"The following table shows the percentage of taxes paid in Ohio to net income arising in Ohio in the year 1892 by a number of railway companies which are believed to be representative ones: Lake Shore and Michigan Southern Railway Company Cleveland, Columbus, Cincinnati and St. Louis Pennsylvania System The Valley Railway Cleveland and Canton.. Cleveland, Lorain and Wheeling Cleveland and Pittsburgh Toledo and Ohio Central. Columbus, Hocking Valley and Toledo Cleveland and Marietta Cincinnati, Portsmouth and Virginia. Cincinnati, Hamilton and Dayton... Percentage 11.22 10.62 6.90 8.83 7.05 6.39 8.48 6.54 5.16 8.25 17.94 6.57 11.99 7.99 9.35 Over periods of time the property tax is likewise ineffective as a measure of taxpaying capacity. It is inelastic in that it fails to adapt itself even to measurably permanent changes in the profitableness of the railway business. The Ohio tax commission of 1893 in its report brings out certain facts which bear directly on this point: ? "The valuation of the Lake Shore and Michigan Southern Railroad Company in the year 1878 was $12,996,609; in the year 1892 it was $12,457,745. In the year 1878 the gross earnings of the whole Lake Shore System were $13,505,159, whereas in the year 1892 the gross earnings were $22,415,382 and the net earnings were $6,612,192, as against $5,493,165 in 1878. "The comparison for the same respective years of the valuations of the Cleveland and Pittsburgh Railway Company is equally striking. In 1878 the whole valuation was $5,731,000; in 1892 it was $4,495,000. On the other hand, the company did 50 per cent more business in 1892 than in 1878, its gross receipts being $2,272,166 in 1878 and $3,429,278 in 1892. "The Pittsburgh, Fort Wayne and Chicago Railway Company was assessed in Ohio in 1878 at $10,732,001, and in 1892 at $10,525,948, while the gross receipts in 1878 were $7,830,000 and $11,659,142 in 1892." These illustrations have been chosen in instances where identity in point of mileage of line from 1878 to 1892 was substantially preserved. The year 1878 was selected because it differed in point of valuation in no material way from other years of that period. The real value of the property of these lines, if determined on the basis of earnings, undoubtedly increased during this period; and had account of this increase been taken the valuation would unquestionably have more nearly approximated a constant relation to earnings. Other States show results fully as bad. In the administration of the tax on the cash valuation of property the method of arriving at a valuation by capitalizing earnings at a certain percentage must not be confused with the property-valuation method. Such a method practically amounts to a tax on earnings, and in its effect avoids some of the objectionable features of the property tax. Such a method has already been followed in New York and has been pronounced legal by the courts of that State. In Ohio it has had a limited application, and in a few other States it is occasionally employed in measuring the value of franchises for taxation, but instances are so isolated as to be of but slight importance. The general property tax as locally administered is peculiarly liable to facility of evasion and lack of uniformity in its operation. The latter failing is typically illustrated by an instance cited in the report of the New York railway tax commission of 1879, where it is stated that in two adjoining counties of the State (New York) the valuation of the same railroad, as determined by the assessors of the two counties, varied $24,000 per mile. Other counties varied as much as $20,000 per mile. 2. Taxes on capitalization.-(a) Tax on capital stock at par.-This tax is of slight significance from the standpoint either of present or of probable future State practice. (b) Tax on capital stock at actual or market value, and on capital stock plus bonded debt.-In those States where these methods have been followed results have been reasonably satisfactory. The Massachusetts tax commission of 1897, commenting on the system of that State, remarks that "little complaint is heard regarding those taxes-a signal 1 Report of the Ohio tax commission of 1893, p. 58, proof that the taxpayers accommodate themselves, if not with ease, at least without serious complaint, to burdens which are steady, regular, predictable, and for which, in consequence, they are able to make calculations and adjust their affairs. 66 The corporation tax is particularly simple, and is assessed with unerring exactness in the case of large and well-known corporations, whose shares are regularly dealt in, and consequently have a publicly recorded value. Railways, banks, the larger manufacturing corporations, and others whose stocks are frequently quoted, are taxed without a word of inquiry and without a possibility of escape."1 Moreover the tax is economical in its administration and tolerably constant in its yield. Applied to railroads, the Massachusetts tax, like the corporation taxes of Pennsylvania and New York, has fairly well kept pace with increasing railway earnings. In some cases State law requires that capital stock shall be valued at its actual value. This is the law in Pennsylvania as well as in New York. Actual value must be distinguished from market value, although in practice the two are likely to be the same where market values are easily ascertainable. The New York courts have emphasized the importance of observing the distinction. Judge Comstock says: * "There is no property so liable to speculation as stock in corporations. * * Stocks may be and frequently are inflated or depressed by those who wish to sell or buy. They are subject, moreover, to all the vicissitudes of the money market. Actual value is the result to be arrived at, for such are the words of the statute, and the inquiry, therefore, must have a primary regard to the property and estate which alone impart such value." 2 * * * Where, as in Pennsylvania, bonded debt is taxed, difficulties arise because of the restriction of the tax to resident bondholders. The extent of the injustice arising from this cause may be inferred from the following table, prepared by the Committee on Railroad Taxation of the Pennsylvania Tax Conference. Bonds and stocks of certain railroads of Pennsylvania and the amount of bonds held in Pennsylvania. "A moment's inspection of the above table-and a great many more examples might have been given-will show that it is impossible that the system of taxing railroads in Pennsylvania could act equitably as between these roads. Take the fourth example: This is a road with $230,000 of bonds, not one of which is held in the State, and capital stock of the appraised value of $384. The State taxes on this road outside of the tax on gross earnings were, in 1893, 5 mills on $384, or $1.92. The eighth road does not differ much in its character from the fourth, and is worth about the same. This road has $200,000 of bonds, all held in the State, and $80,000 capital stock. Its State taxes outside of the tax on gross earnings were $1,200. The last road but one paid no State taxes on capital stock or bonds, as all of its bonds were held by nonresidents and its stock was worthless. The road with $2.900,000 of bonds, 50 per cent of whose mileage is in the State, would pay nothing on bonds and the capital-stock tax on but $62,350. This is certainly not equitable taxation."5 1 Report of Massachusetts tax commission of 1897, p. 69. 2 People v. Commissioners of Taxes and Assessments (23 N. Y., 192). 3 Railroad company v. Pennsylvania (15 Wall., 300). 4 This is a portion of a table on p. 16 of the Report of the Committee on Railroad Taxation, Pennsylyania Tax Conference. Report of Committee on Railroad Taxation, Tax Conference of Pennsylvania Interests, p. 16, Compared with other classes of property in the State, the Committee on Railroad Taxation concluded that in 1892 the railroads paid less and in 1893 fully as much as other property. The general opinion of the committee as regards railway taxation in the State was as follows: There are glaring inequalities in the taxation of Pennsylvania railroads, some. paying on a fair valuation very much more than the average, others less. * * This inequality grows out of the complex system of taxation of railroads in vogue in Pennsylvania."1 The Connecticut system, levying a tax on capital stock and total indebtedness, as a "tax on property," avoids the difficulty which arises in taxing nonresident bondholders. The tax conference of Pennsylvania interests proposed a bill on the lines of the Connecticut system as a substitute for the present Pennsylvania system. The auditor's department has since looked into the effect of such a move upon the taxation of corporations from the standpoint of productivity. A summary of the results of that investigation, so far as it applied to railroad taxation (187 railroads reporting), is as follows: The decision of the United States Supreme Court in the Multnomah County case must not be forgotten as suggesting possibilities in the way of greater uniformity in the State taxation of corporate bonded debt. In New York the join committee on taxation, reporting a bill on January 15, 1900, for the taxation of mortgage debts, made the following statement in this connection: Can corporate bonds and other mortgage debts, when owned by nonresidents, be taxed by this State? The owners are beyond our territorial jurisdiction, and of course no personal liability for a tax can be imposed upon them. But the debts themselves are within our power if we can reach the debtor or the security. This is shown by the familiar practice of attaching or garnisheeing debts owed to residents of other States or countries in judicial proceedings. The Supreme Court of the United States has held that an attachment in Iowa of a debt owed by a citizen of Iowa to a citizen of Kansas was valid (although personal jurisdiction of the Kansas person was not obtained), and that payment of the debt under the order of the Iowa court was made binding by the Constitution of the United States upon the courts of Kansas. (Chicago, etc., Railway Co. v. Sturm, 174 U.S., 710.) It is said that the situs of intangible property is at the domicile of the owner, and for some purposes the statement is correct. The rule, however, belongs to the common law. It does not possess constitutional authority. The legislature is competent to change it. The Supreme Court of the United States has sustained against nonresidents a statute of Oregon imposing taxes on mortgages. (Savings Society v. Multnomah County, 169 U.S., p. 421.) "2 B. THE INCOME TAX PRINCIPLE. The income tax principle lies at the bottom of the transportation tax systems of a number of the States, where various taxes on receipts and earnings have been established. 1. Tax on gross receipts.-This is the tax on transportation companies recommended by the railway tax committee in 1880, as well as by the Maryland tax commission of 1896 and the Maine tax commission of 1889. The New York committee remarks that "the requisite of a correct system of railroad, as of other taxation, is that it should, in so far as it is possible, be simple, fixed, proportionate, easily ascertainable, and susceptible of ready levy." The committee recommends the tax on gross receipts as "perfectly simple, * * thoroughly proportionate, * * and can by no possibility be evaded." A little farther on in the report the systems of Michigan and Wisconsin were characterized as "most intelligent and in conformity with correct principles." The Maine tax commission likewise recommends the tax on gross receipts as a method 'doubtless as * 1 Ibid, p. 18. * 2 Report of the Joint Committee on Taxation, N. Y. legislature of 1900, p. 12, fair as any, for by that method the levy is graduated to the amount of business the road is doing." The report of the Maryland tax commission of 1886 concerned itself largely with railroad taxation. The commission recommended a graded license fee on gross earnings. In a supplementary minority report the following remarks were made: “The plan recommended by the other members of the commission is, perhaps, as good as any, which is in entire harmony with our existing system of taxation, and deserves the careful consideration of the legislature. If it is decided, however, to inaugurate a new system, experience points to the Wisconsin method as preferable. The roads are thereby exempt from local taxation, and a license fee for the operation is charged, varying according to the gross earnings per mile. The license fees are expected to defray the entire expenses of the State government, and this plan is being followed elsewhere and everywhere with the same satisfactory results. It is simpler than the assessment by local authorities as well as State authorities, and the railroads are almost too powerful to be handled by the local authorities, who are likely to be worsted in their contests with vast corporations." But, of recent years the opposition which has developed in Michigan and Wisconsin against their systems of gross receipts taxation has been considerable. This agitation, to which we referred above, has arisen largely out of a comparison of the results of the gross receipts tax in those States with the apparently more successful results of the method of cash valuation in several adjoining States. A quotation from the message of the governor of Michigan to the fortieth legislature of the State well presents the attitude of the opposition in Michigan: The method is unjust. The tax upon earnings or income operates in favor of the railroad companies. When the times are hard and the earnings smaller, the tax is less. In the meantime the State's burdens are no less, and may, perhaps, have increased, and the relief accorded to the railroad companies during these hard times and depression must be borne by the property owners generally. Thus, during times of depression, when the people are less able to pay, their burdens are increased, and just to the extent that the railroad companies' burdens are diminished. "What would be the result if the State attempted to collect the entire burden of a tax upon earnings or income? How much would the farmer or merchant have contributed from 1893 to 1897? The result would have been that the State would have received but little, if any, income and would have been bankrupt and unable to meet its obligations." The report of the Michigan railroad commissioner for 1897 states the same position a little differently: ' "It is apparent that the present system of taxing railroads is unjust. "First. Because it is inequitable as compared with the tax upon other property and because it is unjust to tax one kind of property upon its earning capacity and refuse the same privilege to other property. "Second. Because the State, under the present law, is powerless to determine whether the earnings reported by the companies are accurate or not, the whole machinery for determining or reporting the same being practically within the control of the railroad companies. Third. Because a partial control thereof by the State is inadequate to protect it. "Fourth. Because the system as applied to roads doing an interstate business is a usurpation of the power of Congress to regulate commerce between the States, and to that extent is void." The Wisconsin tax commission of 1898 had the following to say about the system of that State:? * * * "Our work has led us to the conclusion that all the corporations which are taxed on the basis of earnings or on a mileage basis pay relatively less taxes than other persons and less than they would pay on the basis of value. (But) we are now prepared either to recommend that the system of taxation be changed to the method of assessment by a State board or the specific rates of taxation which should be fixed if the present method should be continued. "We recommend that if the present mode of taxing railroads be continued a new and closer classification of rates be fixed for the purpose of preventing the inequalities which arise under the system now in force (as well as) that the present plan of taxing railroads on the basis of mileage be discontinued." 16A 1 Report of the Railroad Commissioner of Michigan for 1897, p. xli. 2 Report of the Wisconsin Tax Commission of 1898, p. 183. -65 * * * The systems of both Michigan and Wisconsin provide for taxes graduated according to receipts per mile of line. That this method results in many inequalities will be seen from the following extract from the report of the Wisconsin tax commission of 1898:1 "So long as the system of taxing on the basis of gross earnings exists it is evident that careful attention should be given to the subject of classification. There are several instances which illustrate that the existing classification sometimes leads to singular results which would seem to call for some correction. "The taxes paid by the Green Bay and Western Railroad in 1897 were $3,745, and its gross earnings were reported at $442,319, or $1,965.86 per mile. Under the existing law, if the road had earned $35 more per mile it would have paid a tax of $13,500 instead of $3,745. That is, a difference of less than $8,000 of gross earnings by this road made a difference in its taxes of nearly $10,000. As a further illustration, the taxes paid by the Kewaunee, Green Bay and Western road were $609.33, and its gross earnings $72,083, or $1,964.12 per mile. If the road had earned $36 more per mile it would have paid a tax of $2,202 instead of $609.33. That is, a difference of about $1,300 on its gross earnings made a difference in its taxes of nearly $1,600." Apart from practical considerations of this nature, it is to be doubted whether the method attains its object. This practice may in part be based upon those grounds which are commonly urged in favor of progressive taxation, but its chief justification is to be found in the notion, mistaken or otherwise, that the larger, relatively, the gross earnings of a company are per mile, the larger is the proportion attributable to net earnings, and as a consequence, the greater its taxable capacity. That the truth of this notion is not verified by the statistics of the larger railroads operating through several States of the country may be seen from the following table:2 Since, however, the matter of a graduated tax is essentially a State problem, which involves both large and small roads, a different result might be expected from an examination of the figures of lines or portions of lines operating in single States. But the following table shows that the evidence is almost as contradictory here as in the case of entire railway systems. 1 Report of Wisconsin tax commission of 1898, p. 132, 2 Figures are compiled from the Statistical Report of the Interstate Commerce Commission for 1897, and cover the fiscal year ending June 30, 1897. 3 Figures for Wisconsin are compiled from the statistical report of the Interstate Commerce Commission for 1897; those for Illinois from the report of the Illinois railroad and warehouse commission for 1898. |