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