In 1796 Daniel Hylton, a wealthy Virginian farmer, brought a suit before the United States Supreme Court arguing that a federal tax on carriages violated a constitutional distinction between direct and indirect taxation. While the Constitution granted Congress unlimited authority to pass indirect taxes on imported goods, the framers insisted that direct taxes on property be apportioned between the states equally based on population. Apportionment meant that states would contribute toward the tax in proportion to their respective populations, regardless of the number of carriages actually owned in each state. Alexander Hamilton defended the government’s position in his only appearance before the Supreme Court as attorney. On the surface, due to commonly accepted understandings of taxation in the eighteenth century, it appeared the law would be struck down as unconstitutional. A tax on carriages, after all, had all of the markings of a property tax, which would require the tax to be apportioned between the states. Hylton must have been disappointed when the justices unanimously decided in favor of the government. How did the justices come to this unforeseen conclusion? A closer look at the case reveals an early example of judicial review, the creation of federal taxing authority, and the importance of common law in the Supreme Court’s ruling.
Many scholars have treated the case as strange exception that can only be understood and interpreted in isolation. Robin Einhorn describes the case as a “bizarre anomaly” in the history of American taxation. Erik Jensen argues that the result in Hylton was “inherently flawed,” but viewed the case as a partisan Federalist “statement about National power” rather than an important early precedent. Although the case has been cited only occasionally in the subsequent two hundred years, Hylton offered a clear defense of congressional taxing authority. More recently, Chief Justice John Roberts cited the case in upholding the constitutionality of the Affordable Care Act.
To understand this case and why the conclusions the Supreme Court came to were so surprising, one has to understand the language the Constitution uses to define taxation. The Constitution specifies that “direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers.” Hamilton described a direct tax as one that is “straight but not crooked.” The burden of a direct tax falls directly on individuals rather than indirectly on the sale of goods. It is paid by property owners rather than channeled through intermediaries and collected by producers or distributors. Taxes on property were the most obvious form of direct taxes. Apportioning direct taxes to the states ensured that each state contributed to the federal treasury in proportion to their population. The operation of the tax proceeded in several steps. Congress would first determine the amount of money to raise and divide that amount amongst the states using the population figures from the most recent census. Assessors would then determine the quantity of taxable property (carriages, for example) in each state and divide each state’s quota to determine the tax rate paid by individuals. Collectors would then collect the tax from each property owner. One of the implications of this apportionment scheme is that the amounts paid by individual taxpayers cannot be determined in advance as the rates are dependent on the population and relative wealth of each state.
Congress introduced a tax in 1794 that specified fixed tax rates on different types of carriages. Many people, including Hylton, believed the tax constituted a direct tax on property, and was therefore unconstitutional because it did not follow the apportionment rules outlined in the Constitution. Hamilton claimed that the tax represented an excise, as the tax “varied both as to method and application.” Excises taxes traditionally referred to taxes on manufacturing or to sales. The whiskey excise, for example, taxed whiskey producers, not whiskey consumers. Hamilton argued that the carriage tax only applied to those who used a carriage for pleasure. The law did not apply to wagons or carts employed in industry or agriculture. Here Hamilton contended that the tax applied to the item’s use, not its ownership, and the distinction meant that the tax was indirect and not subject to apportionment.
Hylton’s lawyer, John Taylor, and the government’s lawyer, John Wickham, went to the Virginia Circuit Court to pursue the case. At the end the Circuit Court remained divided due to a fundamental disagreement over the definition of direct taxation, and the case was primed for the Supreme Court. Hamilton anticipated that the case would provide a ringing defense of congressional taxing authority. William Bradford, who had previously served as Attorney General, wrote to Hamilton noting that he hoped that the law would be “supported by the unanimous opinion of the Judges and on grounds that will bear the public inspection.” On the other hand James Madison wrote privately that “a tax on carriages as an indirect tax” was an unconstitutional “fiscal error” in urgent need of correction. When the Supreme Court issued its ruling, Madison wrote that the tax emerged unscathed “in spite of the Constitution.” Thomas Jefferson agreed in his reply, noting that “almost every carriage-owner has been taken in for a double tax” now that the ruling sidestepped apportionment and left congressional taxing authority unchecked.
In the Circuit Court Hylton’s lawyer began by specifying that “deciding constitutional questions” fell within the Court’s purview and that the government’s position “would entirely undermine the design of the restriction.” Taylor centered his argument on defining the meaning of direct taxation. He argued that a direct tax is “a pecuniary duty to be discharged by an immediate payment from the payer to the payee.” If a third person is “interposed between the real payer and payee, advancing the money to the latter, and trusting for reimbursement to the former” then that would create an indirect tax. Clearly the tax would be paid by carriage owners, subjecting the tax to apportionment. Yet, the Constitution also required duties and excises to be equal throughout the United States. If the government insisted that the tax was an excise, the tax would have to be applied uniformly. The tension between these two requirements presented an impossible dilemma. The tax could not be both apportioned and uniform. Consequently, Taylor argued that “the rule of proportion is utterly defeated.” Taylor further warned that “without the ‘principle of proportion’ a danger existed that the whole doctrine of representation and taxation, the very basis of modern republicanism, might be violated.” If the law remained in place, Taylor argued, “every species of a man’s property would be exposed to ‘interception’ by Congress.”
John Wickham made the opposite case for the government. Wickham proposed an alternate definition of direct and indirect taxes. He claimed that a “tax upon their expenses, or consumption” could be called an indirect tax, while “a tax upon the revenue or income” would be a direct tax. Under this definition a tax on carriages could fall under the category of indirect taxes because the law proposed to tax their use. Wickham further proposed that the tax payment was “so far voluntary, that if the consumer is able or willing to do without the subject taxed, he will not be obliged to pay the tax.” By this Wickham meant that carriage owners could avoid the tax by simply converting their carriages from vehicles of pleasure to wagons employed in industry or agriculture. In suggesting that the tax was voluntary Wickham appealed to a popular eighteenth-century argument that indirect taxes could be avoided by altering one’s consumption habits. In the same way that consumers could purchase domestic manufactures rather than consuming foreign imports to avoid paying the tariff, Wickham proposed that carriage owners could set aside their taste for luxury and apply their coaches to practical purposes.
When the parties resumed their discussion before the Supreme Court the arguments took a different direction. Jared Ingersoll, the Pennsylvania Attorney General, replaced Taylor in defending Hylton’s position. Alexander Hamilton took up the government’s side in defending the tax. Although Hamilton had retired from public life after resigning as Secretary of the Treasury, he agreed to return and defend the tax that he had written. In his arguments before the Court, Hamilton cleverly seized upon the uncertainty regarding the definitions of direct and indirect taxes. The confusion over definitions benefited Hamilton’s case, because in the absence of a clear distinction the government would be free to interpret the difference as they saw fit. Hamilton also introduced evidence from eighteenth century political economists and philosophers. He cited various French economists and John Locke who described direct taxes as limited to “capitation and poll taxes” and indirect taxation as “all other articles.” Hamilton also noted that Adam Smith classified a “tax on expense” as indirect and even included an example relating to carriages to illustrate his theories of taxation. Ingersoll challenged Hamilton’s arguments on the grounds that expanding the definition to include “any article of personal property” would create uncertainties and that in “case of doubt, apportionment to be preferred” to arbitrary assessment by tax officials who might apply different standards in different parts of the country. Ultimately, the Supreme Court sided unanimously with Hamilton, arguing that apportionment in the case of the carriage tax would be impractical.
The justices decided the case by applying a common-sense interpretation to the law. Justice James Iredell explained in his opinion that the operation of the carriage tax would be “oppressive and pernicious” if subjected to apportionment. Because each state held varying numbers of carriages the tax rates between states could never be uniform. Taxpayers in states with large populations but few carriages would pay the highest tax rates, while those in wealthy but sparsely-populated states would benefit from the lowest rates. Iredell further noted the difficulties of apportioning the tax, noting that if it “cannot be apportioned, it is therefore not a direct tax.” Although his logic appears circular, Iredell proposed that the tax must be grouped where it logically belongs rather than where it definitionally should be. Willis Whichard, in his biography of Iredell, notes that Justice Samuel Chase also “concluded from practical consideration that the tax was not a direct one” because of the “radically wrong” payment it would cause people to bear. Justice William Patterson likewise “grounded his conclusion on functional application.” The only justice to make a non-functionalist argument was James Wilson, who argued that the tax was neither direct nor indirect, and suggested that the Treasury Department could arrange assessment and collection in the manner it found most convenient. Even this argument relates to functionality in the end as it tries to justify the government laws through lack of constitutional language or direction. In interpreting law based on how the principle would operate in practice, the Justices applied a common-sense interpretation to the Constitution.
In considering the constitutionality of an act of Congress, Hylton v US contributed to the development of judicial review. All of the parties involved in the case believed that the Supreme Court had the authority to determine the constitutionality of the act in question. In his Circuit Court arguments John Wickham argued that that it would be “improper as well as unnecessary” to comment on the court’s ability to hear the case. Before the Supreme Court Ingersoll argued that the law was “unconstitutional and void, if exceeding the limits” of the constitution. The implications of this case on judicial review are not to be understated. Most Americans think of Marbury v Madison as the origin of judicial review, failing to note that Hylton v US and other early cases helped to establish this precedent. Scholars tend to minimize the importance of the pre-Marshall court due to the different way it functioned and its comparative lack of organization. The case is also overlooked because the Court sided with the government and did overturn any provision of the law as the Court did in Marbury v Madison. That the Supreme Court considered the constitutionality of the act, however, reveals that the justices possessed this power even before Marbury cemented it in the popular imagination.
The case also affirmed congressional taxing authority by upholding the constitutionality of the tax. The precedent established in Hylton remained in place for nearly one hundred years. It was not until Pollock v. Farmers’ Loan and Trust Company (1895) that the Supreme Court imposed limitations on congressional taxing power. In that case the Court ruled that a tax on income from rent or dividends was unconstitutional because the law failed to apportion the taxes between the states. The decision in Pollock initiated a two-decade movement to amend the Constitution to make the income tax constitutional. The Sixteenth Amendment ultimately offered a solution by creating an exemption for income taxes in the apportionment clause. Although Hylton is a strange case, its legacy has been long lasting. The ruling in Pollock did not overturn the Federalist court’s precedent. The justices’ decision in Hylton continues to provide a resounding endorsement of Congressional authority to lay and collect taxes.
William Bradford to Alexander Hamilton, July 2, 1795, in William P. Palmer, ed.Calendar of Virginia State Papers and Other Manuscripts from January 1, 1785 to July 2, 1789 Presented in the Capitol at Richmond (Richmond, 1884; rpt. New York: Kraus Reprint Corporation, 1968), 18: 396.