Study Guide for Taxation based from Duka

22 Feb, 2026

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THE POWER OF TAXATION

Standalone Primer | Constitutional Law 2

Based on Duka, Constitutional Law 2 (2025)

I. OVERVIEW: WHAT IS TAXATION?

Every government needs money to function — to build roads, pay soldiers, run courts, deliver public services. The government cannot earn this money the way private persons do, through commerce or labor. Instead, it compels its citizens and residents to contribute a portion of their wealth for the common good. This compelled contribution is a tax, and the power behind it is the power of taxation.

The working definition: Taxation is the power by which the State raises revenue to defray the necessary expenses of the government. (Duka)

More formally, taxes have been defined as "the enforced proportional contributions from persons and property, levied by the State by virtue of its sovereignty, for the support of government and for all public needs." (Cruz)

Unlike police power (which regulates behavior) and eminent domain (which takes specific property for public use), taxation operates broadly — it demands from virtually every member of society a share of their money for the upkeep of government and the promotion of the general welfare.

II. NATURE AND CHARACTERISTICS

A. It is inherent in sovereignty.

Taxation does not need a constitutional provision to exist. "The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits." (Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996) (Duka)

Constitutional provisions relating to taxation are therefore not grants of the power — they are limitations on a power that already exists. This is the same principle as with police power and eminent domain. The security against tax abuse lies primarily in "the responsibility of the legislature which imposes the tax on the constituency who are to pay it." (Duka)

B. It is primarily legislative in character.

Because taxation involves the imposition of a burden on the people — a taking of their money — it must proceed from their elected representatives. Taxation is primarily a legislative prerogative. Courts generally give great deference to legislative judgment on matters of taxation.

C. It is a destructive power.

"Verily, taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government." (Duka) This is why tax statutes must be construed strictly against the government and liberally in favor of the taxpayer.

D. It is also the "lifeblood" of government.

At the same time, "taxes are the lifeblood of government and their prompt and certain availability is an imperious need." (Commissioner of Internal Revenue v. Algue, G.R. No. L-28896, February 17, 1988) (Duka)

"Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself." (Duka) The two principles — strict construction against the government on tax imposition, and the lifeblood theory on tax collection — operate in tandem and must be reconciled.

E. The obligation to pay taxes is not contractual.

It is a duty imposed upon the individual "by the mere fact of his membership in the body politic and his enjoyment of the benefits available from such membership." (Cruz) Because taxes are not debts, non-payment may be the subject of criminal prosecution. The accused cannot invoke the constitutional prohibition against imprisonment for debt — taxes are not debts. (Cruz)

III. THE "POWER TO TAX IS THE POWER TO DESTROY" — AND ITS QUALIFICATION

Chief Justice John Marshall of the US Supreme Court famously declared in McCulloch v. Maryland (17 U.S. 316 [1819]): "The power to tax involves the power to destroy."

This means that if the legislature imposes such an onerous tax as to make a business or activity unprofitable or impossible, the tax effectively destroys it. The principle is used to justify the use of the taxing power as a regulatory instrument — for example, imposing prohibitive taxes on massage parlors used as fronts for prostitution, slot machines, or other non-useful or harmful enterprises.

However, Justice Oliver Wendell Holmes responded in Panhandle Oil v. State of Mississippi (277 U.S. 218 [1928]): "The power to tax is not the power to destroy while this Court sits."

This qualification means that where taxation is used purely as a revenue measure (not for regulatory purposes), it cannot be used as a tool to confiscate or destroy. If a tax is so oppressive as to amount to confiscation, courts may strike it down.

The reconciliation: Both statements are correct, but from different viewpoints. (Duka)

• When taxation is a regulatory instrument (an implement of police power) → the power to destroy is justified.
• When taxation is purely a revenue measure → destruction or confiscation is unconstitutional.

Example: A 1,000% sin tax on cigarettes designed to curb smoking is a valid regulatory tax. A tax seizing 80% of an individual's net income purely to raise revenue, on the other hand, is oppressive and may be struck down for violating due process.

IV. WHO MAY EXERCISE THE POWER OF TAXATION?

A. Primary seat: Congress

The power to tax is primarily vested in Congress. Congress has plenary authority to determine what to tax, how much, and for what purpose — subject only to constitutional limitations.

B. Delegatees — Two categories

1. Local Government Units (LGUs) — LGUs exercise the power to tax no longer merely by virtue of delegation, but pursuant to direct authority conferred by Section 5, Article X of the 1987 Constitution, which provides that "each local government unit shall have the power to create its own sources of revenue and to levy taxes, fees and charges, subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy." (Duka)

The Local Government Code (LGC) was enacted pursuant to this constitutional mandate and governs the scope, limitations, and exemptions from LGU taxation. LGU taxes, fees and charges require a prior public hearing before the enactment of the ordinance imposing them. The levy must not be unjust, excessive, oppressive, confiscatory, or contrary to declared national economic policy (Sections 186 and 187, LGC). (Duka)

⚠︎ Limitation: LGUs cannot impose national-level taxes such as income tax, documentary stamp tax, and the like. These remain with the national government.

2. The President — Congress may, by law, authorize the President to fix within specified limits, and subject to limitations and restrictions Congress may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government. (Art. VI, Sec. 28[2], 1987 Constitution) The President is bound by the conditions set by Congress. (Duka)

The President may also exercise tax-related powers as an incident of emergency powers granted by Congress under Section 23(2), Article VI. (Duka)

V. SCOPE OF THE TAXING POWER

The scope of the taxing power is vast. "It may be exercised upon every object brought within its jurisdiction." (McCulloch v. Maryland) (Duka) All subjects over which the sovereign power of a State extends are objects of taxation; those over which it does not extend are exempt.

Taxation reaches even citizens abroad and their income earned from foreign sources. In other cases, all income earned within the taxing State — whether by citizens or aliens — and all immovable and tangible personal property found within its territory may be subject to tax. (Cruz)

VI. LIMITATIONS ON THE POWER OF TAXATION

The taxing power, while vast, is not without limits. Limitations are either inherent (flowing from the nature of the power itself) or constitutional (expressly imposed by the Constitution).

A. INHERENT LIMITATIONS

These limitations exist even without an express constitutional provision because they flow from the very nature and purpose of the taxing power:

1. Public Purpose

Taxes are exacted only for a public purpose. They cannot be used for purely private purposes or for the exclusive benefit of private persons. "It would be a robbery for the State to tax its citizens and use the funds generated for a private purpose." As an old American case bluntly declared: "To lay with one hand, the power of the government on the property of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery because it is done under the forms of law and is called taxation." (Duka)

The term "public purpose" is an elastic concept given broad interpretation — it covers not only traditional government functions (roads, basic services) but also purposes designed to promote social justice: relocation of illegal settlers, low-cost housing, urban and agrarian reform. "Public purpose is the heart of a tax law." (Planters Products, Inc. v. Fertiphil Corporation, G.R. No. 166006, March 14, 2008) (Duka)

Example of violation: LOI 1465 imposed a ten peso capital contribution on every bag of fertilizer sold "until adequate capital is raised to make PPI viable." PPI was a private corporation. The imposition was for private benefit, not public purpose, and was declared invalid. (Planters Products v. Fertiphil) (Duka)

2. Non-Delegability of the Taxing Power

The power to tax is essentially legislative and generally cannot be delegated. This is consistent with the general rule on non-delegation of legislative power. However, there are recognized exceptions: (a) delegation to the President under Section 28(2), Article VI (tariff rates, quotas, etc.); and (b) delegation to LGUs, now grounded in Article X, Section 5 of the Constitution. (Duka)

3. Territoriality / Situs of Taxation

The State can only tax objects within its territorial jurisdiction. "All subjects over which the sovereign power of a state extends, are objects of taxation; but those over which it does not extend, are, upon the soundest principles, exempt from taxation." (McCulloch v. Maryland) (Duka)

Due process is violated when a tax is imposed on property outside the State — extraterritorial taxation. (Duka)

4. Exemption of Government Entities from Taxation

Government entities and their instrumentalities are generally exempt from taxation. The practical rationale is that taxing one government arm to pay another merely results in money going from one government pocket to another — there is no net revenue gain. For this reason, when the grantee of a tax exemption is a political subdivision or instrumentality, the usual strict rule of construction does not apply. (Duka)

5. International Comity

A State generally does not tax the properties and income of foreign sovereigns, their diplomatic representatives, and property of international organizations operating within its territory. This flows from the principle of sovereign equality and reciprocal respect among nations. (Duka)

B. CONSTITUTIONAL LIMITATIONS

These are express restrictions found in the 1987 Constitution:

1. Uniformity and Equity (Art. VI, Sec. 28[1])

"The rule of taxation shall be uniform and equitable."

Uniformity means that persons or things belonging to the same class shall be taxed at the same rate. It requires geographical uniformity — the tax must operate with the same force and effect in every place where its subject is found. Uniformity does NOT prohibit classification for purposes of taxation — the taxing power may fall more heavily on some than others, as long as the classification is valid. (Duka)

Equitable taxation means that taxes should be apportioned among the people according to their capacity to pay. This is sometimes expressed as the ability-to-pay principle.

For a tax classification to be valid (applying the same standard as the equal protection clause):

1. The classification must rest on substantial distinctions which make real differences;
2. It must be germane to the purpose of the law;
3. It must apply not only to present conditions but also to future conditions substantially identical to the present; and
4. It must apply equally to all those who belong to the same class.

(Bernas; Duka)

Example: Cigarettes classified into local and imported brands, with a uniform rate within each class, satisfies the uniformity rule even if the rates differ between classes, because the classification rests on a substantial distinction.

2. Progressive System of Taxation (Art. VI, Sec. 28[1])

"The Congress shall evolve a progressive system of taxation."

A tax is progressive when the rate increases as the tax base increases. The constitutional mandate for a progressive system reflects the social justice command — the legislature should use taxation as an instrument for more equitable distribution of wealth. The income tax system is the most familiar example: higher earners pay at higher rates. (Duka)

3. Special Purpose Funds (Art. VI, Sec. 29[3])

"All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government."

This prevents the legislature from diverting tax proceeds collected for a special purpose to other uses while that purpose remains. Once the purpose is fulfilled or abandoned, the remaining balance reverts to the general fund. (Duka)

4. Delegated Tariff Power (Art. VI, Sec. 28[2])

Congress may authorize the President to fix tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within specified limits and the framework of the national development program. This is a recognized constitutional exception to the non-delegation rule. The President is bound by Congress's conditions. (Duka)

5. Tax Exemptions Require Majority Vote of Congress (Art. VI, Sec. 28[4])

"No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress."

Tax exemptions are not lightly extended — they represent a loss of revenue to the government. The concurrence of a majority of all Members (not just those present) is required to pass such a law. Statutory exemptions are granted in the discretion of the legislature and where granted gratuitously (e.g., for economic policy), they may be revoked at will. But where the exemption is granted for valuable consideration, it partakes of the nature of a contract and is protected against impairment by the non-impairment clause. (Cruz; Duka)

The rule on construction of tax exemptions:

• Tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority.
• A claim of exemption must be "clearly shown and based on language in the law too plain to be mistaken."
• Taxation is the rule; exemption therefrom is the exception.
• Exception to strict construction: When the grantee is a political subdivision or instrumentality, the strict rule does not apply because the exemption merely reduces the amount of money government handles internally. (Mactan Cebu International Airport Authority v. Marcos) (Duka)

6. Constitutional Tax Exemptions (Art. VI, Sec. 28[3])

The Constitution itself grants tax exemption to:

1. Charitable institutions, churches and parsonages/convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes — exempted from taxation (property tax). (Duka)
2. Non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes — also exempt. (Art. XIV, Sec. 4[3]) (Duka)

Key qualifier: The exemption requires actual, direct, and exclusive use for the exempt purpose. A church that uses a parcel of land for commercial purposes (e.g., leased to a business) cannot claim exemption for that parcel, even if the proceeds go to religious activities.

VII. DUE PROCESS AND TAXATION

Like all government powers, taxation must comply with due process:

Substantive due process is violated when:

• The tax is imposed for a private as distinguished from a public purpose;
• A tax is imposed on property outside the State (extraterritorial taxation); or
• Arbitrary or oppressive methods are used in assessing and collecting taxes (e.g., a tax claiming 80% of net income, or a property tax retroacting 50 years). (Duka)

Procedural due process:

• Due process does NOT require prior notice and hearing before a law prescribing fixed or specific taxes is enacted.
• However, where the tax to be collected is based on the value of taxable property (an ad valorem tax), the taxpayer is entitled to be notified of assessment proceedings and to be heard on the correct valuation. An ex parte appraisal that increases the ad valorem tax without notice violates due process. (Cruz; Duka)

Note: A tax does not violate due process merely because it results in injury rather than benefit to a particular taxpayer. The public purpose test, not individual benefit, governs. (Duka)

VIII. EQUAL PROTECTION AND TAXATION

Taxation is subject to the general requirements of the equal protection clause in addition to the constitutional uniformity requirement. The rules are parallel — both require that any classification used in taxation rest on substantial distinctions and be germane to the purpose of the tax.

Taxes may validly differentiate between: commercial vs. residential lands; urban vs. rural practitioners; luxury vs. prime commodities; non-useful vs. useful enterprises; high-income vs. low-income persons. But taxes cannot be based on differences in race, ethnicity, or other non-substantial distinctions. (Cruz; Duka)

IX. DOUBLE TAXATION

Double taxation occurs when additional taxes are laid on:

1. The same subject;
2. By the same taxing jurisdiction;
3. During the same taxing period; and
4. For the same purpose. (Duka)

Double taxation is NOT forbidden by the Philippine Constitution.

The Philippines has not adopted a specific constitutional prohibition against double taxation. The Supreme Court has not categorically held it to be unconstitutional. (Punzalan v. Municipal Board of Manila, G.R. No. L-4817, May 26, 1954) (Duka)

Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity or by the same jurisdiction for the same purpose. It is not objectionable where one tax is imposed by the national government and another by an LGU (different jurisdictions). (Pepsi Cola v. Municipality of Tanauan, G.R. No. L-31156, February 27, 1976) (Duka)

Despite the lack of a specific prohibition, double taxation will not be allowed if it violates the equal protection clause — i.e., if certain properties are subjected to additional taxes while others similarly situated are not. (Cruz)

Elimination of Double Taxation (Tax Treaties)

Double taxation usually takes place when a person is a resident of one contracting State and derives income from, or owns capital in, another contracting State, and both States impose tax. Tax treaties address this through: (a) allocation of exclusive taxing rights to one State; or (b) requiring the State of residence to grant relief (e.g., tax credits) when the State of source also taxes. (Commissioner of Internal Revenue v. S.C. Johnson and Sons, Inc., G.R. No. 127105, June 25, 1999) (Duka)

X. TAX vs. LICENSE FEE

A critical distinction for the bar exam:

(Acebedo Optical Company, Inc. v. Court of Appeals, G.R. No. 100152, March 31, 2000) (Duka)

Practical test: If a business permit fee is collected primarily to regulate (ensure compliance with standards), it is a license fee (police power). If the amount goes far beyond the cost of regulation and is intended to raise revenue, it is a tax.

XI. TAXATION AS AN INSTRUMENT OF POLICE POWER

The taxing power and police power are distinct but may intersect. The legislature may use the taxing power as an implement of police power — imposing taxes specifically to discourage or effectively prohibit activities inimical to the public welfare.

Examples: Prohibitive taxes on massage parlors used as fronts for prostitution; heavy taxes on tobacco and alcohol (sin taxes) to discourage harmful consumption; special levies to rehabilitate the sugar industry (Lutz v. Araneta).

When taxation is used as a police power instrument, the "power to destroy" is legitimate. But when it is purely for revenue, oppressive or confiscatory taxes are unconstitutional. (Duka; Cruz)

XII. JURISPRUDENCE CHEAT SHEET

XIII. SUMMARY TABLE

Compiled for personal study use — ConLaw 2, JD 302 | Atty. Llorico Primary source: Duka, Constitutional Law 2 (2025)