The federal income tax was reinstated in 1913 because tariffs and excise taxes could no longer fund a growing federal government fairly or reliably, and the ratification of the Sixteenth Amendment on February 3, 1913 finally removed the constitutional barrier that had blocked a peacetime income tax since 1895. Congress had taxed income once before, during the Civil War, but repealed that tax in 1872 and spent the next four decades relying on customs duties.1Internal Revenue Service. Historical Highlights of the IRS By the early twentieth century, that arrangement had run out of room.
Tariffs Could Not Keep Up With a Growing Government
For forty years after the Civil War income tax ended, the federal treasury ran almost entirely on customs duties and excise taxes on products like alcohol and tobacco.2Internal Revenue Service. Evolution of Taxation in the Constitution The system had two problems that got worse as the country grew.
The first was volatility. Federal revenue rose and fell with trade volumes, so an economic downturn or a shift in trade policy could gut the budget with little warning. As the government expanded its military, built out infrastructure, and took on new responsibilities, the mismatch between what it needed and what tariffs could deliver kept widening.
The second was fairness. Tariffs raised the price of imported goods, and lower-income families spent a much larger share of their earnings on those goods than wealthy ones did. A factory worker and an industrialist paid the same inflated price for imported cloth, but that price carved a far bigger hole in the worker’s paycheck. Reformers argued that a broad-based tax on earnings would grow naturally with the economy and could be structured so those with the most income paid the largest share. The logic was sound. The Constitution was the obstacle.
The Pollock Decision Made an Amendment Necessary
Congress tried to bring the income tax back in 1894 through the Wilson-Gorman Tariff Act, which imposed a 2 percent tax on personal income above $4,000.3Cornell Law School. Pollock v Farmers Loan and Trust Co, 157 US 429 (1895) It did not last a year. In Pollock v. Farmers’ Loan & Trust Co., the Supreme Court struck it down.
The problem was Article I of the Constitution, which requires that any “direct tax” be apportioned among the states by population.4Constitution Annotated. Article I Section 9 Clause 4 Apportionment meant Congress would have to divide the total tax bill among the states by headcount, regardless of how much income each state actually produced, which is nearly impossible to administer for an income tax. In its 1895 ruling, the Court held that taxing income from real estate was effectively the same as taxing the property itself, making it a direct tax that had to be apportioned. On rehearing, a 5-4 majority extended that reasoning to income from stocks and bonds and invalidated the entire 1894 tax.5Justia Law. Pollock v Farmers Loan and Trust Company, 158 US 601 (1895)
The practical effect was that any future income tax faced the same constitutional challenge. Reformers had one realistic route left: change the Constitution.
Progressive Pressure Shifted Public Opinion
The political energy needed for that change came from the Progressive Era. By the late 1800s, rapid industrialization had concentrated enormous wealth in a small number of industrialists while most Americans lived on modest wages and paid disproportionately through the consumption taxes baked into tariff-inflated prices. Populist and Progressive reformers argued the tax system should reflect ability to pay.
Figures like William Jennings Bryan and Theodore Roosevelt made the case publicly for shifting the federal tax burden from consumption to earnings and capital. A graduated tax, where higher incomes faced higher rates, would fund the expanding government and address the inequality tariffs reinforced. The IRS defines a progressive tax as one that “takes a larger percentage of income from high-income groups than from low-income groups,” which is precisely the system reformers wanted.6Internal Revenue Service. Worksheet Solutions – Comparing Regressive, Progressive, and Proportional Taxes By the early 1900s, visible wealth concentration, an inadequate tariff system, and organized political pressure had combined to make a constitutional amendment viable for the first time since Pollock.
The Sixteenth Amendment Cleared the Legal Barrier
The amendment’s path began with a miscalculation. In 1909, Senator Nelson Aldrich, a conservative opponent of the income tax, proposed sending a constitutional amendment to the states instead of fighting an income tax bill in Congress. Opponents were confident ratification would stall out and fail to win three-fourths of the state legislatures. They were wrong.
The amendment’s language was written to reverse Pollock directly: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”7Constitution Annotated. Sixteenth Amendment “From whatever source derived” covered wages, investments, and income from property. “Without apportionment” eliminated the requirement that had killed the 1894 tax.
Alabama ratified first, in August 1909, and a steady stream of states followed. On February 3, 1913, Delaware, Wyoming, and New Mexico all ratified the same day, with Delaware recognized as the thirty-sixth state and pushing the amendment past the three-fourths threshold required under Article V.8Constitution Annotated. Overview of Ratification of a Proposed Amendment The Secretary of State certified the Sixteenth Amendment on February 25, 1913.9Constitution Annotated. Early Twentieth Century Amendments (Sixteenth Through Twenty-Second Amendments)
What Congress Actually Passed in 1913
Congress moved immediately. President Woodrow Wilson signed the Revenue Act of 1913, also known as the Underwood-Simmons Act, on October 3 of that year. The law did two things at once: it cut average tariff rates from roughly 40 percent to about 27 percent, and it replaced the lost revenue with a new income tax. The income tax was not just a fiscal tool. It was the mechanism that finally let Congress lower the tariffs Progressives had attacked for decades.
The tax was designed to touch only the wealthiest Americans. It set a 1 percent rate on personal income above a generous exemption of $3,000 for single filers and $4,000 for married couples. At a time when most workers earned well under $1,000 a year, those thresholds kept the vast majority of the population off the tax rolls entirely. A graduated surtax added higher rates for the truly wealthy, starting at 1 percent on incomes above $20,000 and climbing to a maximum of 6 percent on incomes above $500,000. The law also continued a 1 percent tax on corporate net income, formalizing a corporate tax that had existed since 1909 under a different legal theory.10Internal Revenue Service. Corporation Income Tax Brackets and Rates, 1909-2002
So the reinstatement in 1913 was not a single decision but the convergence of three pressures: a tariff-based revenue system that could not sustain a modern federal government, a Supreme Court ruling that had made a peacetime income tax legally impossible, and a Progressive movement that finally built the public support needed to change the Constitution. Once the Sixteenth Amendment was ratified, Congress had both the fiscal need and the legal authority to act, and it did so within eight months.