of close approach toward correctness of principle in its formulation or of high degree of efficiency in the details of its operation. It is not surprising, when we consider the rapid growth of the country's external and internal traffic, that tax legislation has failed to adapt itself completely to the new requirements which have arisen because of this speedy growth. American legislative activity, particularly in the field of taxation, has always been conservative, and it is but a natural consequence of the conservative tendency to regard the tax on property values as the "measure of justice and equality" that the old principle has been embodied in the railway tax systems of most of the States.

The system of railroad taxation based on cash valuation of property or of property and franchise is rather complex in its administration. As regards details, its operations are not identical in any two of the States, but its main features are everywhere the same.1

In about a third of the States the process of departure from early methods took the form of a series of substitutions for, rather than modifications of, the general property tax.

2. Taxes on capitalization. In a number of States systems based on the various forms of capitalization were adopted. Prior to 1880 considerable progress had already been made in this direction. In Connecticut, for instance, a tax based on valuation of corporate capital and floating and funded indebtedness came to be employed; in Maine, one based on market valuation of capital stock was adopted, and in New York, one providing railroad taxation in common with corporations generally, upon the basis of capital stock according to dividends, was established. Since 1880, as regards railroad taxation, but little advance has been made in the introduction of these methods into new States. Their most significant extension has been in the cases of the various other classes of transportation companies; but these will be mentioned later.

One of the most serious obstacles to which taxes based on capitalization have been exposed in the past has been the restriction which has been put upon the taxation of corporate bonded debt by decisions of the United States Supreme Court. In 1872 that body decided, in effect, that a State tax on that portion of a company's bonded debt which is held by nonresidents of that State is unconstitutional. It is a well-known fact that the bonded capitalization of the railroads of the country is nearly equal in amount to their capital stock, and that, therefore, a tax which rests in its immediate incidence merely upon the capital stock of a railway corporation, reaches only a portion of the real investment. To this fact may probably be traced the origin of an influence which has acted as a deterrent to the wider adoption of taxes based on capitalization.

In a comparatively recent Oregon case, however, the Supreme Court arrived at the decision that a tax levied within a State upon a foreign held mortgage, which is secured by real estate situated within that State, is constitutional. Should this doctrine be held to apply to corporate forms of mortgage indebtedness, a noteworthy change in the status of the tax on corporate capitalization would be effected. Such, at any rate, has been taken to be the implication of the decision by the committee of the New York legislature of 1899, which drafted a bill providing for the taxation of debts and obligations secured by mortgage of real estate situated within the State."

3. Taxes on receipts.-Another method of railroad taxation which was formulated in the place of the general property tax, was that of the tax on business receipts. Prior to 1880 taxes based on this principle had already been established in a number of States. Thus, Michigan, Minnesota, and Wisconsin had graduated gross receipts taxes. In Pennsylvania, too, a tax on gross receipts, in addition to the earlier general corporation tax on capital stock, was established; and

1 For outline of this method, see p. 14.

2 Numerous precedents had already been set in the taxation of corporations other than railroads. For instance, Georgia, in 1805, and Massachusetts, in 1812, passed acts imposing taxes on the capital stock of banks. A number of States, too, had already applied this method in the early taxation of railroads. Such was the case in Kentucky, where, for instance, the Licking and Lexington, the Louisville and Frankfort, and other railroads incorporated in 1847 and thereabouts were required by charter provision to pay taxes based on their capital stock. Such also was the case in Georgia, as we have already seen, as well as in Massachusetts, Maine, Michigan, and other States, where special provision was made with a view toward dealing leniently with roads which were in a struggling condition.

3 Case of State tax on foreign held bonds (15 Wall., 300).

4 Savings Society v. Multnomah County (169 U.S., 421).

5 Report of joint committee on taxation of the New York legislature of 1899, p. 12.

Here again precedents had been set in the taxation of corporations other than railroads. Such were the early taxes on the premiums of insurance companies (generally gross premiums or gross receipts); e.g., the New York tax of 1829, of 10 per cent on the premiums of foreign fire insurance companies, and the similar taxes of 1825 in Vermont, of 1832 in Massachusetts, of 1839 in Maryland and of subsequent years in other States. From 1840 to 1880, gross receipts taxes on railways were employed in a number of States, but were subsequently abandoned. Such were the Alabama tax of 1865 and the Iowa taxes of 1868 and 1870.

in Delaware and Virginia, net earnings taxes were adopted to supplement the existing taxes of those States. Since 1880 the gross receipts tax has been still further extended. For example, in 1881 Maine abandoned the tax on capital for one based on gross receipts; in the same year New York supplemented its existing system by a gross receipts tax; and in 1882 Vermont, like Maine, provided for a tax on gross receipts. But in Vermont, as the result of constitutional exigencies, this tax has since been made alternative with one based on property valuation. The former method, however, still prevails in practice. Since 1880 several other States, following the example set by Pennsylvania and New York, have adopted gross receipts taxes supplementary to previously existing systems.

But those cases in which taxes on receipts or earnings have been openly introduced into State tax systems are not the only ones in which these methods are applied. In States where the property valuation prevails the State boards whose duty it is to determine valuations very often have considerable discretionary power. The tax laws which apply in these cases frequently provide that the assessment boards shall value railroad property with a due regard to its earning capacity. In such instances, the possibility of arriving at a valuation which will bear an approximately constant relation to earning capacity, though only infrequently realized, still exists. And still further, in those States where the franchise is valued in addition to property, both earnings and capital are often considered in arriving at a valuation. The application and extension of methods such as these are to be regarded as at least an indication of a drift of sentiment toward tax methods based on railway earning capacity. That clause in the constitution of North Dakota which explicitly recognizes the tax on gross receipts as one suited to railway taxation must also be regarded as indicative of possibilities in this connection. The stand which has been taken by the Supreme Court of the United States in the matter of the taxation of receipts from interstate traffic, however, has probably placed a serious impediment in the way of a much wider extension of the railway gross receipts tax than at present exists. In a series of litigations, the Supreme Court held that a State tax on gross receipts resulting from interstate traffic, except when levied as a franchise tax, is an interference with interstate commerce, and is therefore unconstitutional.1

Owing largely to the influence of these decisions, as well as to causes of a local nature, there appears to have set in within the past five years a tendency away from the gross receipts tax in two States which have in the past been its main strongholds. In Wisconsin, and to a greater degree in Michigan, the existing systems have been subject to opposition.

In the case of Wisconsin, the feeling in the matter is well voiced in the report of the Wisconsin tax commission of 1898. They say:

"Most of the forms of tangible property are already taxed in full proportion to their value. In the case of banks, manufacturing, and trading corporations, corporate property appears to be as highly taxed as that of private individuals; but we do not think that this is true of any class of corporations taxed on the basis of earnings or on the mileage basis."

3

There is at least a single reason why taxes on earnings are apt to be at a relatively lower rate as measured by property than direct property taxes. Under the general property tax, as it is commonly administered, assessed valuations are generally only fractions (varying often from one-half to three-fourths) of the true value of the properties subject to assessment. Upon the surface of things, therefore, the rate of tax on property appears relatively higher than it really is. In Michigan the agitation against the existing tax on gross receipts has been very spirited. In 1897, and again in 1898, the railroad commissioner of the State in his reports arraigned the State system as unjust and ineffective; he recommended in its stead the adoption of a tax based on property valuation. The governor of the State and other prominent men have been untiring in their efforts to bring about such a change. As a result during the legislative session of 1897, the "Atkinson bill" was introduced. It failed to pass at that session, and was made the issue for a special session. After various experiences it was passed by the legislature of 1899. This bill, which was largely modeled after the Indiana law, provided for a railway-tax system based on cash valuation' of property and franchise, upon general lines similar to those which characterize that system wherever it prevails. The law, however, was very short lived; for not long afterward the supreme court of the State in two test cases declared it unconstitutional.

1 Compare Fargo v. Michigan (121 U. S., 230), and Philadelphia and Southern Steamship Company (122 U. S., 326), with Maine v. Grand Trunk Railway Company, 142 U. S., 217.

2 Report of Wisconsin Tax Commission of 1898, p. 157.

8 See p. 19.

178 Northwest Reporter, 125.

How much this agitation is the result of merely transitory political influences, and how far it is the outcome of strictly economic causes, it would be difficult to determine. Whatever may be the verdict on that question, it is evident that the political struggle against the existing system has not yet spent its force; and in view of the fact that the people of the State, in the fall election of 1900, voted in favor of a constitutional amendment rendering property taxation possible, it ought not to be a matter of surprise if a measure substantially the same as the Atkinson bill were yet to find its way into the statute books of Michigan.

The experience of Maryland has been quite the opposite of that in Michigan and Wisconsin; for under the law of 1896 the gross-receipts tax on railroads was noticeably expanded.

4. Apportionment of taxes between States.-In connection with the taxation of transportation companies upon all of the bases which have been mentioned above, there has been rapidly spreading an administrative device for the prorating, according to mileage, of taxable elements of an interstate character. In the case of the tax on cash valuation of property the necessity for the adoption of this plan arises, of course, only in the taxation of rolling stock. The plan generally followed in such cases is to tax rolling stock upon that portion of its value which is represented by the proportion of mileage traversed within a State to the total mileage covered.

Under the tax on capital, in the case of foreign corporations, the legal requirement that only such portion of the capital stock of any company as is employed within a State shall be taxed by that State has resulted in the general adoption of the plan. The taxation of sleeping-car companies in Pennsylvania furnishes a good example of this practice. In that State the capital stock of every such company is assessed by a State official, taking as the basis of assessment such proportion of the capital stock as the number of miles of railroad over which the cars of the company are run in Pennsylvania bears to the mileage in that and other States over which its cars are run. The legality of this method has been repeatedly affirmed by the United States courts. In the case of domestic corporations, although the practice of prorating is not necessitated by legal decisions, recognition of the practical justice attainable under the method has led to its general adoption.

Under the gross receipts tax, so far as concerns foreign corporations, any attempt by a State to tax receipts other than those resulting from purely intrastate traffic encounters a direct prohibition in the decision of the United States Supreme Court. In the case of domestic corporations the right of any State to measure the value of a franchise which it has granted by total receipts, even including those from interstate traffic, has been upheld by the courts. But the plan generally followed in such a case has been that of taxing only a mileage proportion of the gross receipts. Such, for example, is the method followed in Maine, where receipts from business of an interstate character are prorated according to the ratio which mileage traversed in doing business within the State bears to total mileage covered both within and outside of the State.

There appear to be no cases where companies doing an interstate business are taxed on their entire gross receipts. Where the prorating method is not expressly provided for statutes usually declare that the tax shall apply to “receipts from business done within this State." In practice there appear to be two ways of carrying this out, either by taxing all companies (both foreign and domestic) upon their receipts from business done wholly within the State, or by taxing all companies by the prorating method, foreign companies not caring to appeal to the courts to avoid the resulting addition to their taxes.

D. MISCELLANEOUS TRANSPORTATION AND TRANSMISSION COMPANIES.

One of the practices which is constantly becoming more and more prominent in the enacting of State tax laws is that of making specific provision for the taxation of transportation and transmission companies other than railways. Of recent years this has been particularly the case with those companies which do a business upon the various railway lines of the country, complementary and subsidiary to the railway business. In legislating for the taxation of these companies the States have very noticeably avoided the property tax. It appears to have been quite generally recognized that a tax on the mere value of the property of these companies would be entirely ineffective in reaching their true taxable capacity. That this evil does actually arise under the property tax is amply affirmed in the experience of those States which still cling to that tax. But changes are con

1 See Pullman Car Company v. Pennsylvania (141 U. S., 18). 2State tax on railway gross receipts (15 Wall., 284); Maine v. Grand Trunk R. R. Co. (142 U. S., 217).

stantly being effected, and the general practice of recent years has been manifestly pointing to the abandonment of old methods and tending toward the adoption of others, which have already proved tolerably efficient in a number of the States.

1. Express companies. In the case of express companies the need for specific tax provision has been very marked. Under the local general property tax these companies have almost entirely escaped taxation. The attorney-general of Montana not long ago made a statement bearing on this point, which is typical of the operation of this method wherever it is employed. He says:

"Take, for instance, one of the principal express companies operating in this State (Montana); in one county it undoubtedly does a business of several hundred thousand dollars, and the property owned by it in the county subject to taxation will not aggregate in value $5,000. The system now prevalent, which ignores the franchise and simply assesses the tangible property, is practically a farce."

Many States have sought to remedy this state of things by specific legislation on the subject, and in most cases where this has been done the gross receipts tax has been adopted. Of quite recent years, however, the legislative trend appears to be toward a form of tax based on capital stock. Indiana adopted such a tax in 1893; Wisconsin pursued a similar plan in 1899, and Iowa in 1900. Ohio several years ago changed over from a gross receipts tax to one nominally based on cash valuation of property, but in reality fixed very largely on the basis of net earnings. The practical difficulty of making adequate provision for the taxation of these companies, at least in the light of various legislative efforts in the matter, is not a slight one. It will be interesting to note the experience of Texas, which is not far from typical in this respect.

The first law in that State upon the subject, enacted in 1879, in line with Southern tendencies, provided for a specific annual tax of $700, to be paid by every company doing business within the State. In 1882 the amount of the tax was reduced to $500. This law continued in force for seven years, when the amount of the tax was raised to $1,000. This act was, in turn, repealed in 1895, when the present law, taxing these companies on the basis of their gross receipts, was enacted. The workings of this law appear thus far to have been attended with satisfactory results.

2. Palace-car companies.-The taxation of sleeping, palace, and dining car companies has claimed considerable attention during the past twenty years. In a number of States taxes based on cash valuation of rolling stock have been adopted. But in the majority of cases where the taxation of these companies has been the subject of legislation the gross receipts tax has been adopted. The tax on capital has also gained ground, as is shown by the enactment of the Indiana law of 1893 and the Wisconsin law of 1899. The experience of Texas in this matter, as in the case of express companies, is an interesting one. The first law on the subject, passed in April, 1879, provided for an annual tax of $2 per mile of road in the State over which cars were hauled. Three months later the system was changed to one of a tax of one-half of one per cent on the value of cars used in the State. In 1881 this law was repealed, and the law levying $2 per mile was reenacted. A year later the tax was reduced to 50 cents per mile. All of these laws having proved unsatisfactory the present law was passed in 1893. This, with the supplementary law of 1897, provides for a tax of one-fourth of one per cent on the annual value of the gross receipts of the companies concerned, in addition to a tax of 25 cents on each one hundred dollars' valuation of the capital stock employed within the State.

3. Fast-freight lines.—The problem of the taxation of fast freight and car lines has of recent years received a considerable share of attention. In the framing of laws for their taxation the tax on capital appears to have been the prevailing model. Such was the case with the Wisconsin law of 1899, as well as with the law passed in Minnesota in 1897, where all other transportation companies are taxed on the basis of gross receipts.

4. Summary. Upon the whole, the most marked tendency to be noted of recent years in the legislation for the taxation of express companies, sleeping-car companies, and freight-line companies has been one which points to the increasing adoption of taxes on capital. The Maryland law of 1893, which already had noteworthy precedents in the general corporation tax systems of Pennsylvania and New York, appears to have set an example which has been followed quite widely in the States northwest of the Ohio River. The gross receipts tax, largely as the outcome of the intervention of the Federal judiciary, has of late been but little adopted.

The most notable practice among the States in the taxation of telegraph companies has been that of taxing them on a valuation of telegraph lines, determined on the principle of a fixed sum per mile of wire. This plan and that of the tax on gross receipts constitute the two methods which prevail in the majority of the States. With telegraph companies, as with railroads, the decisions of the United States Supreme Court have been unfavorable to the taxation of interstate receipts.1

Legislation for the taxation of telephone companies has been upon much the same lines as with telegraph companies, except that not infrequently as regards the former, instead of the method of levy at a specific sum per mile of wire, the plan of a fixed tax per instrument in use has been followed.2 In a number of States, moreover, telephone companies have been made subject to taxes on gross receipts, where telegraph companies have been taxed on some other basis. has been due, at least in part, to the fact that the telephone business is still mainly of a local character, with the result that a tax on the gross receipts of a telephone company, which are predominantly of an intrastate character, does not, as in the case of telegraph companies, encounter the limitations which have been imposed by Federal court decision.

E. OTHER EXPANDING PRACTICES.

This

1. Taxation of foreign corporations.-There yet remain to be noted several changes in the practice of taxing transportation companies, which are coming more and more to characterize the taxation of corporations generally. Chief of these is the growing practice of treating domestic and foreign corporations upon the same general footing. This has come to be the case almost universally with the tax on cash valuation of property. In the case of the tax on capital, State policy and practice are tending in the same direction; and even where the gross receipts tax prevails, although exceptions in practice still exist, State authorities are more and more striving to conform to this rule. The State courts are being instrumental in bringing about the same result. For example, in New Jersey the supreme court has decided that it is not competent for the State to lay a tax upon a foreign corporation in a mode which differs in principle from that which it applies to the taxation of its own corporations. In California it has been held by the court that in case a corporation does an interstate business, such that the State has no power to keep it out, the assumption is that the State must apply to it the same principle of taxation as is applied to domestic corporations. Further, the Louisiana constitution of 1898 provides that foreign corporations may be taxed in a different mode from domestic corporations, but that the principle which is applied must be the same in both cases.

With regard to those laws which have been enacted in many States, under a variety of names, for the levying of a fee upon corporate charters, similar facts are to be noted. In New York, for instance, according to the decision of the courts, the State tax on organization applies to foreign corporations beginning to do business within a State, as well as to those of domestic origin. The Vermont laws of 1890 and 1894 make provision to the same effect, as do, also, the more recent laws of Texas and Washington.

2. Taxes on incorporation.-Another practice which is of growing significance is that of levying taxes upon the incorporation and organization of corporations and joint-stock companies. Fifty years ago legislation of this character was far from general. At present laws of this type are to be found in nearly two-thirds of the States. The same, in the main, holds with regard to the levying of many of the so-called "license taxes" on corporations, and also, since 1878, with respect to the introduction of the franchise feature into the systems of many States.

3. Taxes on securities.-Finally, that change of attitude which is resulting in the abandoning of the tax on security holders must be noted. Not many years have passed since the practice of attempting to collect a tax from the holders of corporate securities was almost universal. Of recent years, particularly in the case of railroad securities, a large proportion of the States have given up the attempt, and, instead, have sought to tax the corporations directly to the full

Telegraph Company v. Texas (105 U. S., 460), and Ratterman v. Western Union Telegraph Company (127 U.S., 411). e. g., Connecticut, Mississippi (according to number of subscribers), and Tennessee. se. g., in Alabama, Kentucky, North Carolina, Vermont, and Wisconsin.

Erie Railway Company v. State (31 N. J., 531, 543).

San Francisco v. Liverpool Insurance Company (74 Cal., 113).