Michigan Law Review, Vol. 72, No. 7 (June 1974), pp. 1309-1354


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's income might be subject to "double-taxation" by different states. The 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. 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's "ability to pay," on which Vermont's progressive rates were predicated, was reckoned by looking to all of his income wherever earned. The result, in principle at least, was to tax resident and nonresident taxpayers with the same federal taxable income at the same rate on their income taxable by Vermont. On its face, this does not seem unfair. From a constitutional perspective, it hardly presents a problem with respect to the Vermont resident because Vermont indisputably possesses the right to tax such income and a fortiori has the right to use it to determine the tax rate. With respect to the nonresident, however, the question is more complex. While it is clear that Vermont may properly insist that the nonresident pay tax on his Vermont-earned income, it is just as clear that Vermont has no jurisdiction to tax the nonresident's non-Vermont income. This raises the question whether taking such nontaxable income into account in determining the rate at which the nonresident's taxable Vermont income will be assessed achieves indirectly what may not constitutionally be achieved directly. My purpose here is fourfold: first, to inquire into the theoretical and constitutional underpinning of Vermont's 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's; and, fourth, to consider in light of the foregoing some of the recurring problems concerning the treatment of nonresidents under state income tax statutes.