By Jackson Brainerd
Monday, April 18, marks the deadline for tax-paying Americans to realize one of life’s two certainties. (Ben Franklin wasn’t entirely accurate on this point. Data suggest people have more success avoiding one than the other.)
Taxpayers get a brief three-day respite from the normal April 15 deadline this year because federal workers, including IRS employees, will be observing Emancipation Day, a legal holiday in D.C., on Friday.
Tax Day generally pertains to the personal income tax, which has had an uncertain history in America.
In 1861, it made an initial, ephemeral appearance at the federal level as a flat tax with a high personal exemption to ensure that the wealthy did their part to fund Civil War expenses and post-war debt. It was repealed 11 years later because administration was costly and rates and exemptions had been respectively lowered and increased to such an extent that it was longer revenue-efficient. Congress tried to reinstitute income taxation again in 1894, when it passed another flat income tax at a 2 percent rate.
Perhaps without the urgency of war to strengthen its case, the effort was ruled an unconstitutional direct tax, which was barred by Article 1, Section 2, Clause 3 of the Constitution. This decision was eventually rendered null after Congress passed the 16th Amendment in 1913, which provided a constitutional basis for income taxation.
Before the income tax was implemented, the primary revenue sources for the federal government were taxes on imports and exports and excise taxes, while states relied on property taxes. Emergencies and times of economic hardship paved the way for the income tax’s primary role in public finance.
It wasn’t until World War I that America settled on the income tax as a primary revenue-raiser, and it became even more responsible for financing government operations during World War II. Indeed, studies have suggested that major state tax reform efforts also have generally been spurred by fiscal crises, as well as political zeal following elections and domino-effects resulting from state tendencies to copy each other.
Wisconsin became the first state to adopt a successful income tax in 1911, beating the federal government to the punch. Most states turned to income taxes during the Great Depression years. (The Tax Foundation has a map showing the year in which the income tax was adopted by each state.)
While rates have changed significantly, federal reliance on the personal income tax has been relatively constant over time. Since 1944, it has fluctuated between 39.9 percent (1950) and 49.9 percent (2001) of total federal receipts. Today, about 47 percent of all federal revenue comes from individual income taxes, 33 percent comes from the payroll tax, 11 comes from the corporate income tax, and excise, estate and other taxes make up another 9 percent.
The historical trend in the states is one of gradually increasing reliance. In 1950, the income tax accounted for 9.3 percent of total revenue, and gradually increased until it overtook the sales tax (which also rose to prominence during the Great Depression) as the primary state government funding mechanism.
The income tax accounted for about 12.3 percent of state revenues by 1960, 19.2 percent in 1970, 27.0 percent in 1980, 32.0 percent in 1990, was 35.8 percent in 2014. Some of this growth in earlier decades was attributable to a slew of states adopting the tax in the 1960s and 1970s, not just base-broadening and rate-raising measures.
Despite the differences in their development, federal and state income taxes have a symbiotic relationship. Forty states and D.C. conform to the federal income tax, which means they incorporate federal exclusions, deductions, and credits into their tax own codes. States first began conforming their income tax to the federal code in earnest during the late 1950s and ’60s as a way to make life easier for their citizens.
For taxpayers, conformity means you only need to copy the information from your federal return onto your state and local return rather than starting a whole new return with different instructions. For states, there are potential drawbacks to conformity. Most states use federal adjusted gross income as the starting point for tax calculations, which can negatively affect revenues. (E.g., if a dollar is not taxed at the federal level, states will miss it as well.)
However, these issues often pale in comparison to the cost efficiency afforded by conformity. According to tax expert David Brunori, “The increased administrative and compliance costs have led observers to conclude that the state income tax could not survive repeal of the federal income tax.”
While Tax Day is one holiday many people would rather not observe, the history of income taxation is inextricably linked to the history of 20th century government and economic theory, and can add perspective to the modern day fiscal policy debates that grew out of it.
Disagreements about the fairness and efficacy of a wealth-based tax (particularly one with progressive rates) were as polarizing during the early experiments with the income tax as they are today, as cartoons from 1878 and 1913 illustrate.
Jackson Brainerd is a research analyst with NCSL’s Fiscal Affairs Program