Collection of the Museum of American Finance
Massachusetts Treasury Certificate # 1794, which“ shall be received in Payment for one-third of the Tax( No. 5) granted in March 1786.”
land to 10 states for the benefit of about 45 railroads.
The second difference was a more limited reliance in the United States on internal taxation by the national government, and much heavier use of internal taxes by state and local governments. In other words, the intergovernmental compact over taxation in the United States was substantially different than that in Britain.
The key element of the compact in the United States was a strong commitment to the fiscal prerogatives of state and local government. The British efforts to impose internal taxation had only strengthened the traditional commitment of the colonies to state autonomy. Funding state militias during the Revolution and paying off war debts of the states during the 1780s had produced further expansion of state taxes. Within the New England and Middle Atlantic states, reformers embraced“ ability to pay” and succeeded in moving away from deeply unpopular poll taxes and shifting to taxes on wealth as measured by the value of property holdings.
Successes in reforming and expanding the capacity of the states to tax increased their reluctance to relinquish taxing powers to a central government. In part to protect the states’ tax base, the Constitution constrained the ability of the central government to tax internally. Article 1, Section 9 required that“ direct” taxes( taxes levied directly on individuals), which included property taxation, be allocated to the states according to the distribution of population rather than wealth.
Motivations to maintain or expand state fiscal autonomy, however, varied greatly by region. The differences between the northern and southern states were powerful and tragic.
In the North, state governments assumed a wide range of economic and social responsibilities, financing canals and railroads, building state hospitals and prisons, and establishing colleges. To fund these programs, northern states increased property taxes that piggy-backed on local property taxes and expanded the scope of property taxation in order to tax all forms of wealth rather than just land and buildings.
In addition, states imposed special taxes on corporations. Between 1830 and 1860, Massachusetts, for example, raised between one-half and three-fourths of its general revenue from a tax of 1 % on the capital stock of banks. In 1854, Wisconsin adopted a tax on gross corporate receipts, and this state tax became a model for federal corporate taxation during the Civil War. Meanwhile, local governments spent heavily on schools and roads and, during the 1840s and 1850s, industrializing cities like New York, Philadelphia and Boston expanded property taxation to pay for water and sewer systems, paved streets, hospitals and police and fire departments. Beginning in the 1840s, local governments collectively spent and taxed on a scale that almost equaled that of the federal government. Between the Revolution and the Civil War, state and local governments together spent more than the federal government.
In the southern states, the attachment to state fiscal autonomy was also strong. But state and local governments in the
region were far less interested in major expenditure programs for education or improved transportation. Consequently, these states could rely heavily on random fees, licenses, poll taxes and poorlyassessed property taxes. Southern states taxed slave owners lightly, often through poll taxes that the slave owners preferred to taxes on the market value of their slaves.
At the federal level, slave owners blocked the federal government from applying property taxes to slaves. If it had not been for the determination of southern slaveholders to shield slavery from federal taxation, the framers of the Constitution probably would have softened the restriction of federal property taxation established by Article 1, Section 9. By including this provision in the Constitution, the founders were interested not only in protecting state and local tax revenues, but also in accommodating the political power of slave owners and, thereby, holding the new union together.
The result was a tragic compromise of republican ideals and a serious, longterm limitation on the development of the fiscal capacities of the federal government. Without this protection, the federal government might well have begun a gradual assault on slavery, just as the slave owners feared, and also attempted to expand national-level spending programs for infrastructure, education and even welfare. The federal government might have funded those programs in part on the models created by innovative state governments, perhaps by piggybacking a federal property tax on the property taxes assessed by state and local governments. Without the Constitutional constraint on property taxation by the national government, the commonwealth ideal— a combination of capitalism with government promotion of both economic development and social cohesion— might have found fuller expression at the federal level.
By the 1860s, the modern financial state rested on three legs: buoyant federal revenues kept strong by vigorous foreign trade; a rich domain of federal lands; and a vibrant partnership among all levels of government. However, the prospect of the expansion of slavery and the division of the Union
18 FINANCIAL HISTORY | Summer 2017 | www. MoAF. org