| Kelley v. Kalodner

• Decision Date: 25 November 1935
• Citation: 181 A. 598,320 Pa. 180
• Parties: Kelley et al. v. Kalodner et al
• Court: Pennsylvania Supreme Court

181 A. 598

320 Pa. 180

Kelley et al. v. Kalodner et al

Supreme Court of Pennsylvania

November 25, 1935

Argued September 30, 1935

Bill in equity. Original jurisdiction, Miscellaneous Docket No. 6 No. 156, in case of Joseph J. Kelley et al. v. Harry E Kalodner, Secretary of Department of Revenue, et al. Act complained of held unconstitutional, and, for reasons stated bill in equity retained.

John P. Connelly, with him F. Gilman Spencer, for Joseph J. Kelley, plaintiff.

Thomas Raeburn White, for Clarence L. Harper, intervener.

Warwick Potter Scott, with him Frederic L. Ballard, of Ballard, Spahr, Andrews & Ingersoll and David A. Reed, for John H. W. Ingersoll, intervening plaintiff.

Charles J. Margiotti, Attorney General, with him John Y. Scott, Deputy Attorney General, for defendants.

Oscar G. Bender, for Pennsylvania Real Estate Association, amicus curiae.

Before FRAZER, C.J., KEPHART, SCHAFFER, MAXEY, DREW and LINN, JJ.

OPINION

MR. CHIEF JUSTICE FRAZER:

Joseph J. Kelley, a taxpayer of the City of Philadelphia, brought this bill in equity, over which we have assumed original jurisdiction, to obtain an injunction restraining The Telegraph Printing Company, a corporation, and appropriate officers of the Commonwealth of Pennsylvania from carrying into effect the provisions of an act of assembly approved July 12, 1935, P.L. 970, imposing a graduated income tax for school purposes on residents of Pennsylvania, including fiduciaries, and on income of nonresidents derived from property or business in Pennsylvania. The relief sought by plaintiff is predicated upon the theory that the act in question is, in several respects, in violation of the Constitution of the Commonwealth and for that reason void and of no effect. In behalf of defendants the attorney general appeared before us and vigorously urged the validity of this legislation. In our consideration of the question, we have also had the benefit of briefs and arguments of other learned counsel, some appearing for the intervening plaintiffs, Harper and Ingersoll, and others as amici curiae. We are highly appreciative of the assistance rendered us by all these gentlemen in the determination of the difficult and important issue here involved.

The act referred to above, the constitutionality of which is attacked by plaintiff's bill, is too lengthy to be set forth verbatim in this opinion. It will suffice to say that the statute provides a comprehensive system for the levy and collection of an annual tax upon the entire net income of residents of Pennsylvania and upon the net income received by nonresidents from property owned or from any business or occupation carried on within this Commonwealth. Gross income is defined in the act as including the "gains, profits and income derived from salaries, wages or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of, or interest in, such property, also from interest, rent, dividends, securities, or the transaction of any business, carried on for gain or profit, and all other income derived from any source whatever, including income derived through estates or trusts by the beneficiaries thereof, whether as distributed or as distributable shares." Numerous exemptions are permitted by the act for the computation of "gross income" as well as deductions for the determination of "net income." Taxpayers are allowed a deduction for living expenses in the amount of $1,000 in the case of a single person, and $1,500 for the head of a family or a married person. In addition a deduction of $400 is authorized for each dependent under eighteen years of age. The tax is imposed at the rate of two per cent of the amount of incomes not exceeding $5,000; two and one-half per cent of the amount over $5,000 but not exceeding $10,000; three per cent of the amount over $10,000 but not in excess of $25,000. Higher rates are applied on incomes within higher brackets, with a provision taxing all income over $100,000 at the rate of eight per cent.

The principal objection to the bill is that it violates sections 1 and 2 of article IX of the Constitution of Pennsylvania which reads as follows: "Section 1. All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws; but the General Assembly may, by general laws, exempt from taxation public property used for public purposes, actual places of religious worship, places of burial not used or held for private or corporate profit, institutions of purely public charity, and real and personal property owned, occupied, and used by any branch, post, or camp of honorably discharged soldiers, sailors and marines."

"Section 2. All laws exempting property from taxation, other than the property above enumerated, shall be void."

It is not disputed that the section quoted above applies to property taxes. The position of the defendants is that this section of the Constitution applies only to property taxes, and that a progressive income tax is not a property but an excise tax, and therefore that the tax levied by the act under consideration does not need to conform to the constitutional provision.

It accordingly appears that our inquiry should first be directed toward ascertaining the nature of a graduated income tax. There are no cases determinative of the question in this State, but counsel have referred us to numerous decisions in other jurisdictions in which the point has arisen. An examination of these authorities shows a clear-cut division of opinion, one line of cases holding that an income tax is in the nature of an excise, the other that such a tax is a property levy. Typical of the former line of cases are Diefendorf v. Gallet, 51 Idaho 619; Ludlow-Saylor Wire Co. v. Wollbrinck, 275 Missouri 339; Simms v. Aherns, 167 Ark. 557, and Miles v. Department of Treasury, 193 N.E. 855. In the last named case, decided January 29, 1935, the Supreme Court of Indiana concluded that a graded income tax "is an excise, levied upon those domiciled in the State, upon the basis of the privilege of domicile, and that the burden may reasonably be measured by the amount of income."

On the other hand, there is a considerable amount of judicial opinion holding a graduated income tax to be a property tax and subject to the constitutional requirements applicable to taxes of that character. Among the cases so holding are Opinion of the Justices, 220 Mass. 613, reaffirmed in 266 Mass. 583; State v. Pinder, 7 Boyce (Del.) 416; Bachrach v. Nelson, 349 Ill. 579, and Culliton v. Chase, 174 Wash. 363. Plaintiffs also maintain that in Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (on rehearing, 158 U.S. 601) the Supreme Court of the United States ruled that an income tax was a property tax. In our opinion, what that case actually decided was that a federal tax on the income from real estate was a direct tax on the land itself and hence subject to the provision of the federal Constitution requiring direct taxes to be apportioned among the states. The court also held that in so far as the tax under consideration was a tax upon the income from municipal bonds, it was a tax upon the power of the states and their instrumentalities to borrow money and consequently repugnant to the Constitution. At all events, whatever light was thrown by the opinion of the court in the Pollock case on the question of whether or not an income tax is a property tax is much obscured by the subsequent decision of the Supreme Court in Brushaber v. Union Pacific R.R. Co., 240 U.S. 1. In the latter case, which involved the constitutionality of the Federal Income Tax Act of 1913, there is dictum of Mr. Chief Justice WHITE to the effect that taxation on income is in its nature an excise. This view had earlier been expressed by the learned justice in his dissenting opinion in the Pollock case. It must be remembered, however, that none of the opinions of the Federal Supreme Court, either at the first or second hearing of the Pollock case, or in connection with the Brushaber case, conclusively determines the question which is before us now, namely, whether an income tax is a property tax within the meaning of the Pennsylvania Constitution. This necessarily follows from the fact that the inquiry into the nature and validity of the Federal Income Tax was directed to a consideration of the exact meaning of the phrase "direct taxes," which in turn involved an understanding of the meaning of that phrase contemplated by the framers of the Constitution and the interpretation given the term by a long line of cases, of which Hylton v. U.S., 3 Dall. 171, was the first and foremost. The net result is that the United States Supreme Court cases relied upon by counsel in the present case are of little or no value as precedents for our consideration.

For our purposes a discussion of the nature of an income tax is hedged in by no artificial restrictions arising from a peculiar or narrow interpretation of the applicable portions of our Constitution in former cases. We are at liberty to determine the question along normal, natural lines. In so doing we are inevitably impelled to the conclusion that an income tax is a property tax. This result seems particularly clear in so far as a tax upon the income from real and personal property is concerned. The act in question places a tax upon all income derived from any source whatever subject, of course, to stated exemptions and deductions. The income from real estate, for example, is not exempt. A tax upon the income from...