Some Reflections on the State Taxation of a Nonresident\u27s Personal Income

With respect to the taxation of personal income, it was plain by 1940 that states were constitutionally free to tax residents on all personal income wherever earned and nonresidents on personal income earned within the state, even though these two principles, taken together, meant that an individual\u27s income might be subject to double-taxation by different states. The Supreme Court, after toying with the idea for a decade, finally rejected the invitation to forge the due process clause into a tool for preventing multiple taxation and reverted to the ruling law of an earlier era that left the solution of such problems to the collective wisdom of the states. As their need for revenue increased, a growing number of states turned to or relied more heavily upon the personal income tax as a revenue source. To the extent that the states\u27 power to tax personal income was not limited by any constitutional proscription against multiple taxation, fairness to the individual taxpayer depended on the states\u27 self-restraint--or enlightened self-interest -- in refraining from exercising their taxing powers to constitutional limits or in granting credits for taxes paid to other states. Despite the absence of any formal interstate agreement designed to achieve greater uniformity and equity in the multistate taxation of personal income, the burden on the individual whose income is taxable by more than one state has been reduced over the years. It is within this framework that an intriguing and troublesome issue involving state taxation of personal income has recently arisen. Ironically, it grew out of an effort by one state, Vermont, to introduce what in its view was probably a greater degree of equality than had previously existed between its resident and nonresident taxpayers. What Vermont did, in effect, was this: In determining the rate at which a resident or nonresident taxpayer would pay tax on his Vermont income, the taxpayer\u27s ability to pay, on which Vermont\u27s progressive rates were predicated, was reckoned by looking to all of his income wherever earned. This raises the question whether taking such nontaxable income into account in determining the rate at which the nonresident\u27s taxable Vermont income will be assessed achieves indirectly what may not constitutionally be achieved directly. Perhaps it does. Over fifty years ago, however, the Supreme Court decided in Maxwell v. Bugbee that such a method for establishing the rate of a death tax suffered from no constitutional infirmity, despite Justice Holmes\u27s dissenting observation for himself and three others that when property outside the State is taken into account for the purpose of increasing the tax upon property within it, the property outside is taxed in effect, no matter what form of words may be used. While a number of states have taken advantage of Maxwell to employ a comparable formula for establishing the rate of a nonresident\u27s estate or inheritance taxes only three states other than Vermont have done so with respect to the taxation of a nonresident\u27s income. Vermont\u27s personal income tax statute raises in a contemporary context some of the fascinating and disturbing problems with which courts and commentators struggled in the 1930\u27s and provides a useful vehicle for examining the scope of state taxing power over a nonresident\u27s personal income. My purpose here is fourfold: first, to inquire into the theoretical and constitutional underpinning of Vermont\u27s taxing scheme against the background of the case that challenged the validity of the levy;second, to analyze the impact of related legislation on the principles upon which the basic Vermont formula was constructed; third, to determine whether there are reasons of law or policy why other states should not adopt schemes similar to Vermont\u27s; and, fourth, to consider in light of the foregoing some of the recurring problems concerning the treatment of nonresidents under state income tax statutes