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CHAPTER XXV

CONSTITUTIONAL PROTECTIONS-Continued

TAXATION

Protections against Unconstitutional Taxes.-Another field in which the rights of all classes need special provision and care is that of taxation. Most of the constitutional safeguards that we have been considering, are also strong protections against improper State tax levies. Of these the most important are the "liberty and property," and the "equal protection" clauses and the commerce clause of Section 8 of Article 1. The latter by giving to Congress the control of interstate trade, prevents the States from interfering by taxation with that form of business. We shall consider the chief problems which have come up in this field under the following heads: The public purpose of taxation.

State taxes on the Federal Government.

On bonds of other States.

On its own bonds held by non-residents.

On national trade.

On railways and other carriers.

On ordinary business corporations engaged in interstate trade. State taxes favoring the products of its own soil.

State taxes with progressive rates.

The need of a revision of the State tax system.

The Public Purpose of Taxation.-May a State or city government tax its people for any purpose that it pleases? This question which often arises, was ruled on in the case of Loan Association v. Topeka, 20 Wallace, 655. A law of Kansas had authorized cities "to encourage the establishment of manufactures and such other enterprises as may tend to develop or improve the city, either by direct appropriation from the general funds, or by the issuance of the bonds of such city." The city of Topeka had accordingly issued bonds and had levied a tax to secure funds for paying off the bonds; it had then granted to an outside manufacturing company some of the bonds as an inducement to locate within the city. The validity of a loan and tax for this purpose having come into litigation, the case was appealed to the national Supreme Court. It was argued against the tax that the property of citizens was being taken from them to be given to a private company and that this was in reality

1 Since we have already considered this subject, partly, in the Chapter on Federal Taxation and Finances, the present chapter is devoted chiefly to the protections against illegal State taxes.

not taxation at all but an abuse of the State's public powers. In support of the constitutionality of the tax it was urged that it had been levied in pursuance of the regular authority of the legislature and that the money had been properly used to encourage the manufacturing interests of the community. The Supreme Court held that there was a sharp distinction between levies for a public purpose and for a private one. A sum collected by government for the benefit of private individuals was not a tax but a taking of property. "A tax" says Webster's Dictionary, "is a rate or sum of money assessed on the person or property of a citizen by government for the use of the nation or State. Taxes are burdens or charges imposed by the legislature upon persons or property, to raise money for public purposes." In deciding whether a rate is for public or private purposes, courts must be governed mainly by the course and usage of the government. The objects for which taxes have been customarily levied were objects found necessary to the support and for the proper use of the government. Whatever pertains to this, and is sanctioned by time and the acquiescence of the people, may be considered a public use, but the Topeka tax, in favor of a manufacturer who was to locate his iron works in the city would open the door for a great host of applicants for subsidies from perhaps two-thirds of the business men in the community. It could not be considered a public purpose, and was therefore unconstitutional. This case establishes firmly the principle that a public object must be served by State and local levies.

Is the Purchase and Ownership of a Public Utility Industry a "Public Purpose" ?—This question was submitted to the Massachusetts Supreme Court by the legislature of that State-Opinion of the Justices, 150 Mass. 592; 1890-the fund being for the purchase of plants to manufacture and distribute gas and electricity. The Justices answered that if the legislature wished to allow taxation and loans for the common convenience and welfare of the inhabitants by giving the municipalities the power of purchasing, owning and operating their own gas and electric plants, such purpose was to be considered a public one, and therefore, the tax would be constitutional. Later the same question arose in reference to a legislative bill, authorizing cities to buy and sell coal and wood for fuel to their inhabitants. Here the Justices were of the opinion that the particular industries mentioned were not sufficiently public to render this a public purpose. They considered the use of tax funds to this end unconstitutional. We must observe, however, that an industry may by its surrounding conditions, slowly pass from a private to a public nature. In certain circumstances the coal business ceases to be one of private concern, and interests the entire public to such an extent that a strike in the industry must be

1The courts of other States however have upheld taxes for the establishment of local fuel-yards.

settled in order to protect the public against serious, irreparable losses. In the same way the use of public funds to acquire and operate an industry may at one time be unconstitutional because the business is not a public one, while at a later period such purchase and operation may well be thought to be of such great common advantage as to make the purchase a public purpose and therefore constitutional. The organization and control of many of our greatest industries has so rapidly changed in the last few decades as to require us to change accordingly our public law governing such industries. Railways may legally receive State aid.

A long series of decisions has upheld such a system because it is for a public purpose. The whole public has such a direct interest in the means of transport and the circulation of business in general that the benefits of such a system accrue largely to the entire community. So far as the Federal Constitution is concerned, the 5th and 14th Amendments liberally construed would allow either Congress or the States to use the proceeds of taxation in this way for the encouragement of an industry such as railroading, which is distinctively a public service business. Despite this interpretation of the Federal Constitution, however, the State constitutions forbid the pledging of the State's credit for this purpose because of the unfortunate influence which such laws have upon the State legislature.

State Taxes on U. S. Bonds and on Parts of the Federal Government.—We have already seen that a State must not tax the various means used by the National Government in carrying out its powers, because such a tax would be an interference with the power of the Federal Government. This was first decided in McCulloch v. Maryland, 4 Wheaton, 316; 1819. Among the important results of this ruling is the exemption of Federal bonds from State taxes. In the case of Weston v. Charleston, 2 Peters, 449; 1829, the city had levied a tax on many kinds of personal property, including the 6% bonds of the United States, and the tax was collected from all residents of Charleston owning such property. Weston owned several national bonds and he paid the tax under protest, afterward suing the city to recover the amount paid. His suit being appealed, the Supreme Court decided in his favor, holding that (1) the Constitution, Article I, section 8, gives to Congress the power "to borrow money on the credit of the United States;" (2) the borrowing power is usually exerted by selling government bonds to the people; the money from the sale of these bonds forms a loan to the government; (3) a tax by a State, or by its agent, a city, upon these bonds would reduce their value, make them less desirable investments and interfere with their sale, thereby also interfering with the borrowing power of the Government. Accordingly the State tax was declared unconstitutional. Since the same principle would apply to any State taxes on national bank stock and national bank notes, and since the National Government does not wish to deprive the

States of their tax revenue from these sources, Congress has provided by Act of 1894 that the States may tax, as money on hand or on deposit, the national bank notes belonging to private individuals, and that they also may tax as personal property the shares of national bank stock (Act of 1864) owned by persons within the State, provided this taxation is at the same rate as on other similar classes of personal property, and provided that each State taxes only its own residents on this property.

Can one State tax the bonds of another?-The only portion of the Constitution which seems applicable is Section 1, Article 4, providing that full faith and credit shall be given in each State to the public acts of every other State. In Bonaparte v. The Tax Court, 104 U. S. 592; 1882, Maryland had included in the tax list of a resident the bonds of certain other States and cities, owned by him, some of which had been exempted from taxation by the States issuing them. The question was raised,-does not the "full faith and credit" clause1 require Maryland to exempt from taxation the bonds or loans and obligations of its sister States, owned by residents of Maryland? The Supreme Court held that the Maryland tax on State bonds was constitutional, because the other States in issuing their bonds or in exercising any of their other powers could only use their authority within their own boundaries. If they chose to borrow money by floating bonds which were purchased by residents of Maryland, they could not extend their authority beyond the limits of their own territory, nor dictate to Maryland what she should tax and what she might not. If they could do so then every State might interfere with the internal affairs of every other State, which was unthinkable. Such an interference was never intended by the "full faith and credit clause" of Article 4. That clause aimed simply to secure and protect the validity of State public acts, records and proceedings, when called in question in other States. The result of this interpretation is that each State has full liberty to tax the securities of its sister commonwealths which belong to its own residents.

A State Tax on its Own Bonds owned by Non-residents.-Can one State tax the residents of other States upon their ownership of its bonds? In Murray v. Charleston, 15 Wallace, 300, the city of Charleston having issued bonds, later levied a tax on personal property and sought to collect this tax from those who held its own bonds. The tax was not disputed so far as it applied to all personal property within the city, including in such personal property the city bonds owned by its residents, but as applied to persons outside the State, the issue was doubtful. The city had instructed its Treasurer, in paying the interest on the bonds, to deduct 5% of the interest in payment of the tax, and this deduction was protested by the bond-holders resident outside the State. The Supreme Court

1 Article 4, Section 1; Full faith and credit shall be given in each State to the public acts, records and judicial proceedings of every other State.

decided that such a deduction was in substance a violation of the contract which the city had made with its creditors, when it issued the loan. Having agreed to pay them 6% interest the city, by deducting a portion of the interest, was in substance scaling down its interest rates, and thereby breaking its agreement to pay the higher rate. This was a violation of Section 10, of Article 1, of the Constitution, which provides that no State shall make any law violating the obligation of contracts,—hence, the tax as levied on outside bondholders was unconstitutional.

State Taxation of National Trade. The protection of national commerce from State levies and interference was one of the main reasons why the commercial interests of the country favored the adoption of the Constitution in 1787. This simple, uniform, national control of trade, and exemption from local burdens, has been a strong feature of the constitutional protection of business. The general rule, as we have already seen, is that the State may not tax interstate trade, because it would interfere with the Federal power to regulate commerce. This simple principle is at times difficult to apply, because of the many complex questions which constantly crop up in business between different sections of the country. For example, when has an interstate shipment of goods legally commenced, so that State taxation may not be levied? In Coe v. Errol, 116 U. S. 517; 1886, this interesting problem arose as to a shipment of logs which had been placed in the river by Coe at the town of Errol. Other logs belonging to him had floated down from another State, and both lots were frozen in the river waiting for the spring freshets to carry them down the stream into another State. The town had levied a tax on logs within its territory; Coe claimed that his property was exempt, in that it was destined for interstate commerce. The case coming to the Supreme Court it was held that after the logs had started on their journey they were exempt from local taxes; accordingly such logs as had come down the river from another State and were held by the ice, were to be regarded as still in process of interstate shipment and could not be taxed by the town, but that those logs which had simply been assembled at the town by Coe and the real shipment of which had not yet actually commenced, could not be exempted from taxation.

State Taxes on "Original Packages."-Can a State tax goods arriving from other States while they are still in the original package? The main principles which govern this constantly recurring question have been decided in the following brief series of decisions: In Woodruff v. Parham, 8 Wallace, 123; 1867, the city had levied a general tax on merchants and auctioneers, which was collected from Woodruff, an auctioneer who had sold only goods shipped from other States and had offered them for sale in the original package. The amount of the tax was fixed according to the amount of sales, and Woodruff protested against the levy on the ground that it was a tax on interstate commerce and as such was (a) an interference by

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