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. 29 * 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 ider 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. 2122 U. S., 326. 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. 66 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 v. New York (434 U.S., 594). D. LOCAL TAXATION. There are four main plans followed in adjusting the relations of local taxing jurisdictions to transportation companies: (1) That of locally taxing all transportation property. (2) That of taxing locally only such property as is not directly employed in conducting transportation. (3) That of no local tax, but a distribution locally of a portion of the proceeds of State taxes, and (4) that of no local tax and no local distribution. A variety of opinion exists with regard to the desirability of these different methods. The advisability of separating the objects of State and local taxation has been widely emphasized. The Pennsylvania tax conference, for instance, reported on this point substantially as follows: In many States the State government gets its revenue from a State tax on county valuations. This was originally the case in Pennsylvania; but a 'series of amendments and judicial decisions-partly by accident and partly by design 'resulted in the separation of State and local sources of revenue. A system of ad valorem State taxation, under which each county's quota is made to depend on the valuation of property in each county, renders a proclivity to low valuations irresistible. In neighboring States the assessed value of taxable property has reached a very low ratio, and it requires constant contention on the part of the taxing officers in those States to prevent it from getting still lower.' The following are the aggregate values of real estate in the States named for 1890 or 1891: New York: Controller's Report, 1890, page 105.. Ohio: Auditor's Report, 1891, page 198.. Indiana: Auditor's Report, 1891, page 215. Illinois: Proceedings of Board of Equalization, 1891, page 35. Kentucky: Auditor's Report, 1891, page 249. West Virginia: Auditor's Report, 1891, page 48. $3,272, 423, 743 1, 151, 038, 031 795, 418. 117 375, 294, 398 376, 181, 276 236, 233, 808 121, 202, 365 "There is also a complaint against the undervaluation of taxable property in Pennsylvania, but it must be conceded that our total aggregate valuation of $2,002,942,127, as shown by the report of the secretary of internal affairs for 1891, bears a far higher ratio to the actual selling value of our real estate than is shown by the reports of the other States named." In the same report figures are given for State and local taxes in Pennsylvania in 1892, which may be grouped together as follows: Upon the question of local assessment the conference committee conclude: "While a difference of opinion exists as to whether taxation should be levied upon such property by the State or by the local boards, it seems to us manifest that it should be assessed and valued by officers whose jurisdiction extends over the entire State. Each railroad, canal, telegraph, or pipe line should be valued as a whole, and if any apportionment is made it should be an apportionment of the average valuation per mile, or of the avails of taxation. This plan has been adopted by a large majority of our sister States." In New York the joint committee on taxation of the legislature of 1899 looked with favor upon the abolition of the local property tax on railroads, but found it impracticable to recommend its abolition. The committee said: We believe, as a fundamental principle of government, that a political entity, in this case the State, should have an independent jurisdiction, into which it alone may go, and from which it may realize sufficient revenue for its own support. Another result of the separation of the State from local taxation would be the strict accountability to which local officials would be held in raising and disbursing moneys used for the support of local government. "The committee, therefore, has sought for subjects of taxation which, together with the indirect revenue now collected by the State, will be sufficient for the support of State government. It was believed at the outset that this purpose might be accomplished by withdrawing from local taxation steam and surface railroads, telegraph, telephone, electric light and power companies, gas, water, and pipe-line companies, and banks and trust companies, and by levying upon such corporations a definite rate of taxation for State purposes. In order to determine the feasibility of such a plan it became necessary to ascertain what proportion of the total tax raised by the political divisions of the State upon the property of such corporations was paid by them, and the committee with very great labor caused to be gathered the entire sums paid by the corporations named in three of the counties of the State, to wit: Oswego, Cattaraugus, and Chenango. The result was indeed startling in many of its aspects. It was found that in the county of Oswego, in the year 1897, the sum of $627,759.82 was raised by taxation for all purposes, and that of this sum the steam railroads alone paid 9.03 per cent, and that in the county of Cattaraugus, in the year 1898, $484,358.22 was raised by taxation for all purposes, and of this sum the steam railroads alone paid 11.89 per cent, and that in the county of Chenango, in the year 1897, $317,837.69 was raised by taxation for all purposes, and that of this sum the steam railroads alone paid 7.97 per cent. In some school districts in the counties named the steam railroads alone paid 50 per cent of the taxes. While the labor involved in the exact ascertainment of the taxes paid by the corporations named was so great that more counties could not be analyzed, it is safe to say that these three counties furnish a criterion for the rest of the State." The following table will summarize the committee's investigation on this point. It must be borne in mind that the figures will have to do only with such taxes as are locally assessed; Steam railroad, street railroad, telegraph, telephone, electric light, power, gas, water, pipe line, and trust companies, and banks. The Maine tax commission viewed with disfavor the separation of State and local taxation. They say: "It is believed by many that it may be possible to assess upon corporations an amount sufficient for State expenses, and thus the necessity for a property tax for State purposes be avoided. If this were possible within the limit of just taxation of corporations, it would, to a considerable extent, relieve the general tax burden of the people. But there are other questions besides that of a slight decrease of taxation to be considered in this connection. Would it be a wise and salutary thing to sever the financial ligament which now closely unites the State government with the town, and, in fact, with every individual? Would it be beneficial to the people at large to have the power and influence of corporations so immensely extended as they would be in case the State were dependent alone on them for its revenues? "It appears to us that such a policy would not be wise, and that to resort to it would be to sacrifice an important principle, a paternal and unifying element of State government, at a very cheap price."1 1 Report of Maine Tax Commission of 1889, p. 56. Upon the matter of a distribution of a portion of the proceeds of State taxation among the local districts, the Pennsylvania tax conference said: "In this State we are drifting into a practice of collecting revenue into the State treasury far in excess of the needs of the State government, with the purpose of distributing the surplus among the townships and municipalities in aid of local taxation. The wisdom of such a policy is questionable. It is an unnecessary circumlocution, and exposes the public revenues to additional dangers of waste and misappropriation. There will be an irresistible tendency in the legislature year by year to increase the appropriations in aid of local charities and other objects whose benefits are not evenly diffused, thus decreasing the amount available each year for schools and roads. The honest and economical administration of public affairs can be better promoted, and the self-reliance of the people better preserved, by remanding the whole process of collecting and disbursing local public revenues to the local authorities as far as possible. To centralize the fiscal department of all branches of civil administration at the capital, making the local authorities dependent on the legislature for the means to defray their necessary expenses, is a vital thrust at the doctrine of local self-government. In New Jersey the act of 1884, among other things, provided for the taxation of "main stem" or "first-class property." and for property other than main stem or "second-class property," by State authorities, with a subsequent distribution of the tax on "second-class property" among the local districts. "This system of taxing property, used for railroad and canal purposes, may be described in a sentence as a property tax by the State, through State assessors or officers, in its entirety as a unit, for the use of the State, with a distribution of a part of the tax by the State to the local taxing districts for the support and maintenance of the local or municipal governments."1 The New Jersey tax commission of 1897, whose report deals largely with local taxation, concludes that the method of distribution works injustice in that State. The commission says: Assuming as a fact that the property used for railroad and canal purposes does pay as much tax, that is, as many dollars, relatively to a like amount of property owned by individuals and other corporations, it does not follow as a logical sequence that the distribution by the State to the local taxing districts is just or fair. On the contrary, it has been shown by evidence and facts before us that the act of 1884 in its practical operation works some injustice to the local districts of the State, not only in the relative amount of land withdrawn completely from the local or municipal tax comprised in the main stems' commonly known as first-class property, but also in the amount of tax which the local taxing districts receive from the land commonly designated as second-class property.' 6 And further: "A study of local or municipal taxation in the United States will show that land is the chief source, the principal object of local taxation. 66 * * * Whenever this principle is violated in a system of taxation, it throws the local or municipal governments out of joint. In the city of Washington, where the land occupied by the buildings of the National Government was exempt from taxation, the burden became so onerous on the individual owners of land that at one time it threatened financial disaster to the District of Columbia, until the Federal Government assumed part of the expenses of the local government, or contributed to such expenses in lieu of the land which was held by the Federal and foreign governments exempt from local or municipal taxation. The lands used for railroad purposes in the principal terminal cities of the United States, such as New York, Boston, Buffalo, Chicago, Philadelphia, and Pittsburg, are taxed locally for the use of the local governments."3 * * * "When it is shown that * * * the geographical position of some of the local taxing districts in the State is such that in those taxing districts it is necessary for the proper and legitimate development and operation of the railroad companies, to acquire and hold, in addition to their main stem, large tracts or blocks of land, there is no reason in good morals or sound principles of taxation why the State should deprive the local municipalities of the taxes derived from tracts or blocks of land held and used for railroad purposes, in addition to the main stems, and known as second-class property under the act of 1884. It is the illogical result of an otherwise logical system.' 94 |