The federal income tax began in 1861 as a temporary Civil War measure

The United States did not have a permanent federal income tax until 1913. Before that, the government funded itself through tariffs on imported goods and excise taxes on specific items. During the Civil War, Congress introduced an income tax in 1861 as an emergency measure to pay for the war effort. It was meant to expire when the war ended.

That first income tax applied only to people earning above a certain threshold — roughly the equivalent of $20,000 in today's money — so it touched only the wealthiest Americans. The tax rate started at 3 percent and rose as high as 10 percent by the end of the war. When the war ended in 1865, the income tax remained in place for another decade before Congress let it expire in 1872.

For the next 40 years, the federal government had no income tax at all. This changed in 1894, when Congress tried to bring back an income tax to replace lost tariff revenue. The Supreme Court struck it down in 1895, ruling that an income tax on property (including investment income) was unconstitutional without apportionment among the states.

Key Takeaways

  • The first federal income tax was introduced in 1861 during the Civil War and was originally intended to be temporary.
  • That early income tax expired in 1872, and no federal income tax existed for the next 22 years.
  • Congress passed another income tax in 1894, but the Supreme Court ruled it unconstitutional in 1895.
  • The 16th Amendment, ratified in 1913, gave Congress the power to collect income tax without apportionment, making the modern income tax system possible.

Why the Supreme Court blocked the 1894 income tax

The Constitution originally required that any direct tax be apportioned among the states based on population. This meant that if a state had 10 percent of the U.S. population, it would have to pay 10 percent of the total income tax collected, regardless of how much income was actually earned there. This rule made a practical income tax nearly impossible to administer.

When Congress passed an income tax in 1894, wealthy taxpayers challenged it in court. In Pollock v. Farmers' Loan & Trust Co., the Supreme Court decided that income from property — including stocks, bonds, and rental income — counted as a direct tax and therefore had to be apportioned. This ruling made the 1894 income tax unconstitutional and blocked any similar attempt.

The 16th Amendment removed the apportionment requirement

The Supreme Court's decision created a political problem. The government needed revenue, and many Americans believed the wealthy should pay more in taxes. The solution was to change the Constitution itself. Congress proposed the 16th Amendment in 1909, which stated straightforward: "The Congress shall have power to collect taxes on incomes, from whatever source derived, without apportionment among the several States."

The amendment was ratified on February 3, 1913, and became law when ready. That same year, Congress passed the first permanent federal income tax under the new constitutional authority. The initial tax rate was 1 percent on incomes above $3,000 (roughly $100,000 in today's money), with a top rate of 7 percent on incomes above $500,000.

How the income tax expanded after 1913

The income tax that started in 1913 was narrow — it affected only about 3 percent of the population because the threshold was so high. Over the following decades, especially during World War I and World War II, Congress lowered the threshold and raised the rates to fund military spending. By the 1940s, the income tax had become a mass tax affecting tens of millions of Americans.

The top marginal tax rate — the rate paid on the highest portion of income — climbed as high as 94 percent during World War II. After the war, rates came down but remained well above the single digits. The income tax became the largest source of federal revenue, replacing tariffs in that role.

State income taxes came later than the federal tax

Most states did not have income taxes when the federal government introduced theirs in 1913. Wisconsin was the first state to pass an income tax, doing so in 1911, two years before the federal tax. Other states followed gradually over the next few decades. Today, 41 states and the District of Columbia have some form of income tax, though a few states (including Florida, Texas, and Wyoming) still have no state income tax at all.

The timing of state income taxes varies widely. Some states introduced them in the 1920s and 1930s, while others did not adopt an income tax until the 1960s or later. A handful of states have never passed one.

How income tax works today

The modern income tax system uses a progressive structure, meaning the tax rate increases as income increases. The federal government sets tax brackets each year, and your tax rate depends on which bracket your income falls into. You pay the lower rate on income in the lower brackets and a higher rate only on income in the higher brackets.

The federal income tax is collected through withholding — your employer deducts a portion of each paycheck and sends it to the IRS. Self-employed people and those with investment income pay estimated taxes quarterly. At the end of the year, you file a tax return to reconcile what was withheld with what you actually owe.

Frequently Asked Questions

Did Americans pay income tax before 1913?

Yes, but only during the Civil War (1861–1872) and briefly in 1894–1895. The Civil War income tax was temporary and expired after the war. The 1894 tax was struck down by the Supreme Court before it could be fully implemented. For 40 years between 1872 and 1913, there was no federal income tax.

Why did the Supreme Court say the 1894 income tax was unconstitutional?

The Court ruled that income from property (stocks, bonds, rental income) was a direct tax and had to be apportioned among states based on population. This made the tax impractical to collect. The 16th Amendment, passed in 1913, removed this requirement and allowed Congress to collect income tax without apportionment.

What was the first income tax rate in 1913?

The federal income tax started at 1 percent on incomes above $3,000 and topped out at 7 percent on incomes above $500,000. Because the threshold was high, only about 3 percent of Americans paid federal income tax in 1913. Over time, Congress lowered the threshold, bringing millions more people into the tax system.

Do all states have income taxes?

No. Forty-one states and the District of Columbia have income taxes, but nine states do not: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only investment income). State income taxes were introduced at different times, with Wisconsin being the first in 1911.