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: 1 "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: 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. 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. 2 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 justice 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 relative 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: 1 "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. Report of Ohio Tax Commission of 1893, p. 51. 3 Figures are compiled from the British "blue books." |