Hale v. State Bd. of Assessment and Review

Background

A group of Iowa residents owned school, county, road, and a soldiers’ bonus bond issued earlier by Iowa and its local governments. State law at the time of issue said such bonds “are not to be taxed,” “shall not be taxed,” or “shall be exempt from taxation.” Iowa later enacted a personal net income tax in 1934, and state officials included $36,893.75 of interest from those bonds in the owners’ 1935 income assessments. The bondowners challenged the inclusion, and the Iowa Supreme Court upheld the tax; the case then came to the United States Supreme Court.

Reasoning

The Court assumed the exemptions created contracts but asked what those contracts meant. Looking at the whole tax code, earlier Iowa decisions, and federal cases, the majority concluded the exemptions were aimed at property taxes levied by value (ad valorem taxes), not at a general tax on a person’s net income. The Court held that a net income tax is essentially different in character from a property tax, so including bond interest in the income tax did not plainly violate the earlier exemptions. The Supreme Court therefore affirmed the Iowa court’s ruling.

Real world impact

The decision allows Iowa to tax interest from state and local bonds as part of a resident’s net income, meaning bondholders may face state income tax on interest even when bonds were described as “not to be taxed” in older statutes. The ruling rests on the specific statutory wording and prior state and federal cases, so a different, broader exemption in law could still preclude such taxation.

Dissents or concurrances

A dissent argued the exemptions were unqualified, that interest is part of the bond, and that any tax on that interest impairs the contract protecting bondholders; that view was joined by two Justices.