Tax Day! The Internal Revenue Service and the Civil War

by Paul R. Spitzzeri

In 1913, as the prohibition of the sale and consumption of most alcoholic beverages was being enacted by many states and was six years from being the subject of an amendment to the federal constitution, another amendment was sought to the constitution to allow the federal government to revive an income tax.

Wyoming became the 36th state and the last needed for a three-quarters requirement for such an amendment and the federal income tax returned.  The main reason for this was that 90% of the revenue collected by the federal government to that point came from taxes on tobacco, liquor, wine and beer.  With the last three to be largely outlawed with the onset of Prohibition, the feds needed to make up the shortfall and fast.  This was even more urgent when, a century ago this month, the United States declared war on Germany and entered the First World War.

Young IRS tax bill 1866
From the Homestead collection is an original IRS income tax bill receipt issued to James T. Young of Rancho La Ballona for his 1865 tax.

But, there was an income tax before in American history and it was also related to war.  With the onset of the Civil War, Congress passed a revenue act in 1862 and which President Abraham Lincoln signed on 1 July to tax incomes and raise funds for expenses incurred by the Union during the “War Between the States.”  A commissioner and office of internal revenue were established and the manufacturing and sale of tobacco and alcoholic beverages, as well as income, were affected.

According to the “Historical Highlights” page of the IRS web site, the income tax rate was established at 3% for those whose annual incomes were from $600 to $10,000 and at 5% for those who had more than $10,000 in income.  Persons earning less than $600 a year were exempt from the tax.

1860 James Young Ballona
House 154, third from the bottom, in this page from the 1860 federal census for Los Angeles Township is the household of James Young, who died about 1867.

The Homestead’s collection has an original Internal Revenue tax bill receipt from 1866 from the Los Angeles office of the collector, and signed by the deputy, C.C. Slocum, for the second California district.  Dated 6 October, the document recorded the payment of $11.25 by James T. Young of the Rancho La Ballona.  Interestingly, despite what the IRS web site said about tax rates, Young was, in fact, assessed a rate of 5% for his stated income for 1865 of $221, yielding  the amount due, plus a 20-cent fee for a notice filed in his case.

Rancho La Ballona, encompassing areas of West Los Angeles and Culver City, was granted to the Machado and Talamantes families, but Tomás Talamantes used his quarter interest as collateral for a loan from Benjamin D. Wilson and William T.B. Sanford.  When Talamantes could not repay his loan, that portion of La Ballona went to Wilson and Sanford.

CDV Of JD Young 2011.524.1.1
A carte de visite (CDV) portrait of John D. Young, by William N. Tuttle of Los Angeles, ca. 1870.  From the Homestead’s collection.

James Young and his son, John D., who migrated to Los Angeles from central Missouri, bought part of the ranch from Wilson in 1859.  The Youngs, who bought an adobe home from a member of the Machado family, held about 1,700 acres of Ballona and a formal partition of the ranch was completed in 1868 among various claimants, including those from the Machado, Talamantes, Sanford and Young families.  It has been stated James was dead by 1868, but his tax bill is dated October 1866, so there is a pretty narrow window for his passing.

James’s widow Elender (Ellen) and son John D. Young then assumed control of the portion of La Ballona and they remained there through the remainder of the 19th century and into the next.  Ellen died in 1898 and John in 1915.  Elenda Street, which roughly lies between Ballona Creek and Washington Boulevard and is very close to where John maintained his section until about 1900, was named for Mrs. Young.

1900 Young Ballona
John D. Young, listed at the bottom of the enumeration sheet, was still living on the family holdings at Ballona when the 1900 census was taken, but soon moved to south Los Angeles, where he died fifteen years later.

As for that Civil War-era income tax, it raised a modest $2.7 million in its first year, but that total climbed to some $20 million in the second.  In 1864, a change in the progressive rates, in which 5% was the rate above $600, 7 1/2% was the levy above $5,000, and 10% was the tax for those few who had incomes above $25,000, dramatically increased the revenues.  In 1865, $61 million was raised and the following year the total lept to $73 million, comprising about 20% of all federal revenues for that year.

By the end of the war, the northeastern section of the country accounted for about three-quarters of the tax revenue and the richest states of New York, Massachusetts and Pennsylvania provided over 60% of the total.  Because the country had some $2 billion in debt by 1866, it was decided, not without considerable controversy, to retain the income tax.  As the economy improved, the act was amended and rates lowered, reducing revenue to under $40 million by 1870.  Congress allowed the law to lapse after its latest extension and the income tax expired at the end of 1871.  It would be another four decades before the national income tax was revived.

For an interesting article on the history of the first national income tax, read this Sheldon Pollack piece in the journal Tax Lawyer.

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