How Failed Tax Policy Led to the Constitutional Convention

“The king of New York levied imposts upon New Jersey and Connecticut, and the nobles of Virginia bore with impatience their tributary dependence upon Baltimore and Philadelphia. Our discontents were fermenting into civil war.” – Fisher Ames

On September 17, 1787, delegates to the Constitutional Convention approved the proposed national charter over which they had labored in secrecy since May. The document was laid before Congress, which—upon dispensing with motions to censure the delegates for exceeding their authority—ultimately directed state legislatures to call ratification conventions. Nearly a year later, on June 21, 1788, New Hampshire became the ninth state to ratify the new constitution, which would go into effect on March 4, 1789. Eight years after ratification, the Articles of Confederation were superseded.

But for those eight years, the Articles of Confederation were the law of the land, crippled by a lack of clear powers of enforcement, an absence of state cooperation, and the inability to levy taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es directly or to compel the states to do so on its behalf. Tomorrow is Constitution Day. Today, let’s examine what taxes in the several states looked like before the Constitution took effect, and how the absence of tax authority led directly to the Constitutional Convention.

Tax Provisions of the Articles of Confederation

The Articles of Confederation and Perpetual Union, as they were styled, were predicated on unanimity. Submitted to the colonies in 1777, they were not ratified until the last state acceded in early 1781. The Congress of the United States established by the Articles was similarly constrained, unable to enact legislation without the unanimous vote of all states (which had one vote each). Even where the new national powers were theoretically broad, therefore, they were practically constrained by the veto power wielded by any dissenting state.

The Articles failed to grant the new national government any general taxing power—hardly surprising given the role of taxes in the still-raging Revolutionary War. Instead, they established that the charges of war, and other expenses incurred for the common defense or general welfare, would be defrayed out of a common treasury supplied by the states (Article VIII). The national government was also empowered to borrow (Article XII) and to sell western lands, an expedient to which it frequently turned.

States themselves had broad powers of taxation, though they were prohibited from adopting imposts or duties which interfered with treaty obligations (Article VI) or from levying special taxes on individuals or goods from other states (Article IV). In practice, however, the national government lacked the means and authority to enforce these prohibitions, complicating treaty negotiations (foreign powers expressed reluctance to enter into agreements which the American states might freely disregard) and ultimately devolving into state laws in conflict with the Articles.

Raising National Revenue

Lacking any authority to levy taxes on its own, the new national government was in the unenviable position of requisitioning the states and hoping for the best. During the drafting of the Articles of Confederation, three methods of assessing states’ contribution quotas were considered: (1) in proportion to population, (2) according to land value, and (3) according to the value of all property. A motion to apportion state obligations on the basis of all property except household goods and apparel failed, and by a 5-4 vote, an alternative—obligations apportioned by the estimated value of lands and improvements—was adopted.

These quotas set the share of national expenditures for which each state was responsible, but did not dictate how the states raised those funds. Nor, as it soon became apparent, did the provision offer any assurance that states would actually comply with their obligations. As Randolph Paul wrote in Taxation in the United States, “Attempted requisitions were regarded by the sovereign states as voluntary contributions or alms and were generally ignored. The payment of taxes came finally to be regarded as a romantically honorable act, or even as a sort of amiable and quixotic manifestation of eccentricity.”

At one point in early 1782, as Paul observes, the national vaults were literally empty. A year later, a proposal to change the assessment method to state population was rejected, as was a proposal to authorize a national tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. . (This required adding an article to the Articles of Confederation, though this did not create any additional bar, as enactment of legislation and the adoption of new articles both required unanimity.) A similar proposal for a 5 percent tariff was again rejected in 1785, so in 1786, Congress took up proposals to add four new articles:

• Proposed Article 15: assessing late fees of 10 percent per year to states that failed to remit revenues according to their apportioned quotas;
• Proposed Article 16: authorizing Congress to assess and collect taxes in states that failed to enact laws funding the national government;
• Proposed Article 17: providing interest payments to states which exceeded their obligations and assessing interest on states in arrears; and
• Proposed Article 18: permitting Congress to establish 15-year budget windows and determine the necessary revenues within that window.

The failure of these proposed articles helped set the stage for the next logical step, the drafting of a new national charter, but first, the battered national government would have to weather a few more crises.

State Tariff Wars

Although prohibited from levying taxes that fell exclusively on residents of other states, and required to extend the privileges and immunities of citizens to them, the several states were not prevented from imposing imposts and duties that fell on shipping from other states so long as they were imposed equally on all vessels in port. This provided ample room for the development of protectionist trade barriers, and increasingly, feuds over taxation boiled over into state retaliatory actions and even tax rebellions, Shays’ Rebellion most prominent among them.

The Annapolis Convention, orchestrated by James Madison, was convened in 1786 in response, but only five states sent delegates. Unable to “remedy defects of the federal government,” as was their charge, within the system established by the Articles of Confederation, the convention issued a report to Congress calling for a constitutional convention, with a recommendation that it convene in Philadelphia the following May.

By early 1787, disputes were coming to a head. Several states were flouting the Articles in spirit and perhaps in letter by imposing tariffs targeting other states, and New York went so far as to impose special entrance and clearance fees on all vessels heading to or from New Jersey or Connecticut. The New Jersey legislature retaliated by imposing a tax of thirty shillings a month on a lighthouse that New York City had purchased in Sandy Hook.

The Articles of Confederation had failed. “The king of New York levied imposts upon New Jersey and Connecticut, and the nobles of Virginia bore with impatience their tributary dependence upon Baltimore and Philadelphia. Our discontents were fermenting into civil war,” lamented Fisher Ames.

And so Congress acceded in part to the recommendations of the Annapolis Convention, authorizing a new convention with broader authority to propose amendments to the Articles of Confederation. The delegates, Madison among them, began their work in May, and quickly came around to the view espoused in the Annapolis report, that the United States required something more than a stronger national government under the Articles. Nothing less than a new Constitution would do.

On September 17, 1787, the delegates approved the text of a new Constitution—and the rest is history.

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