Upon the matter of a distribution of a portion of the proceeds of State taxation among the local districts, the Pennsylvania tax conference said:

'In this State we are drifting into a practice of collecting revenue into the State treasury far in excess of the needs of the State government, with the purpose of distributing the surplus among the townships and municipalities in aid of local taxation. The wisdom of such a policy is questionable. It is an unnecessary circumlocution, and exposes the public revenues to additional dangers of waste and misappropriation. There will be an irresistible tendency in the legislature year by year to increase the appropriations in aid of local charities and other objects whose benefits are not evenly diffused, thus decreasing the amount available each year for schools and roads. The honest and economical administration of public affairs can be better promoted, and the self-reliance of the people better preserved, by remanding the whole process of collecting and disbursing local public revenues to the local authorities as far as possible. To centralize the fiscal department of all branches of civil administration at the capital, making the local authorities dependent on the legislature for the means to defray their necessary expenses, is a vital thrust at the doctrine of local self-government.

In New Jersey the act of 1884, among other things, provided for the taxation of "main stem" or "first-class property." and for property other than main stem or "second-class property," by State authorities, with a subsequent distribution of the tax on "second-class property" among the local districts. This system of taxing property, used for railroad and canal purposes, may be described in a sentence as a property tax by the State, through State assessors or officers, in its entirety as a unit, for the use of the State, with a distribution of a part of the tax by the State to the local taxing districts for the support and maintenance of the local or municipal governments.'

The New Jersey tax commission of 1897, whose report deals largely with local taxation, concludes that the method of distribution works injustice in that State. The commission says: "Assuming as a fact that the property used for railroad and canal purposes does pay as much tax, that is, as many dollars, relatively to a like amount of property owned by individuals and other corporations, it does not follow as a logical sequence that the distribution by the State to the local taxing districts is just or fair. On the contrary, it has been shown by evidence and facts before us that the act of 1884 in its practical operation works some injustice to the local districts of the State, not only in the relative amount of land withdrawn completely from the local or municipal tax comprised in the main stems' commonly known as first-class property, but also in the amount of tax which the local taxing districts receive from the land commonly designated as second-class property."2

And further: "A study of local or municipal taxation in the United States will show that land is the chief source, the principal object of local taxation. * *

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"Whenever this principle is violated in a system of taxation, it throws the local or municipal governments out of joint. In the city of Washington, where the land occupied by the buildings of the National Government was exempt from taxation, the burden became so onerous on the individual owners of land that at one time it threatened financial disaster to the District of Columbia, until the Federal Government assumed part of the expenses of the local government, or contributed to such expenses in lieu of the land which was held by the Federal and foreign governments exempt from local or municipal taxation. The lands used for railroad purposes in the principal terminal cities of the United States, such as New York, Boston, Buffalo, Chicago, Philadelphia, and Pittsburg, are taxed locally for the use of the local governments.

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* * "When it is shown that * * * the geographical position of some of the local taxing districts in the State is such that in those taxing districts it is necessary for the proper and legitimate development and operation of the railroad companies, to acquire and hold, in addition to their main stem, large tracts or blocks of land, there is no reason in good morals or sound principles of taxation why the State should deprive the local municipalities of the taxes derived from tracts or blocks of land held and used for railroad purposes, in addition to the main stems, and known as second-class property under the act of 1884. It is the illogical result of an otherwise logical system."4

In Massachusetts the method of distribution followed by that State was regarded with disfavor by the tax commission of 1897.1 The commission says:

"There are, however, some questions as to the present mode of distributing the proceeds of the taxes on corporate excess to which we think it necessary to call the attention of the general court. They are distributed, it will be remembered, among the several cities and towns according to the ownership of shares by their inhabitants. We have already referred to some anomalous results of this method of distribution. It causes disproportionately large sums to be turned over to a few towns much resorted to by people of means. But, even apart from these difficulties, there are others which make it doubtful whether under any circumstances corporate excess should be made a direct source of revenue to the towns and cities.

"With many corporations there is a very large corporate excess. All railways, by an old decision of the courts, are exempt from local taxation on their right of way; and, in any case, the value of their real estate and machinery, taxable locally, is not a great proportion of their total valuation. This is even more strikingly true in the case of street railways. The cities and towns where the shareholders happen to reside, perhaps distant from the places where the enterprises are carried on, get the main benefit of the taxes."2

In West Virginia the railroad taxes are paid into the State treasury, and a portion locally distributed upon the basis of the situs of the railroad property taxed. The New Hampshire method is a cross between the Massachusetts and West Virginia methods. In that State the tax on the general property of railroads (excepting real estate not in the right of way, which is locally assessed and taxed) is paid to State officials, who subsequently distribute among the towns onefourth of the proceeds of the tax according to the value of railroad property in those towns, and of the residue, to each town such proportion as the number of shares held by its residents bears to the total capital stock of the various railroad companies.3

4

In Wisconsin State court decisions have been adverse to the taxation of railroad property, whether by State or local authorities, and a similar state of affairs now exists in Minnesota.5

E. UNIFORMITY IN RAILWAY TAXATION AMONG THE STATES. The table which follows will throw some light upon the question of the extent to which current State tax methods approach uniformity in their treatment of the individual railway systems of the country. Three of the trunk lines have

1 The following table, taken from page 67 of the report of the Massachusetts tax commission of 1897, will show the effect of the distribution carried out in that State:

The 18 selected towns get five times as much as the average for the State, per head of population, of the proceeds of the tax on corporate excess. As compared with the remaining towns, less fortunate in the ownership of securities by their inhabitants, these few towns get nearly ten times as much per head of population.

2 Report of Massachusetts tax commission of 1897, p. 70.

3 The following table will illustrate the working of the New Hampshire method of distribution. The figures for population are compiled from the census returns of 1900; those for the amounts of the tax distributed, from the New Hampshire treasurer's report, June 1, 1900:

4 For a history of this question see Wisconsin Central Railroad Co. v. Taylor County (52 Wis., 37). 6 Stearns v. Minnesota, decided in the United States Supreme Court, December 3, 1900.

been chosen as typical of what is probably the state of affairs throughout the country.

Railway system.

Erie:

Group II...

Group III.

Total

Group III..

Total

1 Aggregate figures for 1897, 1898, and 1899, compiled from the statistical reports of the Interstate Commerce Commission, territorial Groups II and III.

2 The bulk of taxes on Erie lines is paid in New Jersey, New York, Pennsylvania, Ohio, and Indiana. 3 Including the New York Central and Hudson River, Lake Shore and Michigan Southern, and Michigan Central lines, the Michigan Central including 380.04 miles not in the United States.

4 The bulk of taxes on New York Central lines is paid in New York, Ohio, Indiana, and Michigan. The bulk of taxes on Pennsylvania lines is paid in New Jersey, Pennsylvania, Delaware, Maryland, Ohio, and Indiana.

The following table1 will show the effect of existing_tax methods upon roads situated in different sections of the country, as grouped in the statistical report of the Interstate Commerce Commission:

1 Figures compiled from the statistical report of the Interstate Commerce Commission, covering the year ending June 30, 1899; the territory covered by the different groups is outlined on page 36.

CHAPTER III.

DOUBLE TAXATION.

The problems arising out of double taxation are essentially the product of the complex industrial system of the present day. New complications in property rights have arisen, which, under the continued application of the principles of the property tax, have resulted in much injustice and confusion.

Double taxation arises from two sources-either from the repeated taxation of the same class of subjects by the same governmental authority, or from the taxa

tion of the same class of subjects by competing authorities. The latter is the outcome of the modern mobility of capital and labor; the former results largely from the fact that property and certificates of ownership in property in their various forms have both become the objects of taxation.

It might be well to remark at this point that double taxation is not necessarily unjust taxation. This fact is often overlooked in the use of a "phrase which is itself brimful of duplicity and highly convenient for sophistical reasoners.”1

A. DOUBLE TAXATION BY THE SAME JURISDICTION.

1. Double taxation of property and indebtedness. It is almost superfluous to state that this question arises only under the property tax. One of its phases is the taxation of corporate property and corporate indebtedness.

In the taxation of individuals it is not an unusual practice in the assessment of property either to deduct indebtedness from the final valuation or to exempt indebtedness from taxation when the total property is taxed. This is done, for instance, in the case of mortgages on real estate in several States, to avoid what might otherwise be unjust double taxation. The analogy, however, must not be carried over into the taxation of the capital stock and indebtedness of a corporation; a distinction between corporate and individual indebtedness must not be overlooked. In the case of individuals it would generally be unjust to tax both property and mortgage debt, because the real taxable property, when the mortgage is taxed, is only the surplus above indebtedness. Corporate bonded debt is a portion of the corporate capital. To tax indebtedness of this character in addition to the capital stock is not double taxation, for the capital stock is representative of only a portion of the corporate property. To tax corporate property as well as indebtedness, however, is another question, which gives rise to considerations very similar to those involved in the taxation of both property and capital stock. This will come up later.

It is not uncommonly the practice among the States to forbid the exemption of funded debt when capital stock is taxed. A number of States, notably California, Connecticut, Illinois, and Maryland, permit individuals to deduct indebtedness, but forbid the same practice on the part of corporations. This policy was upheld in the California courts in a decision which pointed out clearly the distinction between individual and corporate indebtedness.2 The Utah statute which forbids the deduction of bonds in the listing of credits illustrates an analogous practice.

There is really no injustice in such a policy. Injustice, in fact, in most cases arises from the opposite practice. As an illustration of this fact may be cited the case of “a company which never paid a dollar of State tax upon capital stock prior to 1895. The New York, Pennsylvania and Ohio Railroad Company, with a capital stock of $44,999,350 and $129,853,080 bonded and other indebtedness outstanding, the cost of the road and equipment being $170,987,509, was the owner of 429.59 miles of railroad, extending from Salamanca, N. Y., to Dayton, Ohio, it being the connecting link between the east and the west of the Erie Railway system and competing with the Lake Shore, Baltimore and Ohio, and Pennsylvania railroads. Of the total mileage, 126.18 were within the State of Pennsylvania. As stated before, this company had never paid to the State a tax on capital stock or bonds, because it was claimed that this property was bonded' far beyond its actual value, and therefore the capital stock was worthless. The bonds were owned by nonresidents of the State, and therefore not taxable. * * * This case is given as an example, showing how many corporations have heretofore escaped taxation by reason of a funded debt, which is capital invited by the stockholders with the hope that they will derive additional benefit from such added capital.” 3

În New York, as concerns the local taxation of capital stock, it has been held by the courts that in estimating the value of the capital stock of a corporation its indebtedness is to be considered; but the valuation having been fixed, only the value of the real estate and not the amount of indebtedness is to be deducted therefrom. Where, however, the "capital stock is of no actual value" because of indebtedness exceeding assets, it must not be assessed. This is applicable only to domestic corporations.

5

1 Report of the Joint Committee on Taxation, New York legislature, 1900, p. 10.

2 Central Pacific Railroad Co. v. Board of Equalization, 60 Čal., 35.

3 Report of the Auditor General of Pennsylvania for 1897, p. vi.

People, ex rel. Broadway and C. R. R. Co., v. Commissioners of Taxes (1 Thomp. & C., 635).

5 People, ex rel. West Side and Yonkers Railway Co., v. Commissioners of Taxes (31 Hun., 32).

The taxation of the interest on bonds involves the same principle as the taxation of the bonds themselves. Interest on bonded debt as fully as dividends on stock constitute an integral part of the corporate income and are, as much as the latter, a product of the corporate investment.

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2. Double taxation of property and stock.-A second phase of the double taxation of the same class of subjects by the same jurisdiction is the double taxation of property and of capital stock. To tax a corporation on its property and at the same time to levy a tax on its securities, as if they were substantive and independent property, is in effect unjust double taxation. It can not be denied that corporate property and capital stock are not identical. As brought out in Commonwealth v. Hamilton Manufacturing Co.,1 "the market value of the shares of a corporation * does not necessarily indicate the actual value or amount of property which a corporation may own. The price for which all shares would sell may greatly exceed the aggregate of the corporate property, or it may fall very far short of it. Undoubtedly the amount of property belonging to a corporation is one of the considerations which enter into the market value of its shares, but such market value also embraces other essential elements. * It is the estimate put on the potentiality of a corporation, on its capacity to avail itself profitably of the franchise, and on the mode in which it uses its privileges as a corporate body, which materially influences and often controls its market value.” While this is true, it will readily be granted that the value of the property is bound up in the value of the capital stock, i. e., that the property is at least a part, if not the whole, of the corporate investment which capital stock is supposed to represent. So far as the two are representative of the same taxable capacity, therefore, the taxation of both by the same authority would be unjust double taxation.

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In general, the legislation and legal decisions of the various States have been adverse to double taxation of this character. The courts of Maryland have from the beginning followed the principle that a tax on capital stock covers a tax on property, and that, therefore, the taxation of both at the same time is unjust. În a number of States (e. g., Alabama, Illinois, Indiana, and Vermont) this principle is recognized and only the excess of capital stock over property is taxed. A recent law in Wyoming provides that the property of domestic corporations shall be assessed and taxed in the same manner as the property of individuals; "but the capital stock of such corporations, representing, as it does, simply the interests of the owner thereof in the property of such corporation, shall not be taxed." In California the taxation of both property and capital stock has been declared by statute to be double taxation, so that neither the corporation nor the shareholder is taxed on capital stock or shares. Colorado follows the dictum that the taxation of tangible property and of shares of stock is not double taxation. The opposite is the practice in Illinois, as well as in Florida and Idaho, where it has been declared that, when corporations are taxed on their property, shares of stock in those corporations shall not be taxed. In Kansas, shares of stock are taxable to holders after property deductions have been made. In New Jersey, shares of stock are not assessed against holders when the corporation is taxed on its property and franchise. In New Mexico, statute provision declares that when a corporation is taxed, either on its property or on its capital stock, shareholders are not to be taxed on their shares. The same provision is made in South Carolina, Tennessee, Utah, Washington, West Virginia, and a few other States; though in Tennessee a legal decision 2 arrives at the conclusion that the State may lay such a tax, notwithstanding the statute to the contrary. In all of these cases, however, a distinction must be drawn between capital stock and shares in the hands of holders. This will be brought up again later.

Early legal opinion in Pennsylvania was not adverse to a tax on both corporate property and capital stock. In Pittsburg, etc., R. R. Co. v. Pennsylvania, the court delivered the opinion that "the power of the legislature is as ample to tax twice as to tax once, and it is done daily, as all experience shows. Equality of taxation is not required by the constitution." But the general trend of subsequent decisions has been in the opposite direction. For instance, it has been held that the capital stock of corporations representing tangible property outside of Pennsylvania is not taxable in Pennsylvania: and further, that "capital stock represents the franchises as well as the property of the company," affirming several previous

112 Allen, 303.

23 Pickle, 406.

366 Pa., 77.

4 Commonwealth v. Standard Oil Co. (101 Pa., 119) and Commonwealth v. American Dredging Co. (122 Pa., 387).

5 Commonwealth v. Delaware, Susquehanna and Schuylkill R. R. Co. (165 Pa., 44).