U.S. Supreme Court COLGATE v. HARVEY, 296 U.S. 404 (1935)

[Page 296 U.S. 404, 419]

Vermont, while exempting from the tax dividends earned within the state, thereby denying petitioner the equal protection of the laws in violation of the Fourteenth Amendment; (2) the act, in violation of the same clause, discriminates in favor of money loaned within the state as against money loaned outside the state; (3) the act arbitrarily denies appellant the $ 800 exemption while giving it to other persons whose situation differed from his only in that they had no income from business, and thereby denies appellant the equal protection of the laws guaranteed by the Fourteenth Amendment; and in each of these three particulars the act abridges the privileges and immunities of appellant as a citizen of the United States in contravention of the same amendment. [Footnote 2]

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United States. This fact is obvious and vital, and no elaboration is required to establish it.

Section 2 of article 4 of the Constitution contains the provision, 'The Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States.' The Fourteenth Amendment, section 1, provides: 'All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States.'

Thus, the dual character of our citizenship is made plainly apparent. That is to say, a citizen of the United States is ipso facto and at the same time a citizen of the state in which he resides. And while the Fourteenth Amendment does not create a national citizenship, it has the effect of making that citizenship 'paramount and dominant' instead of 'derivative and dependent' upon state citizenship. [Footnote 3] 'In reviewing the subject,' Chief Justice White said, in the Selective Draft Law Cases, 245 U.S. 366, 377, 388 S., 389, 38 S.Ct. 159, 165, L.R.A. 1918C, 361, Ann.Cas. 1918B, 856: 'We have hitherto considered it as it has been argued from the point of view of the Constitution as it stood prior to the adoption of the Fourteenth Amendment. But to avoid all misapprehension we briefly direct attention to that (the fourteenth) amendment for the purpose of pointing out, as has been frequently done in the past, how completely it broadened the national scope of the government under the Constitution by causing citizenship of the United States to be paramount and dominant instead of being subordinate

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and derivative, and therefore operating as it does upon all the powers conferred by the Constitution leaves no possible support for the contentions made if their want of merit was otherwise not to clearly made manifest.'

The result is that whatever latitude may be thought to exist in respect of state power under the Fourth Article, a state cannot, under the Fourteenth Amendment, abridge the privileges of a citizen of the United States, albeit he is at the same time a resident of the state which undertakes to do so. This is pointed out by Mr. Justice Bradley in the Slaughter House Case, Fed.Cas. No. 8,408, 1 Woods, 21, 28: 'The 'privileges and immunities' secured by the original constitution, were only such as each state gave to its own citizens. Each was prohibited from discriminating in favor of its own citizens, and against the citizens of other states. 'But the fourteenth amendment prohibits any state from abridging the privileges or immunities of the citizens of the United States, whether its own citizens or any others. It not merely requires equality of privileges; but it demands that the privileges and immunities of all citizens shall be absolutely unabridged, unimpaired.'

The same distinction is made by this court in Bradwell v. State of Illinois, 16 Wall. 130, 138, where, speaking of the privileges and immunities provision of the Fourth Article, it was said: 'The protection designed by that clause, as has been repeatedly held, has no application to a citizen of the State whose laws are complained of. If the plaintiff was a citizen of the State of Illinois, that provision of the Constitution gave her no protection against its courts or its legislation.' [Footnote 4]

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But the court added that with respect to the Fourteenth Amendment 'there are certain privileges and immunities which belong to a citizen of the United States as such; otherwise it would be nonsense for the fourteenth amendment to prohibit a State from abridging them. ... We agree ... that there are privileges and immunities belonging to citizens of the United States, in that relation and character, and that it is these and these alone which a State is forbidden to abridge.' The governments of the United States and of each of the several states are distinct from one another. The rights of a citizen under one may be quite different from those which he has under the other. To each he owes an allegiance; and, in turn, he is entitled to the protection of each in respect of such rights as fall within its jurisdiction. United States v. Cruikshank, , 549.

Under the Fourteenth Amendment, therefore, the simple inquiry is whether the privilege claimed is one which arises in virtue of national citizenship. If the privilege be of that character, no state can abridge it. No attempt has been made by the courts comprehensively to define or enumerate the privileges and immunities which the Fourteenth Amendment thus protects. [Footnote 5] Among those privileges, however, undoubtedly is the right to pass freely from one state to another. Crandall v. State of Nevada, supra; Williams v. Fears, 179 U.S. 270, 274, 21 S.Ct. 128. And that privilege, obviously, is as immune from abridgment by the state from which the citizen departs as it is from abridgment by the state which he seeks to enter. This results from the essential character of national citizenship. Cf. In re Kemmler, 136 U.S. 436, 448, 10 S.Ct. 930; Duncan v. Missouri, 152 U.S. 377, 382, 14 S.Ct. 570; In re Quarles and Butler,

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tigate the tax system of the state, which clearly indicate their judgment, based on a study of conditions in the state, that the existing system was driving investment capital from the state or into secured and non- commercial loans, and that a tax exemption embracing both secured and commercial loans would tend to increase the supply of investment capital for both and to reduce interest rates in the state. [Footnote 1] This Court has no basis for saying that those committees were wrong and no authority to say it. The state Supreme Court has stated in the present case that the Legislature did have in mind these broader advantages, for it rested its decision on the ground that the exemption was made 'in the interests of thrift and state development' and 'for the assistance of the agricultural and industrial interests of the state.' 107 Vt. 28, 175 A, 352, 357.

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interests of the individual, of such debatable wisdom, could be justified only by a pointed command of the Constitution of plain import.

If we turn from the reasoning by which this application of the privileges and immunities clause to state taxation is supported to the decision now actually made, it seems that the clause is thought to prohibit only these inequalities in taxation which are considered to be aribtrary and unreasonable. The exemption of dividends derived from corporate business carried on within the state, and the taxation of similar dividends from without the state, is held not to be an infringement of the clause. Exemption of income from investments in property within the state and taxation of like income from without the state is thought to be valid. But the privileges and immunities clause, it is declared, forbids any difference in the taxation of income from investment made within the state and income from investment made without, a conclusion which can only be attributed to the belief that this discrimination, as distinguished from the others, is arbitrary and unreasonable.

We are thus returned to the point of beginning, to a discussion of the question whether the exemption in the present tax is so unreasonable, so without support of a permissible state policy, as to infringe constitutional limitations. If the exemption does not merit condemnation as a denial of the equal protection which the Fourteenth Amendment extends to every person, nothing can be added to the vehemence or effectiveness of the denunciation by invoking the command of the privileges and immunities clause.

The judgment should be affirmed.

Mr. Justice BRANDEIS and Mr. Justice CARDOZO concur in this opinion. Footnotes

Footnote 1 'Chapter 39.'Sec. 873. Rate; Exemptions; Amount. A tax is hereby imposed upon every resident of the state, which tax shall be levied, collected and paid annually, with respect to;'I. His net income as herein defined, after deducting the exemptions provided in this chapter, at the rate of two per cent; and'II. To the income received by him on account of the ownership or use of or interest in any stock, bond, note, agreement or other interest bearing security at the rate of four per cent; but the words 'income received by him on account of the ownership or use of or interest in any stock, bond, note, agreement or other interest bearing security' shall not include the following items which shall be exempt from taxation under this chapter:'(a) Interest received on account of money loaned within this state, at a rate of interest not exceeding five per cent per annum evidenced by a promissory note, mortgage on real estate or a bond for a deed, including credits representing the purchase price, or any part thereof, of real estate within this state, sold or transferred, evidenced by a promissory note, mortgage or bond for a deed bearing a rate of interest not exceeding five per cent per annum. ...'(e) Dividends on stocks of those corporations which are subject to taxation under chapter 40, but if a corporate franchise tax is not measured by the entire net income of such corporation, then a portion of the dividends paid by such corporation shall be taxable under this chapter, and such taxable portion shall be that proportion of the dividend as the income earned by the corporation from business done without the state of Vermont bears to the entire income of the corporation;'(f). In case the income taxed in this section is derived wholly from ownership of or interest in any stock, bond, note or other interest bearing security, there shall be deducted from such income the following exemptions:'1. In case of a single individual a personal exemption of four hundred dollars;'2. In the case of the head of a family, or a married individual living with husband or wife, a personal exemption of eight hundred dollars; but if either a husband or wife shall receive any income other than that derived from the ownership of or interest in any stock, bond, note or other interest bearing security, then such personal exemption shall not be allowed. A husband and wife, living together, shall receive but one personal exemption of eight hundred dollars against their aggregate net income; and in case they make separate returns, the personal exemption of eight hundred dollars may be taken by either or divided between them. ... 'Chapter 40.'Sec. 887. Rate. For the privilege of exercising its franchise in this state in a corporate or organized capacity, every domestic corporation, and for the privilege of doing business in this state, every foreigh corporation, liable to tax under this chapter shall annually pay to this state a franchise tax to be measured by its net income to be computed in the manner hereinafter provided at the rate of two per cent upon the basis of its net income as herein computed, for the next preceding fiscal or calendar year.'Sec. 888. Basis on business within the state. If the entire business of the corporation be transacted within the state, the tax imposed shall be based upon the entire net income of such corporation for such fiscal or calendar year. If the entire business of the corporation be not transacted within the state and its gross income derived from business done both within and without the state, the determination of its net income shall be based upon the business done within the state and for the purpose of computing such net income the commissioner shall adopt such recommendations and regulations for the allocation of net income as will fairly and justly reflect the net income of that portion of the business done within the state.'

Footnote 2 The further point is made that the discrimination in respect of dividends and interest upon loans is a regulation of interstate commerce and therefore void under the commerce clause of the Federal Constitution. But we mention this latter claim only to reject it as without merit, since clearly a tax upon income is not an interference with interstate commerce simply because the income is derived from a source within another state; and, moreover, if there be any tendency to interfere with such commerce, it is purely collateral and incidental. Nathan v. Louisiana, 8 How. 73, 82; Williams v. Fears, 179 U.S. 270, 276, 21 S.Ct. 128; Diamond Glue Co. v. United States Glue Co., 187 U.S. 611, 616, 23 S. Ct. 206; Anderson v. United States, 171 U.S. 604, 616, 19 S. Ct. 50; Engel v. O'Malley, 219 U.S. 128, 138, 31 S.Ct. 190; Moore v. N.Y. Cotton Exchange, 270 U.S. 593, 604, 46 S.Ct. 367, 45 A.L.R. 1370.

Footnote 3 In United States v. Hall, 26 Fed.Cas. No. 15,282, page 79, 81, Judge Woods said: 'By the original constitution citizenship in the United States was a consequence of citizenship in a state. By this clause this order of things is reversed; ... and citizenship in a state is a result of citizenship in the United States.'

Footnote 4 This does not mean that a state has unlimited power by law to abridge the privileges of its own citizens. It only means that in such case we must look elsewhere than to the language of the privileges and immunities clause of the Fourth Article of the Constitution for the constitutional infirmity of the statute, if it have any.

Footnote 5 For examples, however, see Corfield v. Coryell, Fed.Cas. No. 3,230, 4 Wash.C.C. 371, 380, 381; Slaughter House Cases, 16 Wall. 36, 79, 80; Twining v. New Jersey, 211 U.S. 78, 97, 29 S.Ct. 14; Ward v. Maryland, 12 Wall. 418, 430; Blake v. McClung, 172 U.S. 239, 248, 252 S., 19 S.Ct. 165; United States v. Wheeler, , 41 S.Ct. 133; Paul v. Virginia, 8 Wall. 168, 180.

[Footnote 1] The committee appointed in 1900 by the Governor of Vermont to investigate double taxation and to recommend measures for its relief found that the existing taxing system was driving capital from the state or into tax exempt savings banks, and suggested an exemption of loans secured by property returned for taxation in the state. Double Taxation in Vermont; Report of Special Committee Appointed to Report a Measure for its Relief to the Legislature of 1900, pp. 4, 15. In 1908, a similar committee recognized the same evils, but did not favor the exemption of secured loans alone, because it would increase interest rates on unsecured loans and cause a dearth of commercial credits. Vermont-Commission on Taxation- Report 1908, pp. 43 ff.

[Footnote 2] Slaughter House Cases, 16 Wall. 36; Bradwell v. State of Illinois, 16 Wall. 130; Bartemeyer v. Iowa, 18 Wall. 129; Minor v. Happersett, 21 Wall. 162; Walker v. Sauvinet, 92 U.S. 90; Kirtland v. Hotchkiss, 100 U.S. 491; Presser v. Illinois, 116 U.S. 252, 6 S.Ct. 580; Mahon v. Justice, 127 U.S. 700, 8 S.Ct. 1204; In re Kemmler, 136 U.S. 436, 10 S.Ct. 930; Crowley v. Christensen, 137 U.S. 86, 11 S.Ct. 13; McElvaine v. Brush, 142 U.S. 155, 12 S.Ct. 156; McPherson v. Blacker, 146 U.S. 1, 13 S.Ct. 3; Giozza v. Tiernan, 148 U.S. 657, 13 S.Ct. 1047; Duncan v. Missouri, 152 U.S. 377, 14 S.Ct. 570; Miller v. Texas, 153 U.S. 535, 14 S.Ct. 874; Ex parte Lockwood, 154 U.S. 116, 14 S.Ct. 1082; Iowa Central Ry. v. Iowa, 160 U.S. 389, 16 S. Ct. 344; Plessy v. Ferguson, 163 U.S. 537, 16 S.Ct. 1138; Orient Insurance Co. v. Daggs, 172 U.S. 557, 19 S.Ct. 281; Cumming v. Board of Education, 175 U.S. 528, 20 S.Ct. 197; Maxwell v. Dow, 176 U.S. 581, 20 S.Ct. 448, 494; Williams v. Fears, 179 U.S. 270, 21 S.Ct. 128; Orr v. Gilman, 183 U.S. 278, 22 S.Ct. 213; Cox v. Texas, 202 U.S. 446, 26 S. Ct. 671; Board of Education v. Illinois, 203 U.S. 553, 27 S. Ct. 171, 8 Ann.Cas. 157;

Ballard v. Hunter, 204 U.S. 241, 27 S.Ct. 261; Western Turf Ass'n v. Greenberg, 204 U.S. 359, 27 S.Ct. 384; Halter v. Nebraska, 205 U.S. 34, 27 S.Ct. 419, 10 Ann.Cas. 525; Wilmington Star Mining Co. v. Fulton, 205 U.S. 60, 73, 27 S.Ct. 412; Twining v. New Jersey, , 29 S.Ct. 14; Western Union Tel. Co. v. Com'l Mill. Co., 218 U.S. 406, 31 S.Ct. 59, 36 L.R.A.(N.S.) 220, 21 Ann.Cas. 815; Mo. Pacific Ry. Co. v. Castle, 224 U.S. 541, 32 S.Ct. 606; Graham v. West Virginia, 224 U.S. 616, 32 S.Ct. 583; Selover, Bates & Co. v. Walsh, 226 U.S. 112, 33 S.Ct. 69; Rosenthal v. New York, 226 U.S. 260, 33 S.Ct. 27, Ann.Cas. 1914B, 71; Waugh v. Board of Trustees, 237 U.S. 589, 35 S.Ct. 720; Porter v. Wilson, 239 U.S. 170, 36 S.Ct. 91; Crane v. Campbell, 245 U.S. 304, 38 S. Ct. 98; Armour & Co. v. Virginia, 246 U.S. 1, 38 S.Ct. 267; Omaechevarria v. Idaho, 246 U.S. 343, 38 S.Ct. 323; Maxwell v. Bugbee, 250 U.S. 525, 40 S.Ct. 2; Ownbey v. Morgan, 256 U.S. 94, 41 S.Ct. 433, 17 A.L.R. 873; Prudential Ins. Co. v. Cheek, 259 U.S. 530, 42 S.Ct. 516, 27 A.L.R. 27; Hamilton v. Regents, 293 U.S. 245, 55 S.Ct. 197.