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Updated December 09, 2023 Reviewed by Reviewed by Lea D. UraduLea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.
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The 16th Amendment to the U.S. Constitution was ratified in 1913. It allows Congress to levy a tax on income from any source without apportioning it among the states and without regard to the census.
The text of the 16th Amendment is as follows:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
Congress passed a joint resolution calling for the amendment on July 1909, and Alabama ratified it a month later. The amendment came into force when Delaware, Wyoming, and New Mexico ratified it on Feb. 3, 1913.
The first permanent federal income tax was levied in 1913. The tax schedule consisted of seven brackets, with rates ranging from 1% on the first $20,000 of income to 6% on income exceeding $500,000. The government raised a total of $28.3 million. (These figures are not adjusted for inflation.)
The year the first permanent federal income tax was levied.
Congress had imposed income taxes prior to the ratification of the 16th Amendment. The Revenue Act of 1862 charged citizens earning more than $600 per year 3% of their income, while those making over $10,000 paid 5%.
The tax was collected to fund the Civil War. Rates were raised in 1864, but the law was allowed to expire in 1872. Consequently, the federal government raised most of its revenue from excise taxes and tariffs prior to 1913.
Congress attempted to impose another national income tax of 2% on earnings in excess of $4,000 in 1894. The tax was challenged in court by a Massachusetts resident named Charles Pollock, and the Supreme Court ruled in his favor in Pollock v. Farmers' Loan & Trust Co. in 1895, striking down the tax.
The rationale for the ruling comes from Article I, section 2, clause 3 of the Constitution:
Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers .
In U.S. constitutional law, a "direct tax" is a tax on property "by reason of its ownership."
In Pollock, the Supreme Court ruled that this description applied to income from the plaintiff's 10 shares of the Farmers' Loan & Trust Co., and by extension to all interest, dividends, and rents derived from the property.
The Court did not rule that income from labor was a direct tax, so that could, in theory, have been subject to federal, unapportioned income taxes.
In order to levy a direct tax, Congress would have had to apportion it among the states, assigning each one an amount to raise based, for example, on its representation in the House of Representatives.
The 16th Amendment removed that requirement. The change was supported primarily by states in the South and West, where the tariffs in place (again, the primary source of income for the federal government) exacerbated an already steep rise in the cost of living.
Consider how the Internal Revenue Service (IRS) collected nearly $5 trillion in gross taxes in 2022 with over $2.6 trillion of this attributed to individual, estate, and trust income taxes.
The 16th Amendment is still highly relevant today as it forms the basis of the federal income tax system. Without the amendment, Congress would not have the power to levy income taxes on individuals and corporations. The federal government would have minimal power to raise revenue to fund its operations and programs.
These taxes play a critical role in financing everything from national defense and social programs to infrastructure and education. For instance, even with progressive tax legislation and rules, the CBO projects a federal budget deficit of $1.4 trillion in 2023.
Baked into this budget is over $1.6 trillion of discretionary spending, with roughly half of this attributable to defense.
The 16th Amendment also plays a role in shaping debates about tax policy. Some argue the government's power to levy income taxes should be expanded, especially those that are quick to point out frequent annual deficit budgets. Others feel governments should have restricted powers.
In both cases, the 16th Amendment provides the unofficial starting point for debate.
Though the 16th Amendment provides great power to the Federal government, it does not authorize state and local entities. Therefore, state and local entities may be exempt from federal taxes, limiting the Federal government's ability to raise revenue.
To establish tax legislation, Congress must still enact laws that specify the types of income that can be taxed, the rates at which income is taxed, and the deductions and credits that are allowed.
Therefore, the 16th Amendment is limited in that it itself does not create any tax legislation but only allows for the creation of more legislation. The 16th Amendment is also limited in that it does not override certain constitutional protections.
Lastly, the 16th Amendment only notes the government's ability to raise taxes. It does not dictate where those funds must be spent. Again, Congress must still enact laws that specify how tax revenue can be spent, subject to constitutional limitations.
Therefore, the 16th Amendment is only part of the tax-and-spend puzzle, as governments should have dedicated plans in place for tax funds prior to raising those revenue streams.
The text of the 16th Amendment states that "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."
The 16th Amendment allowed Congress to enact the first nationwide income tax, which is now the Federal government's largest source of revenue. Prior to that point, most Federal revenue came from tariffs.
The 16th Amendment refers to "incomes, from whatever source derived," allowing broad interpretation of the meaning of income. In later cases, the Supreme Court clarified income to mean “gain derived from capital, from labor, or from both combined,” including “profit gained through a sale or conversion of capital assets.”
The House of Representatives passed the 16th Amendment on July 12, 1909, after a five-hour debate, with a vote of 318 in favor and 14 against. The Senate approved the resolution with a vote of 77-0. However, the amendment was not ratified by the required number of states until four years later, in 1913.
The 16th Amendment to the United States Constitution was ratified in 1913 and granted Congress the power to collect income taxes on individuals and corporations.
Before its adoption, the federal government collected most of its revenue from tariffs and excise taxes, which were largely seen as unfair.
This amendment gave the federal government a new source of revenue and enabled the implementation of a modern income tax system that is still used today.
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