The First Federal Income Tax Was Temporary, During the Civil War

The United States first collected income tax in 1861, as a temporary measure to fund the Civil War. Congress passed the Revenue Act of 1861, which taxed income above $800 per year at a rate of 3 percent. This was not meant to be permanent—lawmakers called it a war tax and expected it to end when the fighting stopped.

The tax worked differently than it does today. It applied only to the wealthy; most working people earned less than $800 annually and paid nothing. The government collected it through a system of assessors and collectors in each district, and compliance was spotty. When the war ended in 1865, Congress let the income tax expire, and it disappeared from federal law.

For the next 25 years, the federal government relied almost entirely on tariffs—taxes on imported goods—to fund itself. Income tax was forgotten, and most Americans had never paid one.

Key Takeaways

  • The first federal income tax started in 1861 as a temporary Civil War measure, taxing only people who earned more than $800 per year at 3 percent.
  • The income tax expired in 1872 after the war ended, and the federal government returned to relying on tariffs for revenue for the next 25 years.
  • A new income tax was introduced in 1894 but was struck down by the Supreme Court in 1895 as unconstitutional.
  • The 16th Amendment, ratified in 1913, gave Congress the permanent legal power to collect income tax without apportioning it among the states.
  • The modern income tax system began in 1913 and has grown to become the largest source of federal revenue.

Congress Tried Again in 1894, But the Supreme Court Said No

In the 1890s, the federal government faced a budget crisis. Tariff revenue was falling, and Congress needed money. In 1894, lawmakers passed a new income tax—this time meant to be permanent—that taxed income above $4,000 per year at 2 percent.

The wealthy when ready challenged it in court. In 1895, the Supreme Court ruled in Pollock v. Farmers' Loan & Trust Co. that the income tax was unconstitutional. The Court said that a direct tax on income had to be apportioned among the states based on population, which made it impractical to collect. The tax was struck down, and income tax disappeared again.

This Supreme Court decision blocked any federal income tax for 18 years. Congress could not straightforward pass a new law to fix the problem—the Constitution itself stood in the way. The only solution was to change the Constitution.

The 16th Amendment Opened the Door in 1913

In 1909, Congress proposed the 16th Amendment, which would give it the power to collect income tax without apportioning it among the states. The amendment read: "The Congress shall have power to collect taxes on incomes, from whatever source derived, without apportionment among the several States." It was a direct response to the Supreme Court's 1895 decision.

The amendment went to the states for ratification. It needed approval from 36 states (three-fourths of the 48 states then in the union). By February 1913, it had passed. The 16th Amendment became law, and Congress when ready had the legal authority to tax income.

That same year, Congress passed the Income Tax Act of 1913, which created the modern income tax system. It taxed income above $3,000 per year at rates starting at 1 percent and going as high as 7 percent for the very wealthy. The tax applied to individuals and corporations. This time, there was no constitutional barrier, and the income tax stuck.

How the Income Tax Grew From a Small Tax on the Rich

When the income tax started in 1913, it was still a tax on the wealthy. The $3,000 threshold meant that only about 3 percent of the population paid it. Most working people earned far less and owed nothing.

World War I changed that. As the war dragged on and the government needed more money, Congress lowered the threshold and raised the rates. By 1918, the top rate had climbed to 77 percent. More people were paying, and those who did paid much more.

After the war, rates came down, but the income tax never went away. During the Great Depression and World War II, Congress again expanded the tax to reach millions of ordinary workers. By the 1940s, income tax had become the largest source of federal revenue—a position it has held ever since.

Why the Shift From Tariffs to Income Tax Mattered

Before 1913, the federal government was small and funded mainly by tariffs. Tariffs are taxes on imported goods, and they affect prices for consumers. They also protect domestic industries from foreign competition, which was a major political issue in the 1800s.

Income tax changed the equation. It was a direct tax on earnings, not on goods. It could raise much more money than tariffs, and it could be adjusted to tax different income levels differently. This gave the federal government a new source of power and money, which allowed it to grow and take on new responsibilities.

The shift also changed politics. Tariff policy had been the central economic debate for a century. Once income tax became the main revenue source, debates shifted to tax rates, deductions, and who should pay how much. Those debates continue today.

State Income Taxes Came Later and Developed Separately

While the federal government was fighting over income tax in the 1800s, some states were moving ahead on their own. Wisconsin became the first state to pass an income tax in 1911, two years before the federal government did. Other states followed, but not all of them.

State income taxes developed independently of the federal system. Some states tax income, some do not. Those that do set their own rates and rules. A few states—including Florida, Texas, and Wyoming—have never had a state income tax. This patchwork exists because states have the power to tax their residents' income, and each state makes its own choice.

Today, about 41 states and the District of Columbia collect income tax. The rates and rules vary widely. A person may owe federal income tax, state income tax, or both, depending on where they live and work.

Frequently Asked Questions

Did anyone pay income tax before 1861?

No. The federal government did not have the power to collect income tax before the Civil War. It relied on tariffs, excise taxes, and other indirect taxes. Some states collected property taxes and other local taxes, but there was no federal income tax.

Why did the Supreme Court strike down the 1894 income tax?

The Court ruled that income tax was a "direct tax" under the Constitution and had to be apportioned among the states based on population. This made it impossible to collect fairly. The 16th Amendment later changed the Constitution to allow income tax without apportionment.

What was the income tax rate when it started in 1913?

The 1913 income tax started at 1 percent on income above $3,000 and went up to 7 percent for the highest earners. The threshold of $3,000 meant that only wealthy people paid it. Most workers earned less and owed no federal income tax.

Do all states have income tax?

No. About 41 states and Washington, D.C. collect income tax, but nine states do not. Each state decides whether to tax income and at what rate. You may owe federal income tax, state income tax, both, or neither, depending on where you live and work.

When did income tax become the main source of federal revenue?

Income tax gradually became more important during World War I and World War II as Congress raised rates and lowered the threshold to reach more people. By the 1940s, it had become the largest source of federal revenue, a position it still holds.