There’s been a lot of commentary about whether Sen. Elizabeth Warren’s proposed wealth tax — a 2 percent annual levy on a person’s net worth between $50 million and $1 billion, and 3 percent on net worth above $1 billion — would be constitutional. Several prominent law professors signed on to two letters concluding that the tax would unquestionably be legitimate, letters the senator attached to the press release announcing her proposal.
Strangely, however, neither letter mentions a 2012 Supreme Court decision — National Federation of Independent Business (NFIB) v. Sebelius — holding that the individual mandate penalty for failure to acquire suitable health insurance in the Obamacare legislation was a valid exercise of the taxing power. As I shall explain, Chief Justice John Roberts’s opinion in NFIB makes it clear that the wealth tax would be constitutionally problematic.
The issue isn’t whether Congress can tax wealth; Congress can tax almost anything. But if a tax is a direct tax, the Constitution requires that it be apportioned among the states on the basis of population, regardless of how the tax base is spread across the country. The apportionment rule was intended to make direct taxation difficult and often impossible, and it does just that. If a wealth tax has to be apportioned, Ms. Warren’s tax couldn’t work as intended. The amount that would have to be collected from two states with equal populations would have to be the same, even if one of the states is wealthy and the other poor. That would be crazy, and, as a result — or so one hopes — Congress wouldn’t enact such a tax.
What’s a direct tax? Other than stating that a capitation tax is direct, the Constitution is silent on the definitional issue. In 1796, however, the Supreme Court basically limited the category to capitation taxes and taxes on land. Narrow though that definition is, almost all founders agreed that a tax on land — a wealth tax — is direct, and between 1798 and 1861, Congress apportioned several national taxes on real estate. Congress took it for granted that apportionment was required.
In 1895, the Supreme Court extended its understanding of direct taxes to include a tax on any property, not just real estate. Although the Sixteenth Amendment, ratified in 1913, exempted from apportionment “taxes on incomes” (including income from property), the amendment said nothing about other taxes on property. Unless something cosmic has happened in the meantime, national property taxes remain subject to the apportionment requirement (which is one reason we don’t have a national property tax today).
That brings us to Chief Justice Roberts’ majority opinion in NFIB. To the surprise of almost everyone, the chief (with four reluctantly concurring Democratic justices) concluded that the individual mandate “penalty” was really a tax and enactment was therefore within Congress’s taxing power. But Justice Roberts realized that he also had to analyze whether the “tax” was direct. It hadn’t been apportioned, so if it were a direct tax, it would have been invalid.
Citing the 1796 and 1895 cases, Justice Roberts stated that the only two clear categories of direct taxes are those on property and capitation taxes. Since the individual mandate penalty was neither, it didn’t have to be apportioned. But a straightforward tax on property — a wealth tax — remains a direct tax that must be apportioned.
The Warren proposal is probably going nowhere anyway. It would be an administrative nightmare, requiring the valuation of almost all assets of the well-to-do. But if administrative difficulties aren’t enough to kill it, the direct-tax apportionment rule should finish the job.
Maybe apportionment was a stupid way to constrain the taxing power, and, for that matter, maybe the Constitution shouldn’t have limited that power at all. But the apportionment rule is in the Constitution; it shouldn’t be ignored. And what the Supreme Court says about the meaning of the rule counts for more than letters from fuzzy-headed academics. (Or so says this fuzzy-headed academic.)
The NFIB decision is only seven years old, after all; we aren’t talking about ancient history. Anyone who argues that an unapportioned wealth tax would satisfy constitutional standards but who doesn’t deal with that decision is being misleading.
Erik M. Jensen is the Coleman P. Burke Professor Emeritus of Law at Case Western Reserve University.