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extent of their apparent taxable capacity. The laws of California and of Arizona, for instance, have gone so far as to forbid explicitly the taxation of both corporation and security holder, the law in the latter State asserting that “shares of stock in a corporation possess no intrinsic value over and above the actual value of the property of the corporation for which they stand." The increasing prevalence of this attitude, in addition to the fact of the practical impossibility of collecting a tax from the holders of securities, are both indicative of the abandonment of the practice.
ANALYSIS OF PRESENT METHODS OF TAXING TRANSPORTATION
State practice in taxing transportation companies is a varied one. There seem, however, to be three principles upon which the different State systems have been based-the property-tax principle, the income-tax principle, and the fee principle.
The essence of the property-tax principle is that all property shall be taxed at its true cash value-i.e., the price it would bring upon sale in the open market. The essence of the income-tax principle is that taxes shall be levied in proportion to income. Both property and income taxes are compulsory payments for the support of Government, and with both the aim is to adapt, as far as possible, the amount of levy to the taxable capacity of the various taxable subjects. The fee principle is different. The fee is a payment for benefit received. It may or may not bear a constant relation to taxable ability, and it may be either recurring in its levy or levied once for all. It may equal the full amount of benefit received or it may be less than the amount of benefit.
A. THE PROPERTY-TAX PRINCIPLE.
The property-tax principle underlies the systems of most of the States. It is embodied in two distinct forms. The predominant type is found in the property tax pure and simple, where direct assessment of property, as in the case of individuals, is the rule. Less prevalent, but no less significant, is the form exemplified in the various taxes on capitalization, based on indirect or inferred valuations of corporate property.
1. The property tax.-This is the most common method of taxing transportation companies. In a few cases it is subject to purely local administration, but in most of the States valuations are made by State boards or officials. The workings of the latter method, though not in detail identical in any two of the States, coincide in some such general characteristics as the following: Certain designated officials of the various railroad companies are required to return sworn statements or schedules to State officials, setting forth in detail the length of line with all its tracks, and the proportion thereof in each tax district of the State, all personal property of every kind, all rolling stock, and often a detailed description of the construction of track and roadbed, the time spent in that construction, and the value of materials employed. There is also required a full statement of all real estate owned or used in each tax district; of ail stations, houses, or other buildings, and all equipment connected therewith; of the amount of capital stock, including its market value, or if there is no market value, the actual value of the shares, in some cases including a list of the shareholders and their places of residence, in addition to a statement of the total amount of all indebtedness, generally excluding current expenses. In some States the schedule must contain a statement of the respective companies' entire gross receipts, entire operating expenses, and entire net earnings, with a supplementary statement of the amount of such receipts, expenses, and earnings resulting from business done exclusively within the State. Neglect to furnish these sworn schedules is generally attended with heavy penalties, and false statements are punishable as perjury. Furthermore, in many cases, the State officials, to whom these reports are made, are empowered to require additional statements when necessary, and even, as provided in a number of States, to summon witnesses, to examine them under oath, and to compel the production of corporation books and papers. The work of assessment on the basis of these returns is generally intrusted to a specially con
stituted State board, by whom the valuation is determined and in most cases apportioned among the local taxing districts for the computation and collection of the tax. Railroad real estate not directly employed in traffic operations is generally both assessed and taxed by local officials.
The chief advantages of this general method may be summed up as follows: The duties of assessment are in the main performed by experienced and competent officials, thus minimizing the liability to unequal assessments, as between localities and between companies, under a property tax; the popular demand that corporations be taxed upon the same basis as individuals is realized; the method is in accord with both State and Federal constitutional provisions, besides being both reasonably productive and constant in its yield from year to year.
The reports of special State tax commissions in the main say little about the property tax except by way of condemnation, upon both practical and theoretical grounds; but the general attitude of State administrations and legislators toward the possibility of devising better methods appears to be much the same as that of the controller of Florida, when he says:
"The law provides for a uniform and equal rate of taxation, and that all property shall be assessed at its full cash value,' but it seems to be almost impossible to devise laws, however plain and explicit, that will result in an equal distribution of the burdens of government according to the value of the property owned and the ability of the person taxed to meet the obligation.”*
The chief defects of the method may be summed up by saying that it is cumbersome in its administration and not proportional to the earning power of the different companies taxed. The latter is its main failing. To illustrate: In Illinois, where the system of valuation is as exacting in its provisions and probably as thorough in its execution as in any other State, equality in distribution has not been reached. The following table will verify this statement:
Chicago and Alton.....
Chicago, Burlington and Quincy
Lake Shore and Michigan Southern
Atchison, Topeka and Santa Fe
Kansas City, Fort Scott and Memphis
St. Joseph and Grand Island.
St. Louis and San Francisco
It is interesting to note that with the above roads, which have been chosen indiscriminately, the tax varied inversely with the amount of earnings. Further investigation along the same line developed the fact that, though exceptions are too important to establish a general rule, the general trend was in this direction. Similar facts are to be noted in Kansas, although in that State, owing largely to more fluctuating business conditions, the property tax approaches even less than in Illinois the attainment of equality. A few instances are given in the following table:2
Ratio of net earnings to assessed valuation.
Ratio of net earnings to taxes.
1 Report of the controller of Florida for 1898, p. 10.
2 Figures are for the year ending June 30, 1898, and are compiled in the case of Illinois from the reports of the Illinois State board of equalization, and of the railroad and warehouse commission, for 1898; and in the case of Kansas from the reports of the State auditor and of the State board of railroad commissioners for 1898. Net earnings here, as elsewhere, are taken to represent gross receipts less expenses of operation,
"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:
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.
"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. 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."
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, Pennsylvania Tax Conference.
6 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."
The Connecticut system, levying a tax on capital stock and total indebtedness, '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:
conference Increase. bill.
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.
$121, 569 48, 466
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 propor
* 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,