved in interstate commerce infringes the commerce
clause.
The contention that a state tax
indirectly affecting transactions carried on across state lines, not forbidden
by the commerce clause or by Art. IV, § 2, can be condemned under the
privileges and immunities clause, was definitely rejected by this Court in Williams
v. Fears, supra. There, a state occupation tax upon those engaged in hiring
laborers for employment outside the state was held not to infringe the
privileges and immunities clause or the equal protection clause.
So far as the objection is addressed
to bare inequality of taxation affecting interstate transactions, if valid, it
must be accepted as compelling equality of taxation by
the state of the citizen's residence
and as well by the state into which the transaction extends. More than this,
since the exercise of the privilege involves both states, it would seem to be
infringed not only by an unequal tax imposed by either, but by any tax imposed
at the normal rate by both.
Starting with the dubious assumption
that the protection of every movement of the citizen interstate, an
acknowledged subject of the commerce clause, is independently a subject of the
privileges and immunities clause, the protection afforded by the latter is
expanded until it affords a refuge to the citizen from taxation which has no
necessary relation to his movements interstate, and is in fact not shown to
impose any restraint upon them. A tax immunity created avowedly for the
protection of the citizen's privilege of movement from state to state is thus
pressed far beyond the requirements of the interest put forward to justify it,
and to a point which has never been thought needful or even desirable for the
protection of the commerce of the nation. It is a transition effected only by
ignoring the decision of this Court in Williams v. Fears, supra.
If mere difference in taxation is
made the test of infringement, the iron rule of equality of taxation which the
equal protection and due process clauses have failed to impose, see Bell's
Gap R. Co. v. Pennsylvania, supra, 134 U. S. 237,
is the first fruit of this expansion of the protection of the privileges and
immunities clause. To gain the benefits of its shelter, the citizen has only to
acquire, by a transaction wholly intrastate, an investment outside his state. I
can find in the language and history of the privileges and immunities clause no
warrant for such a restriction upon local government and policy. Citizens of
the United States are given no privilege not to pay taxes. It would seem that a
subordination of state taxing power to the
interests of the individual, of such
debatable wisdom, could be justified only by a pointed command of the
Constitution of plain import.
If we turn from the reasoning by
which this application of the privileges and immunities clause to state
taxation is supported to the decision now actually made, it seems that the
clause is thought to prohibit only these inequalities in taxation which are
considered to be arbitrary and unreasonable. The exemption of dividends derived
from corporate business carried on within the state, and the taxation of similar
dividends from without the state, is held not to be an infringement of the
clause. Exemption of income from investments in property within the state and
taxation of like income from without the state is thought to be valid. But the
privileges and immunities clause, it is declared, forbids any difference in the
taxation of income from investment made within the state and income from
investment made without, a conclusion which can only be attributed to the
belief that this discrimination, as distinguished from the others, is arbitrary
and unreasonable.
We are thus returned to the point of
beginning, to a discussion of the question whether the exemption in the present
tax is so unreasonable, so without support of a permissible state policy, as to
infringe constitutional limitations. If the exemption does not merit
condemnation as a denial of the equal protection which the Fourteenth Amendment
extends to every person, nothing can be added to the vehemence or effectiveness
of the denunciation by invoking the command of the privileges and immunities
clause.
The judgment should be affirmed.
MR. JUSTICE BRANDEIS and MR. JUSTICE
CARDOZO concur in this opinion.
The committee appointed in 1900 by
the Governor of Vermont to investigate double taxation and to recommend
measures for its relief found that the existing taxing system was driving
capital from the state or into tax exempt savings banks, and suggested an
exemption of loans secured by property returned for taxation in the state.
Double Taxation in Vermont; Report of Special Committee Appointed to Report a
Measure for its Relief to the Legislature of 1900, pp. 4, 15. In 1908, a
similar committee recognized the same evils, but did not favor the exemption of
secured loans alone, because it would increase interest rates on unsecured
loans and cause a dearth of commercial credits. Vermont-Commission on
Taxation-Report 1908, pp. 43 ff.
Slaughter House Cases, 16 Wall. 36; Bradwell v. Illinois,
16 Wall. 130; Bartemeyer v. Iowa, 18 Wall. 129; Minor v. Happersett, 21 Wall. 162; Walker v. Sauvinet, 92 U. S. 90; Kirtland
v. Hotchkiss, 100
U. S. 491; Presser v. Illinois, 116 U. S. 252; Mahon
v. Justice, 127
U. S. 700; In re Kemmler, 136 U. S. 436; Crowley
v. Christensen, 137 U. S. 86; McElvaine v. Brush, 142 U. S. 155; McPherson
v. Blacker, 146
U. S. 1; Giozza v. Tiernan, 148 U. S. 657; Duncan
v. Missouri, 152
U. S. 377; Miller v. Texas, 153 U. S. 535; Ex
parte Lockwood, 154 U. S. 116; Iowa
Central Ry. v. Iowa, 160 U. S. 389; Plessy
v. Ferguson, 163
U. S. 537; Orient Insurance Co. v. Daggs, 172 U. S. 557; Cumming
v. Board of Education, 175 U. S. 528; Maxwell
v. Dow, 176
U. S. 581; Williams v. Fears, 179 U. S. 270; Orr
v. Gilman, 183
U. S. 278; Cox v. Texas, 202 U. S. 446; Board
of Education v. Illinois, 203 U. S. 553; Ballard
v. Hunter, 204
U. S. 241; Western Turf Assn. v. Greenberg, 204 U. S. 359; Halter
v. Nebraska, 205
U. S. 34; Wilmington Star Mining Co. v. Fulton, 205 U. S. 60, 205 U. S. 73;
Twining v. New Jersey, 211 U. S. 78; Western
Union Tel. Co. v. Commercial Milling Co., 218 U. S. 406; Missouri
Pacific Ry. Co. v. Castle, 224 U. S. 541; Graham
v. West Virginia, 224 U. S. 616; Selover, Bates & Co. v. Walsh, 226 U. S. 112; Rosenthal
v. New York, 226
U. S. 260; Waugh v. Board of Trustees, 237 U. S. 589; Porter
v. Wilson, 239
U. S. 170; Crane v. Campbell, 245 U. S. 304; Armour & Co. v. Virginia, 246 U. S. 1; Omaechevarria v. Idaho, 246 U. S. 343; Maxwell
v. Bugbee, 250
U. S. 525; Ownbey v. Morgan, 256 U. S. 94; Prudential
Ins. Co. v. Cheek, 259 U. S. 530; Hamilton
v. Regents, 293
U. S. 245.