Appeals from decree of Commonwealth Court, Nos. 255, 260, and 275, May T., 1971, in case of D. Curtis Amidon, Rodney D. Mayheim and Marvin M. Zimmerman v. Robert Kane, Secretary of Revenue, Robert P. Casey, Auditor General and J. Shane Creamer, Attorney General of the Commonwealth of Pennsylvania; Richard A. Tilghman et al. v. Robert Kane, Secretary of Revenue; concerned taxpayers of Allegheny County et al. v. Commonwealth of Pennsylvania and Robert Kane, Secretary of the Department of Revenue.
Perrin C. Hamilton, with him Walter T. Darmopray, Joseph A. Malloy, Jr., and Hamilton, Darmopray, Malloy & Milner, for plaintiffs, appellants.
Sidney M. DeAngelis, for plaintiff, appellant.
Robert E. Wayman, with him Wayman, Irvin, Trushel and McAuley, for plaintiffs, appellants.
Israel Packel, with him Frank P. Lawley, Jr., William H. Smith, and J. Shane Creamer, Attorney General, for Secretary of Revenue et al., appellees.
Bell, C. J., Jones, Eagen, O'Brien, Roberts, Pomeroy and Barbieri, JJ. Opinion by Mr. Justice Roberts. Mr. Chief Justice Bell joins in this opinion and files a concurring opinion. Concurring Opinion by Mr. Chief Justice Bell. Concurring Opinion by Mr. Justice Pomeroy. Dissenting Opinion by Mr. Justice Eagen. Mr. Justice Jones joins in this dissent.
In this consolidated appeal, we are asked to review a May 20, 1971 decree of the Commonwealth Court dismissing three separate complaints in equity challenging the constitutionality of the recently enacted Personal Income Tax provided by Article III of the Tax Reform
Code of 1971, adopted March 4, 1971, Act No. 2, 72 P.S. § 7107 et seq.*fn1
The various plaintiff-appellants advance four arguments in support of their claims that the Personal Income Tax is repugnant to the Pennsylvania Constitution. First, it is contended that the tax violates Article VIII, Section 12(a) by virtue of its enactment without the Governor's submission to the General Assembly of a balanced operating budget. Second, it is urged that the tax constitutes an illegal delegation of legislative power in contravention of Article II, Section 1. Third, it is claimed that the tax illegally exempts property from taxation in violation of Article VIII, Section 5. And finally, it is argued that the tax ignores the mandate of Article VIII, Section 1 that "[a]ll taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, . . . ."
After careful and considerable study, we conclude that the tax in question offends the constitutional requirement of uniformity and that it is for this reason invalid.
Preliminarily, it is noted that we are not unmindful of the fiscal problems and difficulties besetting the Commonwealth. We must at the same time, however, emphasize that our awareness and full appreciation of these problems cannot in any way enlarge or otherwise affect our limited constitutional role in this adjudication.
The selection of subjects for taxation, their classification, and the method of collection are legislative matters. Jones & Laughlin Tax Assessment Case, 405 Pa. 421,
A.2d 856 (1961). Thus, this Court may not consider the wisdom of a challenged tax or the purpose of its enactment. Blauner's, Inc. v. Philadelphia, 330 Pa. 342, 198 Atl. 889 (1938). So long as a statute is constitutional, the Legislature is the sole judge of its necessity or expediency and a court cannot refuse to enforce it on any ground that it is unjust, unwise, inexpedient, obsolete or contrary to any supposed policy or custom. Olin Mathieson Chemical Corporation v. White Cross Stores, Inc., 414 Pa. 95, 98, 199 A.2d 266, 267 (1964); Lurie v. Republican Alliance, 412 Pa. 61, 65, 192 A.2d 367, 370 (1963); Commonwealth ex rel. Kelley v. Cantrell, 327 Pa. 369, 193 Atl. 655 (1937); Commonwealth ex rel. Kelley v. Clark, 327 Pa. 181, 193 Atl. 634 (1937); Harris v. Mercur, 202 Pa. 313, 51 Atl. 969 (1902); Journeay v. Gibson, 56 Pa. 57 (1868); Steiner v. Coxe, 4 Pa. 13 (1846); see also Commonwealth v. Life Assurance Company of Pennsylvania, 419 Pa. 370, 377-78 n. 11, 214 A.2d 209, 215 n. 11 (1965), appeal dismissed, 384 U.S. 268, 86 S. Ct. 1476 (1966).
Conversely, however, we cannot deem a legislative enactment constitutional merely because it may seem in our view to be just, expedient, necessary or wise, or because it enjoys unanimous popular support. The Constitution is in matters of state law the supreme law of this Commonwealth to which all acts of the Legislature and of any governmental agency are subordinate, Pittsburgh Railways Co. v. Port of Allegheny County Authority, 415 Pa. 177, 202 A.2d 816 (1964); Cali v. Philadelphia, 406 Pa. 290, 177 A.2d 824 (1962), and it is our duty and responsibility to consider only whether the legislation meets or violates constitutional requirements. Stander v. Kelley, 433 Pa. 406, 250 A.2d 474 (1969). Accordingly, quite aside from the instant tax's possible social, economic or other merit, we must
determine whether it satisfies the constitutionally mandated standard of uniformity.
The Personal Income Tax contained in Article III of the Tax Reform Code of 1971 operates as follows:
Section 305 of the Code purports to impose a tax "[f]or the privilege of receiving, earning or otherwise acquiring income from any source whatsoever . . . ." However, the annual tax of 3 1/2% is levied not upon all income "from any source whatsoever" but rather only upon "the taxable income of the taxpayer". "Taxable income" is defined in Section 302(q) to mean with a few specific variations "the same as 'taxable income' as defined in the Internal Revenue Code . . . ."*fn2
The concept of taxable income in the Internal Revenue Code is of course an artificial construct, in many ways far removed from the common and ordinary meaning of the term income. For example, income derived from gifts and inheritances, interest on the obligations of a state or political subdivision, contributions by employers to employee health and accident plans, and the first one hundred dollars received by a taxpayer as dividends from domestic corporations is all specifically excludable from taxable income.*fn3 In addition, the Internal Revenue Code permits the deduction of myriad items from actual or gross income in order to compute taxable income.*fn4 Some of the more common and well known examples of such deductions are real estate taxes, interest on real estate mortgages and other personal financing, alimony payments, and various other state and local taxes.*fn5
The structure of the Pennsylvania Personal Income Tax may be alternatively illustrated and perhaps clarified by consideration of the following schematic summary of Internal Revenue Service Form 1040, the officially prescribed form for individual federal income tax returns.*fn6
15 㤱 INCOME (business income; capital gains;
pensions and annuities, rents
and royalties, partnerships,
estates or trusts, etc.; farm
income; miscellaneous income)
17 -ADJUSTMENTS (sick pay; moving expenses;
employee business expense; self-
employed retirement plan)
47 -DEDUCTIONS (medical and dental expenses;
taxes; contributions; interest;
In other words, the Pennsylvania Personal Income Tax is tied directly to "line 50" of IRS Form 1040, the amount appearing on that line being subject to the 3 1/2% annual tax.
As is readily apparent from an examination of Table I, most of the discrepancies between an individual's actual total income "from any source whatsoever" and his Pennsylvania "taxable income" arise as a consequence of the subtraction of the various adjustments, deductions, and exemptions appearing between lines 16 and 50. As to some taxpayers, however, even line 16 does not reflect all income from whatever source. As stated above, the Internal Revenue Code provides that certain species of income are altogether excludable from taxable income. Thus, for example, a person whose only income is in the form of interest received from state or municipal bonds (tax exempts) need not report any of such income on any of the lines prior to line 16 with the result that the amount entered on line 16 will be zero.
After defining taxable income in terms of the federal tax base,*fn7 the Tax Reform Code of 1971 provides four
types of tax credits. Section 316 allows a credit for income taxes imposed by another state, Section 317 provides a similar credit for 30% of certain local taxes, and Section 318 deals with a credit for taxes paid by a trust on accumulated income. Finally, Section 319 sets out a variable schedule of "vanishing tax credits" for the benefit of individuals whose state taxable income does not exceed $9,900.
Does then the foregoing scheme of taxation conform to the requirements of the Uniformity Clause?
The constitutional imperative of uniformity in the imposition of taxes has remained unchanged since its first adoption in the Pennsylvania Constitution of 1874.*fn8 Article IX, Section 1 of that constitution directed without qualification that: "All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws." Legislative
proposals to amend the Uniformity Clause were rejected by the electorate in 1913 and 1928,*fn9 and the May, 1967 referendum submitted to the people of Pennsylvania concerning whether a constitutional convention would be called specifically provided that the convention would not revise that portion of the constitution. Likewise, the constitutional convention enabling act stated in no uncertain terms that ". . . nor shall that part of Article IX, Section 1 of the Constitution providing that: 'All taxes shall be uniform . . .' be modified, altered or changed in any respect whatsoever." Act of March 16, 1967, P. L. 2, § 7,  Pa. Laws 7. (Emphasis added.)
In addition to its unbroken historical continuity, the constitutional standard of uniformity also possesses widespread and far reaching application. While some other jurisdictions adhere to the view that uniformity applies only to property taxes,*fn10 our particular constitutional mandate that "[a]ll taxes shall be uniform . . ." is quite clear, and it is settled that this mandate applies to all species of taxes. As was stated in Saulsbury v. Bethlehem Steel Co., 413 Pa. 316, 196 A.2d 664 (1964): "The question of whether or not the constitutional requirement of uniformity applies to a particular kind of tax depends upon the peculiar wording of the requirement itself. The Pennsylvania Constitution specifically states that ' All taxes shall be uniform, upon the same class of subjects.' (Emphasis supplied.) This language is as broad and comprehensive as it could possibly be and must necessarily be construed to include all kinds of taxes, be they in the nature of property or excise levies. The Pennsylvania constitutional provision is all inclusive and is clearly not limited to requiring uniformity
on property taxes alone. See Banger's Appeal, 109 Pa. 79 (1885); Cope's Estate, 191 Pa. 1, 43 A. 79 (1899); Kelley v. Kalodner, supra [320 Pa. 180, 181 Atl. 598 (1935)]; Com. ex rel. v. A. Overholt & Co., Inc., 331 Pa. 182, 200 A. 849 (1938); and 51 Am. Jur., Taxation, § 157." Id. at 319, 196 A.2d at 666. It is thus quite clear that the instant tax must satisfy the requirement of uniformity.
The substantive content of the Uniformity Clause is of course less susceptible to precise definition than is the scope of its application. However, certain general principles are well established. As this Court declared in the Allentown School District Mercantile Tax Case, 370 Pa. 161, 87 A.2d 480 (1952): "[The Uniformity Clause] means that the classification by the legislative body must be reasonable and the tax must be applied with uniformity upon similar kinds of business or property and with substantial equality of the tax burden to all members of the same class: Commonwealth v. Girard Life Insurance Co., 305 Pa. 558, 158 A. 262; Knisely v. Cotterel, 196 Pa. 614, 46 A. 861; Dufour v. Maize, 358 Pa. 309, 56 A.2d 675; Commonwealth v. McCarthy, 332 Pa. 465, 3 A.2d 267; Dole v. Philadelphia, 337 Pa. 375, 11 A.2d 163. . . .
"Uniformity requires substantial equality of tax burden: Com. v. Overholt & Co., Inc., 331 Pa. 182, 200 A. 849; Com. v. Repplier Coal Co., 348 Pa. 372, 35 A.2d 319; Moore v. Pittsburgh School District, 338 Pa. 466, 13 A.2d 29. While taxation is not a matter of exact science and perfect uniformity and absolute equality in taxation can rarely ever be attained (Wilson v. Philadelphia, 330 Pa. 350, 352, 198 A. 893), the imposition of taxes which are to a substantial degree unequal in their operation or effect upon similar kinds of business or property, or upon persons in the same classification, is prohibited: Cf. Com. v. Overholt & Co., Inc., 331 Pa. 182, 190-191, 200 A. 849; Pollack v. Farmers' Loan
and Trust Co., 157 U.S. 429, 599. Moreover while reasonable and practical classifications are justifiable, where a method or formula of computing a tax will, in its operation or effect, produce arbitrary or unjust or unreasonably discriminatory results, the constitutional provision relating to uniformity is violated: Turco Paint & Varnish Co. v. Kalodner, 320 Pa. 421, 184 A. 37; Hans Rees' Sons v. North Carolina, 283 U.S. 123.
"We may aptly repeat what was said by (former Chief) Justice Maxey in Com. v. Overholt & Co., Inc., 331 Pa., supra, page 191: 'A tax to be uniform must operate alike on the classes of things or property subject to it. . . .'" Id. at 167-68, 170, 87 A.2d at 483, 484.
In addition to these general principles, two prior decisions of this Court are particularly pertinent to our disposition of this appeal.
The first of these, Kelley v. Kalodner, 320 Pa. 180, 181 Atl. 598 (1935), involved a 1935 Pennsylvania statute imposing an annual tax upon the entire net income of Pennsylvania residents and upon net income received by nonresidents from property owned or from any business or occupation carried on in the Commonwealth.*fn11 That act authorized many exemptions for purposes of calculating "gross income" and numerous deductions for the computation of "net income". It likewise sought to enact a standard deduction for living expenses ($1,000 in the case of single persons and $1,500 in the case of married persons and heads of households), and an additional $400 deduction for each dependent under the age of eighteen. The tax was then imposed upon net income at a graduated rate: incomes under five thousand dollars were taxed at 2%; incomes between five and ten thousand dollars at 2 1/2%; incomes between ten and twenty-five thousand dollars at 3%; etc. Reasoning
as follows, this Court declared the tax invalid: "The question then arises, does the act fulfill the rule of uniformity prescribed by the Constitution. Plaintiffs contend it does not and for several reasons. The first is that the provision exempting from taxation those persons whose incomes fall below $1,000 or $1,500, depending upon whether they are single or married, shows upon its face a lack of uniformity. There can be no doubt that these exemptions were inserted for the purpose of putting the burden of the tax upon those most able to bear it, but it results in taxing those whose incomes arise above a stated figure merely because the legislature believes their incomes are sufficiently great to be taxed. It is obvious that the application of the tax is not uniform. . . . Moreover, the tax is in violation of the uniformity clause in its application to the persons whose incomes fall within the various brackets designated in the act. . . ." 320 Pa. at 188-89, 181 Atl. at 602 (emphasis added). The Kelley decision, in other words, clearly involved an alternative holding: the tax was deemed constitutionally deficient both because of the personal exemptions and because of the graduated rate.
The second of the two decisions most significant to the instant case is Saulsbury v. Bethlehem Steel Company, supra, decided in 1964. In that case we ruled then an "occupation and occupational privilege tax" which exempted individuals with an annual income of less than $600 transgressed the limits of uniformity. In so holding, this Court reaffirmed the rule of Kelley v. Kalodner and largely on the basis of that decision concluded that: "If a tax is levied on an occupational privilege, it must apply to all who share the privilege. Part of this class may not be excused, regardless of the motive behind the action." 413 Pa. at 320, 196 A.2d at 666 (emphasis added).
It is true that the challengers of the constitutionality of state or local taxation bear a heavy burden in their efforts to overturn such legislation. See, e.g., Commonwealth v. Life Assurance Company of Pennsylvania, supra, at 376-77, 214 A.2d at 214. Nevertheless, in comparing the taxing scheme in Kelley and Saulsbury with that involved in the instant case, the conclusion is unescapable that the personal income tax presently challenged violates uniformity. Although the Tax Reform Code of 1971 purports to impose a flat 3 1/2% tax upon "taxable income", the concept of "taxable income" already reflects the federal personal exemptions for the taxpayer and his qualified dependents. (See Table I, supra, lines 49 and 50.) Thus, built-in to the Tax Reform Code of 1971 are exactly the same elements of nonuniformity as were condemned in both Kelley and Saulsbury.
A further noteworthy feature of inequality is the instant tax's exclusion from taxable income of all interest received on the obligations of the Commonwealth or any of its political subdivisions. The Tax Reform Code of 1971 imposes in its own terms a tax "[f]or the privilege of receiving, earning or otherwise acquiring income from any source whatsoever . . . ." The holder of tax exempt Pennsylvania securities certainly enjoys this privilege of receiving income yet is not taxed for the privilege but instead is given a tax preference. This situation is manifestly contrary to our holding in Saulsbury that a tax upon a privilege ". . . must apply to all who share the privilege." In addition, despite the existence of a legislative policy favoring this type of tax preference for state and local obligations of this Commonwealth, such a legislative policy cannot prevail over a clear constitutional mandate of uniformity.
We need not, however, limit our present analysis to these particular inequalities, for the Personal Income
Tax is replete with other commonly occurring instances of nonuniformity, many of which can be conveniently illustrated in the following tables. The examples contained in these tables have been consciously chosen to reflect the state income tax liability of ...