Underwood Tariff Act - Business in United States of America

The Law: Federal legislation that reduced import tariffs and created the federal income tax
Date: Signed into law on October 3, 1913
Significance: Initially touted as an act to lower tariffs, the longer term significance was the manner in which the act attempted to offset the loss of tariff revenue—namely by creating the federal income tax on individuals. Consumers were provided with competitively priced products, and manufacturers were encouraged to be more efficient in their production processes.
Also known as the Revenue Act of 1913, the Underwood Tariff Act was called for by President Woodrow Wilson in a special session of Congress in April, 1913.Wilson’s call for a reduction in tariffs marked the first time that a president had spoken to a joint session of Congress in more than one hundred years. As a result, there was heavy media coverage of Wilson’s move to lower the average citizen’s cost of living. Congressman Oscar Underwood of Alabama shepherded the bill through the House, and it passed easily in May, 1913. The Senate, however, was influenced by lobbyists. It was not until September that the bill passed. The law reduced tariffs to the lowest that they had been in more than fifty years. The average rate went from 41 to 27 percent.
To compensate for the lost revenue, the act created a federal income tax. The Sixteenth Amendment to the Constitution had been ratified on February 3, 1913, allowing for an income tax. Initially, the income tax applied to few individuals, and this aspect of the act was not considered significant.
Also included in the act was a provision to allow the establishment of an independent study commission to provide the president and Congress with advice on the proper rates for tariffs. The Federal Tariff Commission was created in 1916 to collect expert information on the fiscal and industrial effects of customs duties. The commission still exists in the twenty-first century under the name of the International Trade Commission.