Evans v. McCabe
The Tennessee Supreme Court decision in Evans v. McCabe (1932) held that the Tennessee Constitution prohibits the state from enacting and collecting a tax on income earned within the state. (1)
L. C. Evans, a Nashvillian who owned a farm in Maury County, and five other individuals and businesses in Tennessee brought suit against Charles M. McCabe, commissioner of finance and taxation under Governor Henry H. Horton. The suit challenged Chapter 21 of the Acts of the General Assembly’s Second Extraordinary Session in 1931. Known as the “Income Tax Act of 1931,” Chapter 21 levied a tax graduated from 1 percent to 5 percent on the “entire income” of every individual in the state from “any source whatever.”
In an opinion by Chief Justice Grafton Green, the supreme court struck down the act as a violation of Article II, Section 28 of the Tennessee Constitution. At that time, Section 28 conferred three main powers of taxation on the general assembly. (Section 28 has since been amended, but not so as to affect the holding in Evans v. McCabe.) First, the legislature could tax all property–real, personal, or mixed–but only based on the property’s value (ad valorem) and at an equal rate for all property. Second, the legislature could tax “Merchants, Peddlers, and privileges” in such manner as the legislature may direct. Finally, in the so-called income tax clause, the legislature had the authority to tax incomes “derived from stocks and bonds that are not taxed ad valorem.”
The holding in Evans v. McCabe followed directly from the Shields v. Williams decision by the same court in 1929 interpreting the income tax clause. (2) Before 1929 the state taxed stocks and bonds on an ad valorem basis at the same rate as other property, with the result that the tax consumed almost all of the income generated by the stocks and bonds. The general assembly responded by passing the Income Tax Statutes of 1929, also known as the “Hall Income Tax” after its sponsor, Senator Frank S. Hall, of Dickson. The Income Tax Statutes removed the ad valorem tax from stocks and bonds and replaced it with a 5 percent tax on their incomes.
Several taxpayers challenged the constitutionality of the Income Tax Statutes, claiming that they violated Section 28’s requirement that all property be taxed on an ad valorem basis at the same rate. The supreme court in Shields v. Williams upheld the statute’s constitutionality. It reasoned that the income tax clause is an exception to Section 28’s general requirement that all property be taxed equally and that it allows the general assembly to tax the income generated by stocks and bonds rather than their value.
Three years later, when reviewing the Income Tax Act of 1931 in Evans, the supreme court expanded upon its holding in Shields. The court reaffirmed that the income tax clause was an exception to the general provisions in Section 28 governing the taxation of property. Because of the inclusion of a specific exception in Section 28, the court concluded that the constitution’s drafters did not intend to recognize any other exceptions to the general property tax rule. Thus, the court held powers that the legislature had been given to tax property and privileges. By creating one exception to these general powers for stocks and bonds, the drafters of Section 28 intended that no other exceptions should be recognized. Therefore, the court concluded that Section 28 did not permit the legislature to impose a general income tax.