Fourteenth Amendment, Section 1:
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; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.
At the outset, the Court did not regard the Equal Protection Clause as having any bearing on taxation. 1 It soon, however, entertained cases assailing specific tax laws under this provision, 2 and in 1890 it cautiously conceded that
clear and hostile discriminations against particular persons and classes, especially such as are of an unusual character, unknown to the practice of our governments, might be obnoxious to the constitutional prohibition. 3 The Court observed, however, that the Equal Protection Clause
was not intended to compel the State to adopt an iron rule of equal taxation and propounded some conclusions that remain valid today. 4 In succeeding years the clause has been invoked but sparingly to invalidate state levies. In the field of property taxation, inequality has been condemned only in two classes of cases: (1) discrimination in assessments, and (2) discrimination against foreign corporations. In addition, there are a handful of cases invalidating, because of inequality, state laws imposing income, gross receipts, sales and license taxes.
Classification for Purpose of Taxation
The power of the state to classify for purposes of taxation is
of wide range and flexibility. 5 A state may adjust its taxing system in such a way as to favor certain industries or forms of industry 6 and may tax different types of taxpayers differently, despite the fact that they compete. 7 It does not follow, however, that because
some degree of inequality from the nature of things must be permitted, gross inequality must also be allowed. 8 Classification may not be arbitrary. It must be based on a real and substantial difference 9 and the difference need not be great or conspicuous, 10 but there must be no discrimination in favor of one as against another of the same class. 11 Also, discriminations of an unusual character are scrutinized with special care. 12 A gross sales tax graduated at increasing rates with the volume of sales, 13 a heavier license tax on each unit in a chain of stores where the owner has stores located in more than one country, 14 and a gross receipts tax levied on corporations operating taxicabs, but not on individuals, 15 have been held to be a repugnant to the Equal Protection Clause. But it is not the function of the Court to consider the propriety or justness of the tax, to seek for the motives and criticize the public policy which prompted the adoption of the statute. 16 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. 17
One not within the class claimed to be discriminated against cannot challenge the constitutionality of a statute on the ground that it denies equal protection of the law. 18 If a tax applies to a class that may be separately taxed, those within the class may not complain because the class might have been more aptly defined or because others, not of the class, are taxed improperly. 19
Foreign Corporations and Nonresidents
The Equal Protection Clause does not require identical taxes upon all foreign and domestic corporations in every case. 20 In 1886, a Pennsylvania corporation previously licensed to do business in New York challenged an increased annual license tax imposed by that state in retaliation for a like tax levied by Pennsylvania against New York corporations. This tax was held valid on the ground that the state, having power to exclude entirely, could change the conditions of admission for the future and could demand the payment of a new or further tax as a license fee. 21 Later cases whittled down this rule considerably. The Court decided that
after its admission, the foreign corporation stands equal and is to be classified with domestic corporations of the same kind, 22 and that where it has acquired property of a fixed and permanent nature in a state, it cannot be subjected to a more onerous tax for the privilege of doing business than is imposed on domestic corporations. 23 A state statute taxing foreign corporations writing fire, marine, inland navigation and casualty insurance on net receipts, including receipts from casualty business, was held invalid under the Equal Protection Clause where foreign companies writing only casualty insurance were not subject to a similar tax. 24 Later, the doctrine of Philadelphia Fire Association v. New York was revived to sustain an increased tax on gross premiums which was exacted as an annual license fee from foreign but not from domestic corporations. 25 Even though the right of a foreign corporation to do business in a state rests on a license, the Equal Protection Clause is held to insure it equality of treatment, at least so far as ad valorem taxation is concerned. 26 The Court, in WHYY Inc. v. Glassboro, 27 held that a foreign nonprofit corporation licensed to do business in the taxing state is denied equal protection of the law where an exemption from state property taxes granted to domestic corporations is denied to a foreign corporation solely because it was organized under the laws of a sister state and where there is no greater administrative burden in evaluating a foreign corporation than a domestic corporation in the taxing state.
State taxation of insurance companies, insulated from Commerce Clause attack by the McCarran-Ferguson Act, must pass similar hurdles under the Equal Protection Clause. In Metropolitan Life Ins. Co. v. Ward, 28 the Court concluded that taxation favoring domestic over foreign corporations
constitutes the very sort of parochial discrimination that the Equal Protection Clause was intended to prevent. Rejecting the assertion that it was merely imposing
Commerce Clause rhetoric in equal protection clothing, the Court explained that the emphasis is different even though the result in some cases will be the same: the Commerce Clause measures the effects which otherwise valid state enactments have on interstate commerce, while the Equal Protection Clause merely requires a rational relation to a valid state purpose. 29 However, the Court’s holding that the discriminatory purpose was invalid under equal protection analysis would also be a basis for invalidation under a different strand of Commerce Clause analysis. 30
A state law that taxes the entire income of domestic corporations that do business in the state, including that derived within the state, while exempting entirely the income received outside the state by domestic corporations that do no local business, is arbitrary and invalid. 31 In taxing the income of a nonresident, there is no denial of equal protection in limiting the deduction of losses to those sustained within the state, although residents are permitted to deduct all losses, wherever incurred. 32 A retroactive statute imposing a graduated tax at rates different from those in the general income tax law, on dividends received in a prior year that were deductible from gross income under the law in effect when they were received, does not violate the Equal Protection Clause. 33
There is no denial of equal protection in prescribing different treatment for lineal relations, collateral kindred and unrelated persons, or in increasing the proportionate burden of the tax progressively as the amount of the benefit increases. 34 A tax on life estates where the remainder passes to lineal heirs is valid despite the exemption of life estates where the remainder passes to collateral heirs. 35 There is no arbitrary classification in taxing the transmission of property to a brother or sister, while exempting that to a son-in-law or daughter-in-law. 36 Vested and contingent remainders may be treated differently. 37 The exemption of property bequeathed to charitable or educational institutions may be limited to those within the state. 38 In computing the tax collectible from a nonresident decedent’s property within the state, a state may apply the pertinent rates to the whole estate wherever located and take that proportion thereof which the property within the state bears to the total; the fact that a greater tax may result than would be assessed on an equal amount of property if owned by a resident, does not invalidate the result. 39
Motor Vehicle Taxes
In demanding compensation for the use of highways, a state may exempt certain types of vehicles, according to the purpose for which they are used, from a mileage tax on carriers. 40 A state maintenance tax act, which taxes vehicle property carriers for hire at greater rates than it taxes similar vehicles carrying property not for hire, is reasonable, because the use of roads by one hauling not for hire generally is limited to transportation of his own property as an incident to his occupation and is substantially less extensive than that of one engaged in business as a common carrier. 41 A property tax on motor vehicles used in operating a stage line that makes constant and unusual use of the highways may be measured by gross receipts and be assessed at a higher rate than are taxes on property not so employed. 42 Common motor carriers of freight operating over regular routes between fixed termini may be taxed at higher rates than other carriers, common and private. 43 A fee for the privilege of transporting motor vehicles on their own wheels over the highways of the state for purpose of sale does not violate the Equal Protection Clause as applied to cars moving in caravans. 44 The exemption from a tax for a permit to bring cars into the state in caravans of cars moved for sale between zones in the state is not an unconstitutional discrimination where it appears that the traffic subject to the tax places a much more serious burden on the highways than that which is exempt from the tax. 45 Also sustained as valid have been exemptions of vehicles weighing less than 3,000 pounds from graduated registration fees imposed on carriers for hire, notwithstanding that the exempt vehicles, when loaded, may outweigh those taxed; 46 and exemptions from vehicle registration and license fees levied on private carriers operating a motor vehicle in the business of transporting persons or property for hire, the exemptions including one for vehicles hauling people and farm products exclusively between points not having railroad facilities and not passing through or beyond municipalities having railroad facilities. 47
The state’s latitude of discretion is notably wide in the classification of property for purposes of taxation and the granting of partial or total exemption on the grounds of policy, 48 whether the exemption results from the terms of the statute itself or the conduct of a state official implementing state policy. 49 A provision for the forfeiture of land for nonpayment of taxes is not invalid because the conditions to which it applies exist only in a part of the state. 50 Also, differences in the basis of assessment are not invalid where the person or property affected might properly be placed in a separate class for purposes of taxation. 51
Early cases drew the distinction between intentional and systematic discriminatory action by state officials in undervaluing some property while taxing at full value other property in the same class – an action that could be invalidated under the Equal Protection Clause – and mere errors in judgment resulting in unequal valuation or undervaluation – actions that did not support a claim of discrimination. 52 Subsequently, however, the Court in Allegheny Pittsburgh Coal Co. v. Webster County Comm’n, 53 found a denial of equal protection to property owners whose assessments, based on recent purchase prices, ranged from 8 to 35 times higher than comparable neighboring property for which the assessor failed over a 10-year period to readjust appraisals.
Then, only a few years later, the Court upheld a California ballot initiative that imposed a quite similar result: property that is sold is appraised at purchase price, whereas assessments on property that has stayed in the same hands since 1976 may rise no more that 2% per year. 54 Allegheny Pittsburgh was distinguished, the disparity in assessments being said to result from administrative failure to implement state policy rather than from implementation of a coherent state policy. 55 California’s acquisition-value system favoring those who hold on to property over those who purchase and sell property was viewed as furthering rational state interests in promoting
local neighborhood preservation, continuity, and stability, and in protecting reasonable reliance interests of existing homeowners. 56
Allegheny Pittsburgh was similarly distinguished in Armour v. City of Indianapolis, 57 where the Court held that Indianapolis, which had abandoned one method of assessing payments against affected lots for sewer projects for another, could forgive outstanding assessments payments without refunding assessments already paid. In Armour, owners of affected lots had been given the option of paying in one lump sum, or of paying in 10, 20 or 30-year installment plan. Despite arguments that the forgiveness of the assessment resulted in a significant disparity in the assessment paid by similarly-situated homeowners, the Court found that avoiding the administrative burden of continuing to collect the outstanding fees was a rational basis for the City's decision. 58
An owner aggrieved by discrimination is entitled to have his assessment reduced to the common level. 59 Equal protection is denied if a state does not itself remove the discrimination; it cannot impose upon the person against whom the discrimination is directed the burden of seeking an upward revision of the assessment of other members of the class. 60 A corporation whose valuations were accepted by the assessing commission cannot complain that it was taxed disproportionately, as compared with others, if the commission did not act fraudulently. 61
A special assessment is not discriminatory because apportioned on an ad valorem basis, nor does its validity depend upon the receipt of some special benefit as distinguished from the general benefit to the community. 62 Railroad property may not be burdened for local improvements upon a basis so wholly different from that used for ascertaining the contribution demanded of individual owners as necessarily to produce manifest inequality. 63 A special highway assessment against railroads based on real property, rolling stock, and other personal property is unjustly discriminatory when other assessments for the same improvement are based on real property alone. 64 A law requiring the franchise of a railroad to be considered in valuing its property for apportionment of a special assessment is not invalid where the franchises were not added as a separate personal property value to the assessment of the real property. 65 In taxing railroads within a levee district on a mileage basis, it is not necessarily arbitrary to fix a lower rate per mile for those having fewer than 25 miles of main line within the district than for those having more. 66