THE INCOME TAX IN PENNSYLVANIA

By WILLIAM J. MCKENNA*

THE enactment of a 4% retail sales tax by the Pennsylvania

legislature in 1959 reflected the need of the Commonwealth
to seek additional taxes to meet the expanded functions and serv-
ices of the state government. The general fund appropriations by
the state have increased from $531 million in the biennium of
1945-47 to approximately $1.9 billion in 1959-61. Future trends
in the expenditures of the Commonwealth promise to be even
higher than those of 1959-61. These increased expenditures will
require increases in the present taxes, and in all probability new
sources of taxes. It is not likely that it will be politically feasible
to increase the present 4% selective sales tax, or to expand its
coverage to include food and other exemptions.
Thus, a long shadow appears upon the horizon of the state-the
shadow of a personal income tax. But under Article IX, Section
1, of the Pennsylvania Constitution of 1874 the General As-
sembly can adopt only a flat, uniform income tax without any
exemptions. Since 1913 the Pennsylvania legislature has on more
than a dozen occasions introduced amendments to the state con-
stitution which would have authorized that body to enact a pro-
gressive income tax. Only in 1913 and 1937, however, did the
voters actually have the opportunity to vote on such a proposed
amendment. On both occasions the amendment was defeated-hy
the thin margin of 119 votes in 1913, and by 265,041 in 1937. It
is almost certain that in the years ahead the Pennsylvania legis-
lature will again submit to the voters a proposed amendment that
will empower it to enact a graduated income tax.

THE FACULTY TAX IN PENNSYLVANIA

The ancestor of the modern state income tax was the colonial
faculty tax. This was not, however, a true income tax. It was a
*William J. McKenna received his doctorate in Political Science from the
University of Pennsylvania. He is now an Assistant Professor in the De-
partment of Economics at Temple University.
291
292 PENNSYLVANIA HISTORY

tax upon the assumed income of property. The colonial tax listers
merely assessed the owners of property at fixed amounts of in-
come. The measure of income was property itself and not actual
personal income. Other colonial faculty taxes were simply taxes
on the assumed earnings of classified occupations. They were,
therefore, arbitrary in character.
Pennsylvania first adopted the faculty tax in 1782.1 The as-
sessors and their assistants rated occupations at an assumed in-
come. Evidence of religious toleration and concern for the
economic plight of "ministers of the Gospel of all denominations"
is found in the fact that they were exempt from the faculty tax
of 1782.
Later, in 1785, the exemptions of the 1782 law were broadened
to include mechanics and manufacturers.2 Evidently the exemp-
tion of these added classes was not too acceptable, for they were
denied exemption in the faculty tax act of 1799.8 The desire to
subject all groups to taxation resulted in the ending of the exemp-
tion of ministers and schoolmasters by the faculty tax law of 1817.4
The faculty tax laws, although they left to the discretion of
the assessor the actual tax to be levied, provided fixed minima
and maxima depending upon the category taxed. Thus, the faculty
tax act of 1785 provided a minimum of twenty-five cents and a
maximum of $10.00. In actual practice, the faculty tax laws in
the period of 1782 to 1842 were spasmodically enforced and
yielded an inconsequential total revenue.
In the 1830's many of the states embarked on a series of internal
improvements which resulted in the accumulation of a substantial
debt. Pennsylvania was no exception to this trend, and in fact
found itself with an unprecedented debt, and heavy interest
charges. The cost of the state government had risen from $453,000
in 1820 to $6,357,000 in 1830, and it rose to $7,279,000 in 1840.5
In August, 1842, Pennsylvania defaulted on its bonds (after twice

Statutes-at-Largc of Pennsylvania, X, 390.

2 Ibid., XI, 470.
-Ibid., XVI, 379.
'Laws of Pennsylvania, P.L. 30 (1817).
Tanger, Alderfer, and McGeary, Pennsylvania Governinent, State and
I ocal (Penns Valley Publishers, Inc., 1950), 209.
 THE INCOME TAX IN PENNSYLVANIA 293

delaying payments) and was forced to pay its bonds in scrip. A

total of two-thirds of its $36,000,000 debt was held abroad.6
Substantially higher expenditures caused the state to revive a
form of the faculty tax in 1840. In that year the legislature levied
a 1%otax on salaries and a one mill tax upon each dollar of income
received from every trade, occupation, or profession. The objective
of the 1840 law was to secure ". . . additional revenue to be
applied toward the payment of interest and the extinguishment
of the debts of the Commonwealth."
Since the revenue secured from the 1840 act proved inadequate
to meet the interest and debt retirement needs of the state, an
additional law was passed in 1841. This law increased the rates
on salaries to 2% and the rates on profits from trades, professions,
and occupations to 1%. The 1841 tax law contained two features
that have become accepted parts of modern income tax theory and
practice. These provisions were: (1) a flat exemption; and (2)
a limited tax-withholding authority. The flat exemption was
limited to $200. Section 9 of the Act of 1841 contained a withI-
holding provision which permitted the State Treasurer to with-
hold the tax from the salaries of state employes.
In 1854 the following provision was added: "That any tax on
trades, professions, and occupations or single freemen, shall in no
case be less than fifty cents." This fifty-cent minimum was raised
to $1.00 by the Act of 1857,7 and the rate continued in effect until
1871, when the tax was repealed because its yield was insignificant.

THE OCCUPATION TAx TODAY

The faculty tax has been revived in Pennsylvania in the formi

of an occupation tax. It is used extensively in Pennsylvania
through authority of either the county codes or a 1951 amendment
to Act 481 of 1947. The occupation tax is based on an arbitrary
assessment of the value of occupations of all residents above the
age of 21. Considerable difficulty is experienced by assessors in
classifying occupations. The assessments of occupations in Bucks
County are generally from $100 to $1,000; in Chester $50 to
$500; in Delaware from $100 to $250; and in Montgomery $100
o B. U. Ratchford, American State Debts (Duke University Press, Dur-
ham, N. C., 1941), 98.
*Laws of Pennsylvania, 1840, Act 232; 1841, No. 117, Section 9; 1844.
No. 318; 1854, No. 610, Section 30; 1857, No. 667, Section 2.
294 PENNSYLVANIA HISTORY

to $200. In most of the counties of the state the assessment of

occupations is below $500.
Under the present law there exists no limit upon the millage
rates which school districts may levy on occupations.' Thus, many
school districts have a millage rate far above the 1% limit on the
uniform income tax which a number of districts use. This has
led to the criticism that the occupation tax is in reality a "grad-
uated per capita tax." In addition to the school district's levying
an occupation tax, there are many counties which levy an 8 mills
occupation tax. Consequently, the total millage can be quite high.
In 1959 the combined county and school district millage occupa-
tion tax totaled 178 mills in Warwick Township, Bucks County.
This county makes extensive use of the occupation tax.
In 1955 only one first class township and thirty school districts
had levied an occupation tax under Act 481, for a total revenue
of $374,435 ($373,598 of this total was collected by the 30 school
districts). Since 1955 many additional local government units have
adopted the occupation tax. In 1959 alone more than 90 school
districts adopted the occupation tax. But the revenue from this
tax is only a small part of local and county tax revenues.
The occupation tax is to be criticized on the basis of its archaic
character. It is arbitrary in assessment; it is unlimited in millage
rate; its yield is not great; its collection cost is high; it is difficult
to collect and the delinquency rate is high. This tax might well be
dropped in favor of some more remunerative tax.

PENNSYLVANIA CORPORATE INCOME TAX

I. The Corporate Income Tax of 1864

Both the Union and the Confederate governments enacted a
graduated income tax during the Civil War. The Union income
tax was more effective and yielded greater revenue than did the
Confederate. Pennsylvania's revenue needs increased as a result
of the Civil War, and in 1861 the state floated a loan of three
million dollars. This loan was to be fully repaid by 1872. In view
of the total state revenues of $3,637,000 in 1860, the floatation of
a three-million-dollar bond issue was a major undertaking. In order

SThe maximum county occupation tax is now 10 mills (Act of April

17, 1959).
 THE INCOME TAX IN PENNSYLVANIA 295

to raise sufficient revenue to retire this loan, the state enacted a

corporate income tax in 1864.9
Section 1 of the 1864 statute levied a tax upon railroads, canals,
and other transportation companies on the number of tons of
freight "carried upon or over their respective lines of transporta-
tion." The rate of the tax of the 1864 act varied from two cents
to five cents per ton depending upon the type of freight carried.
In addition to the tax upon transportation companies, the 1864
law levied a 3% tax upon corporate and unincorporated enter-
prises conducting business in Pennsylvania. This law accomplished
its prime purpose of raising sufficient revenue to pay off the war
loan and was finally repealed in 1873 and 1874.

II. The Emergency Corporate Profits Tax of 1923

In 192310 a two-year emergency corporate profit tax was en-
acted with a tax rate of '2%. Only net income derived from the
income of business transacted within Pennsylvania, such as build-
ing and loan associations, insurance companies, and national banks
was exempted. This tax expired in 1925, and the yield was small
($2,006,187 in 1924).

III. The Corporate Income Tax Act of 1935

In the same session at which the General Assembly enacted a
classified personal income tax, they also enacted a uniform cor-
porate income tax.' The initial rate of tax was 6%. It was
temporarily increased to 10% in 1936, but was reduced to 7%
from 1937 through 1942. The wartime prosperity of the state
resulted in a reduction of the corporate income tax rate to 4%.
It remained at this rate until 1951 when it was increased to 5%c.
In 1956 the rate was increased to its present rate of 6%. The tax
was reenacted at every session of the legislature, and was made
a permanent tax in the legislative session of 1956-1957.
The court in Comnmonwealth v. Electric Storage Battery held
that this tax "does not tax income as such but imposes a tax upon
the privilege of doing business in the state as measured by net
2
income."'

'Laws of Pcenwsylvania, P.L. 218 (April 30, 1864).

Ibid., P.L. 876 (June 28, 1923).
"Ibid., P.L. 208 (May 16, 1935).
1251 Dauphin 90.
296 PENNSYLVANIA HISTORY

A new law of August 24, 1951:' supplemented the excise in-

come tax by imposing a state property income tax of 5%. This
tax is intended to reach certain interstate net income derived
from property in Pennsylvania which is not taxed by the cor-
porate net income tax. The yield from this state property income
tax is but a small percentage of the total income received by the
state from the corporate income tax. 4 The receipts from the state
corporate income tax have increased substantially-from approx-
imately $26.9 million in 1940 to an estimated $157.5 million
in 1960.

THE UNIFORMITY CLAUSE OF THIE 1874 CONSTITUTION

I. Origin of the Clause

Little light is shed upon the origin of the tax uniformity clause
in the debates of the constitutional convention of 1872-1873.
This provision as finally adopted by the convention states that,
"All taxes shall be uniform, upon the same class of subjects within
the territorial limits of the authority levying the tax." Throughout
the convention there was scarcely any debate on the above section
of Article IX. There was, however, considerable discussion on a
proposed Section 4 of Article IX, which would have provided
uniformity in tax treatment to the property and business of manu-
facturing corporations.
Various objections were voiced against the proposed Section 4
on the basis that it would deprive the state of much future revenue,
that it usurped the power of the legislature, that it was unnecessary
in view of the uniformity provision of Section 1, that it con-
stituted a distrust of the legislature, and that it assumed power
that properly belonged to the legislature.15

II. Attempts to Amend the Uniformity Clause

After the adoption of the income tax amendment to the Federal
Constitution in 1913, a significant movement developed to amend
the uniformity provision of the Pennsylvania Constitution of 1874
3Laws of Pennsylvania, P.L. 1417.
"4Yields approximately $500,000 yearly.
"A detailed discussion of these points can be found in the Journals of
the Constitutional Convention of I872-1873 (Harrisburg, 1873), III, 218;
VI, 105, 107-108, 111-112, 117-118, 123, 125-126, 129; VII, 676; VIII, 663.
 THE INCOME TAX IN PENNSYLVANIA 297

in order to empower the legislature to enact a graduated income

tax. Amendments to achieve this objective were submitted to the
electorate in 1913 and 1937, but they were defeated. In 1919 and
1959 the adoption of a graduated income tax was discussed by con-
stitutional commissions appointed to consider general revision of
the Constitution of 1874.

A. Constitutional Revision Commissions

(1) The Communission of i919
Serious attention was given by the constitutional revision coml-
mission of 1919 to the question of amending the uniformity pro-
vision of Article IX, Section 1, to authorize the legislature to enact
a graduated income tax. On February 11, 1920, a proposed revision
of Article IX, Section 1, was submitted to the Commission, and
provided that, "all taxes shall be uniform upon the same class of
subjects . . . but the general assembly may . . . classify the sub-
jects of taxation for the purpose of levying graded or progressive
taxes."
James H. Reed moved to strike out from the above the words
"may by such law classify the subjects of taxation for the purpose
of levying graded or progressive taxes." The reason given by Reed
for his motion was that the General Assembly had in 1919 au-
thorized the submission of a proposed amendment to the voters in
November, 1920, that would empower the legislature to enact a
progressive income tax if the voters approved the amendment.
In response to Reed's argument. George Wharton Pepper ex-
pressed the hope that the Reed motion would not carry because the
language of the proposed revision of Article IX, Section 1, sub-
mitted by the committee on taxation and revenue, was identical
with a proposed amendment to the Constitution of 1874 passed
by the legislatures of 1917 and 1919. Pepper also expressed the
opinion that the progressive income tax was in accord with modern
theories of taxation, and that popular interest and approval had
influenced the legislature in its action in passing the proposed
amendment.16
Reed rejected this view and expressed the opinion that the

'' The Commission on Constitutional Amendment and Revision, Journal of

Proceedings (Harrisburg, 1920), I, 712-713.
 M9 PENNSYLVANIA HISTORY

commission should not approve or disapprove the progressive in-

come tax until the people had voted upon it at the general election
of 1920. It was brought out later in the debate that, because of a
ruling of the Attorney General' 7 of the state, the proposed amend-
ment of Article IX, Section 1, could not be legally submitted to
the voters in the election of November, 1920, because it did not
meet the constitutional provision which required the publication
of a proposed amendment three months prior to the next general
election.
This ruling of the Attorney General reinforced the feeling of
Pepper that the Commission itself should recommend the adoption
of a progressive income tax, because it was not a sound govern-
mental principle to make it impossible for the General Assembly
to levy a progressive income tax simply because this power might
be abused. The power to tax, he felt, was a power of sovereignty
which must be granted to the legislature so that it could adapt the
tax burden to the strength of the shoulders upon which it was to
be cast. Reed felt, however, that the legislature could be depended
upon to propose a progressive income tax by constitutional amend-
ment if the need arose.
Other commission members were opposed to the progressive in-
come tax in principle. Hampton L. Carson felt such a tax was not
in keeping with true "Americanism," and Edward Stackpole that
the members of the legislature would be subjected to human traits,
frailties, and temptations which might lead them to excess taxa-
tion and thereby drive the people of Pennsylvania to the point of
revolution."8
Those opposing the modification of the uniformity clause of
Article IX, Section 1, won the day, and on the motion of Charles
H. English the commission adopted language identical with that
of the Constitution of 1874.

(2) The Com1mlzissioll of I958

Since 1920 there have been several attempts to revise the Penn-
sylvania Constitution of 1874 by holding a constitutional conven-

17 Opinion dated July 8, 1919. (Report and Official Opinions of the At-
torney general of Penisylvantia, 1919-1920, 90.)
"The Commission on Constitutional Amendment and Revision, Journal
of Proceedings (Harrisburg, 1920), I, 720-721, 723-724.
 THE INCOME TAX IN PENNSYLVANIA 299

tion. The voters turned down constitutional conventions in 1921,

1924, 1935, and 1953.19 One of the major considerations leading
to the rejection of a constitutional convention was the fear that a
graduated income tax would be authorized in any new constitution.
During this same period most of the states adopted some form
of graduated income tax. In Pennsylvania an amendment was sub-
initted to the voters in 1937 which would have permitted the legis-
lature to enact a graduated income tax. This amendment was de-
cisively defeated. The Pennsylvania legislature in 1935 enacted a
classified income tax which was promptly declared unconstitutional
by the state Supreme Court as violating the uniformity provision
of Article IX, Section 1.
In recent years many distinguished citizens have advocated re-
vision of the Constitution of 1874.20 Recognition of this move-
ment was given by the creation of a Constitutional Revision
Commission in 1958. This Commission made many suggestions for
revision, but, interestingly enough, it refused to recommend a
change in the uniformity clause of Article IX, Section 1. The
majority of the Commission felt that, "change in the uniformity
clause of Article IX, Section 1, to permit a graduated income tax
would be bitterly contested by the voters." 2'
The majority of the Commission, therefore, was of the firm
opinion that the recommendation of a graduated income tax might
imperil the adoption of the other recommendations of the majority.
The rejection of the moves to call a constitutional convention on
five occasions since 1891, the rejection of the proposed graduated
income tax amendments in 1913 and 1937, the rejection of the
inheritance tax amendment in 1928, and the rejection of many
individual amendments were all cited as support for the majority
view.22
A sharp difference of opinion occurred as a result of the failure
of the majority of the Commission to recommend a change in the
uniformity clause of Article IX, Section 1. This failure, the

"19The voters also rejected a constitutional convention in 1891. In no case

was the vote for a constitutional convention more than 45 per cent. Report
of the Commoiissionu on Constitutional Revision (Harrisburg, 1959), 14.
"2For example, Governors Fine, Leader, and Lawrence have all gone on
record for a revision of the Constitution of 1874.
"Report of the Comnmnission on Constitutional Revision (Harrisburg,
1959), 14.
22 Ibid., 10.
300 PENNSYLVANIA HISTORY

minority felt,' was so serious that it might "vitiate much of the

hard work done by the Commission." The minority felt the Con-
mission should adopt a tax system with progressive taxation be-
cause it would not unduly burden people of limited means. Jeffer-
son B. Fordhain and Richardson Dilworth in a separate minority
report argued that the uniformity of taxation under the Pennsyl-
vania Constitution is too restrictive, and that in most states the
uniformity clause applies only to ad valorem property taxation. A
progressive income tax, they felt, would be sufficiently flexible
to meet the revenue.needs of the state without unreasonable hard-
ship on any taxpayer.

B. Graduated Income Tax Amendments

(1) Amendment of 1913

In 1911 and in 1913, the Pennsylvania legislature passed joint

resolutions which proposed an amendment to the Constitution
of 1874 that would have authorized the legislature to classify the
subjects of taxation "for the purpose of levying graded or pro-
gressive taxes."
The electorate was almost evenly divided on this amendment.
It was defeated by the slim margin of 119 votes out of a total
of 408.071. The final vote was 204,095 against, and 203,976 for
the amendment. A total of 54 counties voted against the amend-
ment to 13 for it. Two counties, Philadelphia and Allegheny, gave
a combined majority for the amendment of 62,422.24 The re-
maining eleven counties which supported the amendment gave a
combined majority of 4,127. Thus, the thirteen counties which
approved the amendment gave a total majority of 66,189. The
adverse vote of 54 counties was, therefore, barely sufficient to
defeat the amendment by 119 votes.

(2) Amicndment of i919

This proposed amendment was never actually submitted to the

'The minority report was signed by Genevieve Blatt (Secretary of

Internal Affairs), Richardson Dilworth (Mayor of Philadelphia), Harriet
M. Geehan (Second Vice-President, Pennsylvania League of Women Voters).
: `4 Philadelphia's majority was 51,547 and Allegheny's 10,875. Lancaster,
Berks, and Dauphin counties were decisive in the defeat of the amendment.
They defeated the amendment by 12,934 votes.
 THE INCOME TAX IN PENNSYLVANIA 301

voters because of a ruling of the Attorney General that the joint

resolution was defective in the date of its submission.

(3) Amendment of 1928

The purpose of this amendment was not to enable the legislature

to enact a graduated income tax. It was concerned with giving
the legislature the authority to enact a non-uniform inheritance
tax. This amendment was defeated by a vote of 658,513 against to
429,516 for-a defeat by a margin of 228,997 votes.

(4) Amendmcent of 1937

In 1935 the Supreme Court of Pennsylvania declared that the
classified income tax law of 1935 was invalid in that it conflicted
with the uniformity provision of Article IX, Section 1. Evidently,
there had been doubts among the legislators that the 1935 classified
income tax would be sustained by the Pennsylvania Supreme
Court. Therefore, they had enacted in the regular sessions of
1935 and 1937 a joint resolution authorizing the submission of
the proposed income tax amendment to the voters of the state. 25
This amendment proposed not only to authorize the legislature
to enact graded or progressive income taxes, but also to grant
certain property exemptions. The proposed amendment read:

. . . the General Assembly may by general laws exempt

from taxation a uniform value in money of the total
taxable value of each person's property or of the taxable
value of homesteads.... Uniformity shall not be required
in the case of income, inheritance, estate and other excise
taxes which may be graded or graduated and provide for
exemptions.

This proposed amendment was overwhelmingly defeated by the

voters on November 2, 1937. The vote was 706,955 for and 971,996
against-a margin of 265,041. Only seven counties26 voted in favor
of the amendment. Philadelphia, however, defeated the proposed
i amendment by only 4,316 votes (156,607 against to 152,291 for).
Allegheny County also voted against the amendment-98,377 for
Laws of Pennsylvania, P.L. 1367 (1935) P.L. 2875 (1937).
Beaver, Berks, Erie, Fayette, Lackawanna, Montour, and Schuylkill.
The majority for the amendment by these seven counties was 22,335.
30>2 PENNSYLVANIA HISTORY

and 114,573 against. Several other important counties gave heavy

majorities against the proposed income tax amendment of 1937.27
One important factor that contributed to the defeat of this
amendment was the fact that in addition to providing for a grad-
uated income tax, it also empowered the legislature to grant broad
property tax exemptions. Thus, it was a double-barreled tax
amendment, ". . . providing for graded taxes and property exemp-
tions. The people may want one of these and not the other, but
as the amendment now comes to them, they must take both or
neither.`2
After the defeat of the above amendment, the Philadelphia
Evening Bulletin commented editorially:

No tears need be shed over the emphatic defeat of the

proposed income tax amendment to the Pennsylvania
Constitution. It was not what it proposed to be; for under
pretense of tapping a new revenue vein, it would have
dangerously enlarged the leaks in property exemption. 2 9

The failure to submit the income tax amendment on its own

nierits may have been the decisive factor in its defeat. The legis-
lature had successfully enacted a graded income tax, and although
it was held unconstitutional as violative of the uniformity pro-
vision of Article IX, Section 1, there is some substance to the
contention that the pressing need for additional revenue and the
principle of a tax geared to ability to pay might have been accept-
able to the voters in 1937. In spite of the defeat of the income tax
amendment in 1937, efforts have been continued in the legislature
to resubmit the question to the voters.

THE CLASSIFIED INCOME TAX OF 1935

In 1934 the Democratic party elected a governor for the first
time since 1890. The Democratic party also won control of the
state Senate and House. The increased demands upon the state
for school funds, welfare programs, and expansion of other func-
tions compelled the General Assembly to seek new sources of
'Cambria, Chester, Delaware, Lancaster, Luzerne, Montgomery, and
York. These counties (plus Philadelphia and Allegheny) defeated the amend-
ment by 124,483 votes.
6 Philadelphia Evening Bulletin, November 1, 1933, 8.
"IIbid., November 4, 1937, 14.
 THE INCOME TAX IN PENNSYLVANIA 303

revenue. Local units of government were seeking new revenue, but

the tax burden on real property, the principal source of local
revenue, was such that there was much local resistance to raising
the property levy. A classified income tax was proposed.
Governor George H. Earle, III, initially opposed" 0 the enact-
ment of a graded income tax by the legislature because of his
doubts as to its constitutionality. He felt that it would work
hardship upon "thousands of Pennsylvania businesses and in-
dustries operating at a small margin of profit." But later Gov-
ernor Earle stated that he would approve the submission of a
graduated income tax amendment to the people provided the pro-
ceeds of such a tax were devoted to school use.
The classified personal income tax of 1935 provided for rates
graduated from 2% to 8%. The 2% rate applied to incomes up
to $5,000 and the 8% to net incomes in excess of $100,000. Ex-
emptions of $1,000 were granted to single persons, $1,500 for
married persons or heads of families and $400 for dependents
under the 1935 act. A similar tax (1% to 8%) was levied on all
net income from "property owned and from any business, trade, or
occupation or professions carried on" in Pennsylvania by non-
residents.
This classified income tax was enacted in the face of its con-
tended unconstitutionality. The Supreme Court of Pennsylvania
in Kelly v. Kalonder31 did in fact declare the entire act to be un-
constitutional in that it violated the uniformity provision of Article
IX, Section 1, of the Constitution of 1874.
The state argued that the income tax should be sustained bh-
cause of the excessive tax burden on real estate and because "the
necessities of the times requires that the tax burden be more
equitably distributed." This argument was rather abruptly re-
jected by the court which held that "there would be no stability
in our law"32 if necessity alone justified legislation.
In the Kelly case the court gave some weight to the action of
the voters in rejecting the proposed graduated income tax amend-
nent in 19X13, and the inheritance tax amendment of 1928, as
evidence of public "antagonism to the proposed theory of taxa-

"3°Philadelphia Inquirer, February 13, 1935.

3'220 Pa. 180 (1935).
R2Ibid., 192.
304 PENNSYLVANIA HISTORY

tion."`i The court also held that a tax upon income from property
is a property tax and not an excise tax and, therefore, requires
uniformity. The court, however, refused to rule that a tax upon
personal income is a tax upon property and rejected the per-
sonal income tax on the basis that classes of incoMe&4 created
by the 1935 income tax law were a "pretended classification"
and were, therefore. "unjust, arbitrary, and illegal." As a justifica-
tion for this view the court cited the case of Copes Estate"
which held unconstitutional a tax levied on inheritance by classify-
ing inheritance taxes according to the amount of inheritance.
A severe blow was given to the graduated income tax move-
ment in Pennsylvania by the decision of the Pennsylvania Supreme
Court in the Kelly case and by the subsequent rejection in 1937
of the proposed graduated inconme tax amendment.

LOCAL GOVERNMENT INCOME TAX IN PENNSYLVANIA

In 1932 the Pennsylvania legislature passed the Sterling Act-"

which permitted Philadelphia and Pittsburgh to levy income and
other taxes. These taxes were to be in effect until such time as
the state itself should tax the same subject. In such a case the
state tax would automatically vacate the city ordinance passed
under the authority of the Sterling Act. The above provision was
intended to avoid double taxation of the same subject matter. 7

I. Philadelphia Income Taxes

A. 1938-Under the authority of the Sterling Act, Philadelphia
on November 26, 1938, enacted an income tax ordinance. This
ordinance levied an income tax on individuals and provided for
a $15.00 exemption credit per person. It contained no tax-with-
holding featured8 This 1938 income tax ordinance, however, was
declared unconstitutional by the Pennsylvania Supreme Court in
Butcher v. City of Philadelphia, insofar as it provided for a $15.00

Ibid.
k Classes were: under $20,000; $20,000 to $100,000; and in excess of
$100,000.
3 191 Pa. 122.

"Laws of Penna., P.L. 45 (August 5, 1932).

" See Murray v. Philadelphia,364 Pa. 157 (1950).
" The withholding feature was later incorporated into law, and was held
constitutional in Dole v. City of Philadelphia, 337 Pa. 375 (1940).
 THE INCOME TAX IN PENNSYLVANIA 30;5

exemption. 1 The exemption, it was held, violated the uniformity

provision of Article IX, Section 1, of the Pennsylvania Constitu-
tion of 1874. The rest of the ordinance was held valid. The city,
nevertheless, repealed the 1938 ordinance on January 7, 1939.
B. 9i939-On December 13, 1939, the city of Philadelphia en-
acted a new income tax ordinance. This act provided for a rate of
1'2%! on all income from wages and salaries. The act also con-
tained a withholding provision, and the tax was applicable to resi-
dents of Philadelphia, and to non-residents who worked in Phila-
delphia. 40 In addition to taxation of the wages and salaries of
individuals, the ordinance levied a tax on net profits of indi-
viduals engaged in unincorporated businesses. Since 1939 the
rate of the Philadelphia income tax has varied from 1% to 1 '2%.
The yield has been substantial-from $16.3 million in 1940 to
$69.0 million in 1950.

11. Pittsburgh Income Tax

Not until March 1, 1954, did Pittsburgh introduce an income
tax. Its initial rate was 1%, but this was increased to 12% iion
January 1, 1955. This tax is levied upon the wage and salary
income of individuals and the net profits of unincorporated busi-
nesses. The yield of this tax has increased-from $5,800,000 in
1955 to $6,013,872 in 1959.

III. Extension of the Wage Tax to Other

Pennsylvania Jurisdictions
A very important extension of the power of local governmental
units to enact an income tax was granted by the legislature in
1947. In that year the Sterling Act was amended and the power
to enact an income tax was extended to "class 2a cities, cities
of the 3rd class, boroughs, towns, townships of the 1st class,
school districts of the 2nd class, school districts of the 3rd class,
school districts of the 4th class." 41 At first there was no limit on
the rate of income tax which the local governmental units could

:'333 Pa. 477 (1938).

"' The taxation of non-residents was upheld in Dole v. City of Phila-
ticlphia, 337 Pa. 375 (1940).
LaLzus of Pennsylvania, P.L. 1145 (1947).
306 PENNSYLVANIA HISTORY

levy, but later the legislature limited this rate to a maximum

of 1% .42
The 1947 act did not contain a provision for an offset credit
of the Philadelphia income tax which could be applied against
any income tax imposed by the local government unit in which
the taxpayer resided. Nor did the act contain any provision for
the sharing of the receipts of the Philadelphia income tax with
other political jurisdictions whose residents paid the Philadelphia
income tax. As a result none of the areas adjacent to Philadelphia
has enacted an income tax under the Act of 1947.4' Several at-
tempts have been made to have the General Assembly limit the
Philadelphia income tax to residents of Philadelphia. But all such
efforts have either failed to pass in the legislature, or if passed,
have been vetoed by the Governor. 44
However, other local political subdivisions must allow a wage
tax credit for all residents who work in other jurisdictions. School
districts levy the wage tax only upon residents. Where the city
and the school district are co-terminous (for example, a city and
a school district), the 1%gincome tax limit must be shared equally
between them unless they agree to a different basis of sharing the
income tax receipts.4o
Since the enactment of the enabling act of 1947, a total of 786
local governmental units have adopted an income tax varying, for
the most part, from '2% to 1 %0.46 Revenue from the earned in-
come tax is now an important source of revenue for local gov-
ernmental units. The increasing dependence of local governmental
units upon income taxes as a source of revenue is bringing Penn-
sylvania nearer to the stage when it may be advantageous to have
a state-wide uniform tax rather than thousands of local income
taxes.
If the state were to adopt a uniform income tax, an immediate
problem would confront the local governmental units using the

'Ibid., P.L. 898 (1949).

4 The city of Chester late in 1959 contemplated the adoption of a 1%l
income tax, but the city finally turned to other tax sources.
Vetoed by Governor Leader on May 24, 1957.
4 See Minich v. City of Sharon, 266 Pa. 267 (1951).
"4The leading counties with governmental units using the income tax as
of September 1, 1959, include: Allegheny (151) ; Cambria (75) ; West-
moreland (54); Beaver (52); Washington (50); Mercer (44) ; Lycoming
(39); Crawford (37); and Erie (35). In 1953 only 286 units had an
income tax.
 THE INCOME TAX IN PENNSYLVANIA 307

income tax. The state would be faced with the necessity of re-
placing the local revenue that would be lost through the state in-
come tax. This might be done by: (1) a saving clause which
would permit the local units to retain the income tax in addition
to the state income tax; (2) returning to the local units the
revenue lost by dropping the local income tax; (3) authorizing
the raising of present real estate and other local taxes; (4) au-
thorizing new local taxes; (5) increasing state grants to local
units; or (6) absorption by the state of some of the functions of
local government.
Each of the above has its difficulties, and these difficulties will
increase as more and more local units of government adopt the
income tax. A state-levied uniform income tax would have the
advantage of centralized collection and distribution. Such a state-
wide uniform income tax might be regarded as an interim measure
until the voters have an opportunity to vote on a graduated income
tax amendment.

PROSPECTS FOR THE INCOME TAX IN PENNSYLVANIA

I. The Uniform Income Tax

There exists little likelihood that the revenue demands of
the Commonwealth will decrease in the years ahead. All projec-
tions point toward even greater revenue needs in the future.
The 1959-1961 general fund appropriations of the Commonwealth
were approximately $1.9 billion, compared with $531 million
in 1945-47.
Governor Fine in his message to the legislature on March 21,
1951, proposed a flat '2%o0 income tax as one which would yield
substantial revenue but at the same time would "fall least heavily
upon those who can least afford to pay additional taxes." Governor
Fine also contended that such a tax would be anti-inflationary,
and that credit as a tax reduction would reduce the federal income
tax liability of the taxpayer. The legislature rejected Governor
Fine's request and instead adopted a sales tax.
Nor was Governor Leader successful in securing the passage of
his 1%7o flat income tax. Governor Leader repeated Governor
Fine's arguments for the adoption of the income tax, but without
success in the state Senate. The prolonged session of 1954-1955
308 PENNSYLVANIA HISTORY

finally enacted a sales tax which yielded-$198.4 million in 1955-57.

Since 1957 no progress has been made in the state legislature in
the direction of enacting a state-wide uniform income tax.

II. The Graduated Income Tax

In the session of 1959 the Democratic House of Representatives
passed a resolution by a vote of 114 to 69 which provided for
submission to the voters of a constitutional amendment for a
graduated income tax. This resolution would have placed a ceiling
of 6% on the graduated rate. The resolution was never brought
to a vote in the state Senate; it was bitterly attacked by Senator
Edward J. Kessler who described such a tax as the "most
despicable impost ever invented.""4 There is little chance at the
moment that the General Assembly will enact a joint resolution
to submit a graduated income tax to the voters in view of the
present political division of the Pennsylvania legislature.

THE FUTURE

It seems clear that the Commonwealth cannot in the future avoid

some form of a state-wide income tax for the following reasons:
1. The graduated income tax is at present used as a source of
revenue in 33 states.
2. Most of the states have some form of sales tax in addition to
the income tax.
3. The revenue needs of the Commonwealth will continue to in-
crease.
4. The political complexion of the Commonwealth may shift to
the Democratic philosophy of a state income tax, probably
graduated.
5. The nature of the sales tax is regressive.
6. It will be politically difficult to increase th- present sales tax
beyond the 4% rate.
7. It will be equally difficult to broaden the sales tax base to
cover the necessities of life not yet taxable by the sales levy.
8. The income tax, especially the graduated levy, is geared to
the ability to pay.

'Philadelphia Inquirer, August 12, 1959, 11.

 THE INCOME TAX IN PENNSYLVANIA 309

9. The income tax is easy to collect, and taxes the income source
directly.
10. The income tax is not shiftable.
11. The yield is high, and there are few evasions or delinquencies.
12. The rates are easy to establish.
13. The income tax reaches those with little or no taxable property.
It is also a just and fair principle that the voters be given a
chance, in view of the changes that have occurred in recent years
in the functions and costs of government, to vote on an income
tax amendment that will present a clear yes-or-no choice in
respect to the adoption or rejection of a graduated income tax.
The only alternatives to some form of income tax are: the in-
crease and broadening of the sales tax, new forms of taxes (such as
parimutuel betting), increase in corporate income and other taxes.
motor vehicle taxes (these can and should be considerably in-
creased), per capita taxes, increase in cigarette and tobacco taxes,
and a series of "nuisance taxes." Another approach would be the
reduction of state expenditures. curtailment of certain functions,
and a limitation of new functions and services. This approach will
probably not be tried. Therefore, some form of personal income
taxation appears the only remaining choice.

SUMMARY

The expansion of the functions and services of the Pennsylvania

state government has resulted in the adoption of extensive new
taxation, and increased levies of other tax sources. The expansion
of state functions makes inevitable the adoption of new taxes. The
one yet untapped source of revenue, on the state level, is per-
sonal income. Historically speaking, Pennsylvania had a faculty
tax of some type from 1782 to 1871, and has revived this tax in
recent years. In the Civil War period, Pennsylvania introduced a
corporate income tax for purposes of debt retirement, and this
corporate income tax is similar to the modern concept of corporate
income tax.
The Pennsylvania Constitution of 1874 introduced in Article
IX, Section 1, the concept of uniformity in taxation. Uniformity
had traditionally applied to ad valorem taxation, but Pennsyl-
vania has also applied it to income taxation. The constitutional
convention of 1872-1873 did not debate the issue of uniformity
310 PENNSYLVANIA HISTORY

of personal income taxation, but devoted its attention to the issue

of uniformity of corporate taxation.
Since 1874 five attempts to have the voters call a new constitu-
tional convention for the formulation and adoption of a new con-
stitution have been defeated by the voters. The voters have also
rejected, in 1913 and in 1937, attempts to amend the uniformity
clause to permit the legislature to enact a system of graded or
progressive income taxation. In 1928 the voters rejected an effort
to allow non-uniform inheritance taxes. Constitutional revision
commissions have likewise failed to advocate the adoption of a
progressive income tax. Efforts to enact a state-wide flat income
tax have failed of adoption by the legislature. The 1935 progressive
income tax was declared unconstitutional by the Pennsylvania
Supreme Court as violative of the uniformity clause of the Con-
stitution of 1874. The uniform flat-rate corporate income tax of
1935, however, has become a very important source of state revenue
since its adoption.
In 1932 the legislature authorized Philadelphia and Pittsburgh
to enact a flat personal income tax. Since 1947 some 786 local
governmental units in the state have enacted flat rate income tax
laws pursuant to the authority granted under Act 481. The wide-
spread use of the income tax on the local level poses the question
of whether such a tax should be imposed on a state-wide basis,
even if the proceeds of such a tax are partly redistributed to the
local governmental units, or if some other solution should be
adopted.
The future prospect indicates that present sources of tax revenue
will be insufficient to meet the growing needs of the state. It is
this fact alone that may force the adoption of a flat rate income
tax. Such a tax will give added force for the submission of a con-
stitutional amendment empowering the legislature to enact a
graduated income tax.