The Wilson-Gorman Tariff of 1894 (also called the Income Tax Act of 1894) was a bill passed by Congress that reduced the Tariffs on certain imports into the United States.^[1] The final version lowered duties slightly, but added a number of other provisions. One of these was a 2% federal income tax. Other items such as coal, lumber, and wool were added to the duty-free list, ^[2] while sugar was removed from the duty-free list (where it had been included as a result of the McKinley Tariff of 1890). Debates over tariffs had been going on since America became a country. As the US became increasingly industrialized, the debates became more heated. The act was an effort by Democrats to help the country recover from the Panic of 1893, a serious economic depression.^[3] It tried to accomplish this by lowering tariffs and making up for the loss of revenues by a federal income tax. They believed if the US lowered tariffs other countries would also. They also believed they could push through a direct tax on personal income.^[a] The act failed to achieve any of its goals. A year later it was repealed by the Supreme Court decision Pollock v. Farmers' Loan & Trust Co as being unconstitutional. Indirectly, the tariff was a contributing cause to the Spanish–American War.^[6]

In the last days of the Benjamin Harrison administration, a number of events hurt the economy. A major employer, the Reading Railroad, went into receivership. This led to an unfortunate chain of events. Hundreds of banks and businesses which depended on the Reading and other railroads were forced to close.^[7] The US stock market went down dramatically. Fearing things could get worse European investor pulled their funds out of the US.^[7] Even so, the depression spread to Europe. Meanwhile there was an agricultural depression in the south and western United States causing the economy to become much worse.^[7] When President Grover Cleveland took office, over 4 million people had already lost their jobs. But Cleveland believed he should do nothing—the situation would correct itself.^[7]

The Democrats in Congress had for a long time wanted to lower tariffs. The Wilson-Gorman tax act called for a 2% income tax on any "gains, profits and incomes" over $4,000 for a period of five years.^[b][10] The income tax was supposed to make up for revenue that would be lost by tariff reductions.

It was the first income tax since the Civil War. Unlike the wartime tax, there had been pressure in Congress for a direct tax on income.^[2] Between 1874 and 1893, nearly 70 income tax bills had been introduced by Democrats in Congress.^[2] Generating revenue was not the primary goal of a direct income tax.^[2] The main issue was fairness. The bulk of federal revenue was from tariffs that all Americans had to pay when they bought imported products.^[2] But giant businesses like railroads, steel manufacturers, sugar companies were making large profits that were not being taxed.^[2] Securities, bonds and savings were also not being taxed.^[2] So an income tax was a fair remedy for this situation.

Those who opposed an income tax, most living in the large eastern cities, called it "class legislation" (meaning targeting their class).^[2] Many thought it was a tax on the rich since 90% of Americans did not have to pay the tax. Others thought that a federal income tax would take money away from the state governments.^[2]

The Wilson-Gorman Tariff made the economy worse.^[3] It led to cheaper goods being imported from other countries that competed with American-made products.^[3] This hurt the profits of American businesses. At the same time, American companies did not find many overseas markets for their goods.^[3] The tariff act also hurt the Cuban economy. It led to increased anger by Cubans against Colonial Spain.^[6] This was a contributing factor leading up to the Spanish-American war in 1898.

But the income tax portion of Wilson-Gorman that was its undoing. There was strong resistance by wealthy citizens and high-earning companies that were targeted by the income tax.^[3] As the economy got worse the Los Angeles Times remarked, "The Democrats are in favor of an income tax for the reason that Democrats, as a rule, have no incomes to tax."^[3]

A year later the act was overturned by the 5–4 decision in Pollick. That decision, in turn, was later overturned by the passing of the Sixteenth Amendment to the United States Constitution.^[11]

• A Short History of Taxes, Forbes
• 1894 Income Tax and the Wilson-Gorman Tariff Act