It is often urged (as in the message of the governor of Michigan, cited above) that the gross-receipts tax furnishes a source of revenue which fluctuates violently from year to year. The following table, setting forth the amounts of railway taxes and their proportions to total State revenues in Michigan and Wisconsin for six consecutive years, will throw some light on this point. 1 Figures are compiled from reports of State treasurers, and cover years ending June 30, * Figures are compiled from reports of State treasurers, and cover years ending September 30. The degree of fluctuation here is not so great as in the case of total State revenues. The question of the degree to which a gross receipts tax approaches a perfect measure of net earning capacity is an important one from the standpoint of jus tice in tax distribution. The following table will illustrate this point. The figures are compiled from the statistical report of the Interstate Commerce Commission for 1897. The figures for net earnings are assumed to represent the rela tive tax-paying ability of the different groups of companies, and are determined by deducting from gross receipts all the expenses of conducting transportation (not including interest payments and taxes). The territorial groups are those employed by the Interstate Commerce Commission in their annual statistical reports, and cover the whole country. Group I comprehends the New England States; Group II, the Middle States (excepting the northwestern section of Pennsylvania, the dividing line running through Pittsburg), Maryland, and the northern section of West Virginia; Group III, Ohio, Indiana, and the southern peninsula of Michigan (the dividing line running through Pittsburg and Chicago, the northwestern section of Pennsylvania being included); Group IV, South Carolina, North Carolina, Virginia, and the major part of West Virginia; Group V, the remaining Southern States east of the Mississippi; Group VI, the States and portions of States east of the Missouri River and west of the eastern border of Illinois and the Great Lakes; Group VII, Montana, Wyoming. Nebraska, the northern third of Colorado, and the portion of the Dakotas west of the Missouri River; Group VIII, Kansas, Arkansas, Oklahoma and Indian Territories, Missouri (south of the Missouri River), the southern two-thirds of Colorado, the extreme northern corner of Texas, and New Mexico (north and northeast of Santa Fe); Group IX, Louisiana, Texas. and New Mexico (southeast of Sante Fe); Group X, the remainder of the country. The objection may be raised that these illustrations are far from revealing the justice or injustice of the gross receipts tax as between individual roads. The objection is a valid one. They do, however, strike an average figure for groups of roads situated in different sections of the country, in which varying economic conditions predominate. By this means a general survey of the workings of a general gross receipts tax as regards tax distribution may be obtained. If individual roads were chosen the apparent injustice of the tax would be even greater, for there are roads which have large gross receipts and no net income-taxes and operating expenses swallowing up all of the earnings. Others are operated for varying percentages of the gross earnings, leaving a varying remainder for net income. In such cases gross receipts would furnish a very inconstant index of tax-paying ability. 2. Tax on net earnings or income. From the standpoint of actual practice this tax is of but slight significance, but it has often been so strongly urged that a brief consideration will not be amiss. First, with regard to what elements should enter into net income as a basis for taxation, Professor Seligman makes the following statement: ' Gross receipts consist of all earnings from transportation of freight and passengers, receipts from bonds and stocks owned, rents of property, and all miscellaneous receipts from ancillary business enterprises or otherwise. From these aggregate gross receipts we should deduct what are classified by the Interstate Commerce Commission as operating expenses; that is, expenses for conducting transportation, for maintenance of roadway, structures, and equipment, and for general expenses of management. No deduction should be made for fixed charges, i. e., for taxes or for interest on the debt, or for the amount used in new construction, in betterments, in investments, in new equipment, or for any of the expenditures that find their way into profit and loss account." A tax on this basis Professor Seligman regards as the "most logical form of corporate taxation." The Ohio tax commission of 1893 likewise decided with regard to a franchise tax on corporations that "from the economic standpoint and from the standpoint of exact justice, the best method is to obtain the net earnings."? A tax on the net income of transportation companies would undoubtedly have a number of considerations in its favor. For instance, compared with the tax on gross receipts, it would avoid the possibility of acting as a check on expenditure for improvement of service, particularly in the maintenance and repair of equipment. Then, too, in the event of the adoption of a uniform and correct system of railway accounting its administration would be very simple; but chief of all, as the Ohio tax commission claim, it would, if rightly administered, be proportional in its effect upon the different companies taxed, i. e., it would effect an equitable tax distribution. Out of the inference that in the railway business as traffic increases net income bears a ratio to expenditure which in the long run constantly grows proportionately larger, it has already been claimed that a tax on net income would be a better revenue yielder than the tax on gross receipts. The following table does not bear out this view: Gross and net receipts of railways of England and Wales.3 a Taxes are not deducted here in arriving at net receipts. b Prior to and including this date, steamboat, canal, and harbor expenses were not deducted from gross receipts in arriving at net receipts. Objections to the tax on net income have arisen chiefly from the administrative standpoint. Chief among these has been the contention that receipts might be largely exhausted in the payment of large salaries, thus effecting a distribution of corporate income and avoiding the payment of a large portion of corporate taxes. This might readily happen with small corporations, where the managers are the chief holders of the corporate stock; but in the case of railways this need 1 Seligman, Essays in Taxation, p. 201. 2 Report of Ohio Tax Commission of 1893, p. 51. 3 Figures are compiled from the British "blue books.” scarcely be apprehended. The numerous holders of corporate securities would most certainly object to the curtailing of their dividends which would result from such a practice. The practice of the more advanced European nations is in line with this form of corporate taxation. In England corporations are taxed under the provisions of the general income tax law (Schedule D), on their "net profits," determined substantially on the lines of the definition of net income laid down above. Railroads in addition to this tax pay a "corporation duty," corresponding to the "death duties" on individuals, in addition to a duty of 5 per cent on receipts from passenger traffic. In France corporations in general pay a tax of 3 per cent on "les intérêts, dividendes, revenus et tous autres produits des actions de toute nature," besides the usual real estate and license taxes. Railroads in addition pay a "public conveyance" tax on passenger and express traffic. This does not, however, operate as a direct tax on the corporation, for the tax is added to the price paid for passenger tickets and to the amount of express charges. Corporations generally commute for the payment of the usual stamp tax and the tax on the transfer of securities by the payment of an annual tax on the amount of their capital stock. Most of the States of Germany tax corporations on income. Prussia for more than 45 years has followed the plan of a tax on net income with its railroads. Italy, like England, taxes corporations on net income under the same law which applies the system to the taxation of individuals. All interest and dividends are included in the assessment. In the United States the possibility of applying such a method would depend to a degree on the attitude of the United States Supreme Court. The question arises whether or not this form of taxation, so far as it applied to income from interstate traffic, would encounter the same objections as the tax on gross receipts. * * In the case of State Tax on Railway Gross Receipts the court said: "It is not denied that net earnings of such corporations are taxable by State authority without any inquiry after their sources. * If this statement is to be taken as an accurate index of the tendency of the court in the matter, it would be needless to inquire further. The decision in this case has, however, since been largely discredited; and even though the validity of this particular statement has not been called into question, it would not be well to base any general conclusion upon it alone. * * The only other case which sheds any light on the question is that of Philadelphia and Southern_Steamship Company v. Pennsylvania. In this case, which had to do with the Pennsylvania tax on gross receipts, the court say: "As a tax on transportation * it can not be supported where that transportation is an ingredient of interstate or foreign commerce, even though the law imposing the tax be expressed in such general terms as to include receipts from transportation which are properly taxable. It is unnecessary, therefore, to discuss the question which would arise if the tax were properly a tax on income. It is clearly not such, but a tax on transportation only." The most that can be said, therefore, is that a tax on the net income of transportation companies would probably not be regarded as an interference with interstate commerce, even though such income were in part the product of interstate traffic. C. THE FEE OR BENEFIT PRINCIPLE. Besides the various taxes proper which are levied upon corporations, there are certain impositions in the nature of fees-payments for special benefits rendered by the State. Payments of this latter character are rendered to Government in return for the right to become a corporation and the right to do business in a corporate capacity. The fee principle lies at the root of a variety of impositions levied under a variety of names; and in some cases it is almost impossible to distinguish that part of a levy which is imposed under the fee principle from that which is levied der the tax principle. In such cases the payment for benefit received is involved in the total tax payment, and is the justification for a departure from the test of tax-paying ability in tax distribution. The most important of these levies is the franchise tax. "The right or privilege given by the State to two or more persons of being a corporation-that is, of doing business in a corporate capacity"-constitutes a 115 Wall., 284. 3 E. g., see Home Insurance Company v. New York (434 U. S., 594.) franchise. The franchise tax is levied with a view to securing for the State some return from the valuable privilege which it has granted. The California constitution of 1879 first brought franchise taxation prominently into notice. Since that time the method has been incorporated into the tax systems of a majority of the States, and its legality has been confirmed by the decisions of the United States courts.' The right to tax a franchise is limited to the State granting it, for the corporate franchise as such may not be taxed except under the law of the State which created it. But State practice generally applies the same methods to both domestic and foreign corporations by imposing taxes, as in New York, on “ the corporate franchise or business." The franchises of corporations granted by the United States Government are not taxable by the States. The State taxation of franchises, moreover, must not interfere with interstate commerce. Aside from these limitations the power of the States to tax franchises is practically unrestricted. As a consequence different bases of measuring the value of the franchise have been applied at the same time in different States, and at different times in the same State. Gross receipts, dividends, profits, indebtedness, capital stock, capital stock minus value of property, capital stock minus value of realty, etc., have all been employed for this purpose. In Illinois the value of the franchise and capital stock subject to taxation is declared to be the capital stock and debt in excess of the value of the tangible property which is otherwise taxed. In practice, however, in the case of railroads, the valuation of the tangible property has been such as to leave no excess to be taxed as the value of capital stock. In New Jersey the method followed is not substantially different from the Illinois method, although it is subject to variation from time to time. The California method provides for the taxation of the excess of capital stock over value of property. In Massachusetts "a fair cash valuation" of the corporate capital stock is taken as the "true value of its corporate franchise" In Kentucky capital stock less the assessed value of tangible property in the State measures the value of the franchise. The Mississippi law vaguely declares that the State railroad assessors in appraising the value of the corporate property shall "take into consideration the value of the franchise" and "the capital stock engaged in business in this State." The provision in the Vermont law is equally vague, although in that State transportation companies generally have paid a tax on gross receipts in lieu of the tax on “rights, corporate franchise, and property." In Kansas, Tennessee, and in other States, earnings, capital stock, and debt are all taken into consideration in valuing the corporate property and franchise for taxation. It will thus be seen that the "franchise tax" does not stand for any definite method of levy. From the legal standpoint, however, it has a high importance from the service which it renders in avoiding certain restrictions which, without it, would arise in the administration of the ordinary methods of corporate taxation. Thus, the constitutions of a number of States require that taxes on property shall be uniform. It is often desirable in the taxation of corporations to have recourse to methods which if applied to property as property taxes would be held unconstitutional owing to lack of uniformity in their operation. The legal fiction of the "franchise tax" obviates this difficulty. Then, too, as we have already indicated, State taxes on property the subject of interstate traffic or on receipts the product of interstate business are unconstitutional, but when such a tax is levied as a franchise tax its validity is indisputable. Furthermore, if a tax is a franchise tax, exemptions for certain otherwise exempt or extraterritorial property can not be claimed as under the property tax. Lastly, if a tax is a franchise tax certain objections to double taxation are removed. For instance, under the property tax the capital stock of a corporation may be taxed only on that portion employed in carrying on its business within the State in which the tax is levied. Under the franchise tax the entire capital stock is liable even if in part invested in property situated within another State and taxed by that State. The so-called "license" and "privilege" taxes closely resemble the franchise tax. Examples of this are the New Jersey "license tax on the corporate franchises" of telegraph, telephone, express, and parlor car companies, the Wisconsin "license tax" on the gross earnings of railroads, the Mississippi "privilege tax" on railroad and car companies, and the Tennessee "privilege tax" on railroad, express, telegraph, and telephone companies. 1 E. g., see Home Insurance Company r. New York (434 U. S., 594). |