v. Nature of Taxation Power Q: What is the nature of states power to tax?

(Bar Question 1964) A: The nature of states power to tax is two-fold. It is both an inherent power and a legislative power. It is inherent in nature being an attribute of sovereignty. This is so, because without the taxes the states existence would be imperiled. There is thus, no need for a constitutional grant for the state to exercise this power (Domondon, 2006). a. Inherent power of Sovereignty Q: Describe the power of taxation. May a legislative body enact laws to raise revenues in the absence of a constitutional provision granting said body the power to tax? Explain. (Bar Question 2005) A: The power of taxation is inherent in the State, being an attribute of sovereignty. As an incident of sovereignty, the power to tax has been described as unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it (Mactan Cebu International Airport Authority vs. Marcos, 261 SCRA 667 (1996) cited in Mamalateo, 2008). The power of taxation is an incident of sovereignty as it is inherent in the State, belonging as a matter of right to every independent government. It does not need of constitutional conferment. Constitutional provisions do not give rise to the power to tax but merely impose limitations on what would otherwise be an invincible power. No attribute of sovereignty is more pervading and at no point does the power of government affect more constantly and intimately all the relations of life than through the exactions made under it (Churchill and Tait vs. Concepcion, 34 Phil. 969).Taxation being an attribute of sovereignty, its relinquishment is never presumed (Luzon Stevedoring Co. vs. CTA, L-30232, July 29, 1988).

Q: Why is the power to tax considered inherent in a sovereign State? (Bar Question 2003) A: It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty. Without this power, no sovereign State can exist nor endure. The power to tax proceeds upon the theory that the existence of a government is a necessity and this power is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent State or government. No sovereign State can continue to exist without the means to pay its expenses; the and that for those means, it has the right to compel all citizens and property within its limits to contribute, hence, the emergence of

the power to tax (51 Am. Jur. 42; Question No. 1, 2003 Bar Examination cited in Dimaampao, 2005).

b. Essentially a Legislative Function The power to tax is inherent in the State, and the State is free to select the object of taxation, such power being exclusively vested in the legislature EXCEPT where the Constitution provides otherwise (Art. V, Sec. 28(20); Art. X, Sec. 5). This is based upon the principle that taxes are a grant of the people who are taxed, and grant must be made by the immediate representatives of the people. And where the people have laid the power, there it must remain and be exercised (1 Cooley Taxation, 3rd Ed., p.43 cited in Dimaampao, 2005). Q: What is the extent of the Legislative Power to Tax? A: The extent of the Legislative Power to Tax can be described by the following enumeration (Dimaampao, 2005): 1. Discretion as to purposes for which taxes shall be levied The sole arbiter of the purposes for which taxes shall be levied is the legislature, provided the purposes are public. The courts may review the levy of the tax to determine whether the purpose is a public one but once that is determined, the courts can make no other inquiry as to the purpose of the tax as it affects the power to impose it (1 Cooley Taxation, 4th Ed., 171). As the protection and promotion of the sugar industry is a matter of public concern, The Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative discretion must be allowed full play, subject only to the test of reasonableness (Lutz vs. Araneta, L-7859, December 22, 1955). 2. Discretion as to subjects of taxation The legislature has unlimited scope as to the persons, property or occupation to be taxed, where there are no constitutional restrictions, provided the property is within the territorial jurisdiction of the taxing state. It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation. (Lutz vs. Araneta, L-7859, December 22, 1955) It is settled that the legislature has the inherent power to select the subject of taxation and to grant exemptions. The classification of mail users is based on the ability to pay, the enjoyment of a privilege and on administrative convenience. Tax exemptions have never been thought of as raising issues under the equal protection clause (Gomez vs. Palomar, L-23645, October 29, 1968). The legislature may, in its discretion, select what occupations shall be taxed, and in the exercise of that discretion it may tax all. Or it may select for taxation certain classes and leave the others untaxed (Punsalan vs. Mun. Board of the City of Manila, 95 Phil. 46). 3. Discretion as to amount or rate of tax

The legislature has the right to finally determine the amount or rate of a tax, in the absence of constitutional prohibitions. It may levy a tax of any amount it sees fit. Not only is the power to tax unlimited in its reach as to subjects, but in its very nature, it acknowledges no limits and may be carried even to the extent of exhaustion and destruction, thus becoming in its exercise a power to destroy. 4. Discretion as to the manner, means and agencies of collection of taxes The discretion of the legislature in imposing taxes extends to the mode, method or kind of tax. As to the kind of taxes which may be imposed, the legislature has the power to levy one or more of the following: Property tax, excise, license or occupation tax, a poll or capitation tax, franchise tax, income tax, inheritance tax, stock transfer tax, etc.

c. For Public Purposes Q: What are the tests for determining the public purpose in a tax? A: One test is whether the thing to be furthered by the appropriation of public revenue is something which is the duty of the State, as a government, to provide (Waples v. Marrast, 108 Tex. 5, 184 S.W. 180, L.R.A. 1917 253). Another test is whether the proceeds of the tax will directly promote general welfare of the community in equal measure. The promotion of the general welfare is the States paramount concern. Thus, a law imposing a tax on sugar produced by sugar centrals for the purpose of using the proceeds thereof in the rehabilitation and upliftment of the sugar industry is a tax levied for a public purpose (Lutz v. Araneta, 98 Phil. 148).

d. Territorial in Operation Territoriality or the situs of taxation, which means place of taxation, is a limitation on the taxing power. This is so because the principle is wellrecognized that, however broad the power of taxation may be as to its character and no matter how searching it is in its extent, such power is necessarily limited only to persons, property or businesses within its jurisdiction; that is to say, to subjects within its jurisdiction, or over which it can exercise dominion (Shaffer v. Carter, 252 U.S. 37, 64 L. Ed. 445, 40 S. Ct. 221;Louisville & J. Ferry Co. v. Kentucky, 188 U.S. 384 47, L. Ed. 513, 23 S. Ct. 463; Dewey v. Des Moines, 173 U.S. 193, 43 L. Ed. 665; 19 S. Ct. 379 cited in 51 Am. Jur. 457 cited in Aban, 2001).

e. Tax exemption of the Government

As a matter of public policy, property of the State and of its municipal subdivisions devoted to government uses and purposes is generally deemed to be exempt from taxation although no express provision in the law is made therefor (51 Am. Jur. 503). Tax exemption of government entities and the political subdivisions of the State seems to be a well settled principle (Ibid). The exemption from taxation of the Government and its political subdivisions might also emanate from a statutory grant. This is obviously in conformity with the abovementioned principle. For instance, under Sec.32 (B) (7)(B) of the Tax Code, income derived from any public utility or from the exercise of any essential government function accruing to the Government or any political subdivision is exempt from income tax. Also under the Local Government Code, real property owned by the Government or any of its political subdivisions is exempt from real property tax unless the beneficial use thereof is granted for consideration or otherwise to a taxable person (Sec.234(a), Local Government Code). It is significant to note that the Constitution does not contain any provision granting tax exemption to the Government. Obviously, the reason for this is that the Governments exemption from taxes is an inherent limitation on the States taxing power. However, notwithstanding the immunity of the Government from taxes, the principle is also well recognized that the Government may tax itself. In one case, the Supreme Court held that there is no constitutional limitation on the power of Congress to tax the Armed Forces of the Philippines if it wishes to do so (Bisaya Land Transportation Co. Inc. v. Collector of the Internal Revenue, 105 Phil. 1338 cited in Aban, 2001).

f. The strongest among the inherent powers Q: Is the Power to Tax the Power to Destroy? (Bar Question 1983, 2000) A: Justice Malcolm believed that the power to tax is an attribute of sovereignty. It is the strongest of all the powers of government. This led Chief Justice Marshall of the U.S. Supreme Court, in the celebrated case of McMulloch v. Maryland, to declare: The power to tax involves the power to destroy. This might well be construed to mean that the power to tax includes the power to regulate even to the extent of prohibition or destruction, since the inherent power to tax vested in the legislature includes the power to determine who to tax, what to tax and how much tax is to be imposed (Tolentino vs. Secretary of Finance, 235 SCRA 630). The power to tax includes the power to destroy if it is used validly as an implement of the police power in discouraging and in effect, ultimately prohibiting certain things or enterprises inimical to the public welfare. Xxx But

where the power to tax is used solely for the purpose of raising revenues, the modern view is that it cannot be allowed to confiscate or destroy. If this is sought to be done, the tax may be successfully attacked as an inordinate and unconstitutional exercise of the discretion that is usually vested exclusively in the legislature in ascertaining the amount of the tax. (Cruz, Constitutional Law, 2000 Ed., p. 87)While taxation is said to be the power to destroy, it is by no means unlimited. When a legislative body having the power to tax a certain subject matter actually imposes such a burdensome tax as effectually to destroy the right to perform the act or to use the property subject to the tax, the validity of the enactment depends upon the nature and character of the right destroyed. If so great an abuse I manifested as to destroy natural and fundamental rights which no free government could consistently violate, it is the duty of the judiciary to hold such an act unconstitutional. Hence, the modification: The power to tax is not the power to destroy while the Supreme Court sits. So it is in the Philippines (Dimaampao, 2005). Q: It has been often repeated that the power to tax involves the power to destroy. On the other hand, it has also been stated that the power to tax is not the power to destroy while the court sits. Reconcile the apparently inconsistent statements. (Bar Question 1980) A: The imposition of a valid tax could not be judicially restrained merely because it would prejudice taxpayers property. However, an illegal tax could be judicially declared invalid and should not work to prejudice a taxpayers property. Marshalls view refers to a valid tax while the Holmes; view refers to an invalid tax (Domondon, 2006). vi. Importance of Taxation a. Taxation as General Funds of the Government Q: What is the importance of taxation to the government? A: It is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible (Philippine Bank of Communications v. Commissioner of Internal Revenue, et. al., G.R. No. 119024, January 28, 1999).

vii.

Basis of Taxation a. Lifeblood Theory

Q: Discuss the meaning and the implications of the following statement: Taxes are the lifeblood of government and their prompt and certain availability is an imperious need. (Bar Question 1991) A: Without revenue raised from taxation, the government will not survive, resulting in detriment to society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it (Commissioner of Internal Revenue v. Algue, Inc. 158 SCRA 8, 16-17 cited in Domondon, 2006).

b. Necessity Theory Q: What is Necessity Theory? A: According to our Supreme Court, taxation is a power emanating from necessity. It is a necessary burden to preserve the States sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come within the States territory and facilities, and protection which a government is supposed to provide (Philippine Guaranty Co., Inc. v. Commissioner of Internal Revenue, et. al., L-22074, September 6, 1965 cited in Aban, 2001).

c. Benefits-Protection Theory (Symbiotic Relationship) Q: What is the basis of taxation or rationale for taxation? (Bar Question 1973) A: Reciprocal duties of protection and support between the state and its citizens and residents. Also called symbiotic relation between the state and its citizens (Domondon, 2006). Q: What is symbiotic relationship? A: It is the reciprocal relation of protection and support between the state and the taxpayers. The state gives protection and for it to continue giving protection it must be supported by the taxpayers in the form of taxes. Taxes are what we pay for a civilized society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power (Commissioner of Internal Revenue v. Algue, Inc. 158 SCRA 8, 16-17 cited in Domondon, 2006). viii. Purposes of Taxation

Q: What is the purpose of Taxation? A: The primary purpose of taxation is to raise revenues. For the support of government and for all public needs, is according to Judge Cooley, the purpose of taxes. And so it has been widely believed that the primary purpose of taxation is to raise funds or property to enable the State to promote the general welfare and protection of citizens (Dimaampao, 2005). Q: Must an imposition, in order to be a tax, be levied solely for the purposes of revenue? A: No. Other than to answer the ever present need for revenues, taxation also seeks to: 1. Reduce Social Inequality Our present tax system has adopted the progressive system of taxation, i.e., the tax rate increases as the tax base increases. This system aims at reducing the inequality in the distribution of wealth by preventing its undue concentration in the hands of a few individuals. 2. Encourage the Growth of Local Industries It is settled rule that the power to tax carries with it the power to grant exemptions. Tax exemptions and tax reliefs serve as incentives to encourage investment in our local industry and thereby promote economic growth. 3. Protect our Local Industry Against Unfair Competition The Tariff and Customs Code allows the imposition of certain taxes (countervailing and dumping duties) upon imported goods or articles to further protect our local industry. R.A. 8752 (Anti-Dumping Act) imposes stricter conditions. 4. As an Implement of the Police Power of the State In the case of Tio vs. Videogram Regulatory Board, the Supreme Court maintained the validity of the challenged statute (P.D.1987 entitled An Act Creating the Videogram Regulatory Board), seeing the need to impose taxes upon the video industry as a regulatory measure, considering the unfair competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought about by the availability of unclassified and unreviewed video tapes containing pornographic films and films with brutally violent sequences; and losses in government due to the drop in theatrical attendance (151 SCRA 208 cited in Dimaampao, 2005). Sources Aban, B. (2001). Law of Basic Taxation in the Philippines. Revised Edition. National Bookstore. Caloocan City: Philippine Graphics Arts, Inc. Dimaampao, J. (2005). Tax Principles and Remedies. 2nd Edition. Quezon City: Rex Printing Company, Inc. Domondon, A. (2006). Bar Reviewer in Taxation. 7th Edition. Manila: GIC Enterprises & Co., Inc. Mamalateo, V. (2008). Reviewer on Taxation. 2nd Edition. Manila: Rex Bookstore, Inc.