gross earnings. This is the same thing as providing two taxes. one on gross earnings, at a moderate rate, the other at a higher rate on net earnings, with the proviso that in each particular case the tax collected shall be the higher of the two. For example, the law might provide a tax of ten per cent of net earnings, the amount of which should never be less than two per cent of gross earnings. The same result would be accomplished by providing that each utility should pay either ten per cent, or any other per cent, of its net earnings, or two per cent, or any other per cent, of its gross earnings, whichever were the greater. The committee, of course, uses these particular rates merely for the sake of illustration.3

Virtually the same result could also be obtained by means of a gross earnings tax at a progressive rate, starting with a moderate rate where net earnings bear a small ratio to gross or are nonexistent, and increasing with the increase in the ratio of net to gross. For example, such a progressive tax on gross earnings might be at the following rates:

Every company shall pay an annual tax which shall be based on gross earnings and which shall be the percentage of gross earnings fixed herein:

(a) When it has no net earnings or its net earnings do not exceed 5 per cent of its gross earnings-1 per cent;

(b) When its net earnings exceed 5 per cent of its gross earnings but do not exceed 10 per cent-14 per cent;

(c) When its net earnings exceed 10 per cent of its gross earnings but do not exceed 15 per cent-11⁄2 per cent;

(d) When its net earnings exceed 15 per cent of its gross earnings but do not exceed 20 per cent-134 per cent;

3 The effect of such a tax may be illustrated by the following example:

(e) When its net earnings exceed 20 per cent of its gross earnings but do not exceed 25 per cent-2 per cent;

(f) When its net earnings exceed 25 per cent of its gross earnings but do not exceed 30 per cent-24 per cent;

(g) When its net earnings exceed 30 per cent of its gross earnings but do not exceed 35 per cent-22 per cent;

(h) When its net earnings exceed 35 per cent of its gross earnings but do not exceed 40 per cent-234 per cent;

(i) When its net earnings exceed 40 per cent of its gross earnings-3 per cent.*

Such a combination tax is a reasonable compromise between the gross earnings basis and the net earnings basis. Being based primarily upon net earnings, the tax takes account of the varying abilities of the several utilities. On the other hand, the requirement of a certain minimum contribution from each corporation, upon the basis of gross earnings, meets the public requirement of regular and dependable revenue.

Such an alternative gross or net tax is in harmony with the principles laid down as a guide for measuring the amount of the tax contribution of the public utilities. By proper adjustment of the rates applied to gross and net earnings resectively, the burden of the tax may be made to correspond fairly with the burden of the property tax upon other taxpayers. In determining this rate. the fact must, of course, not be overlooked that much intangible property and also a good deal of tangible property escapes taxation

5

4 The operation of these rates may be illustrated by the following example:

5 For a full discussion of this principle and its application, cf. the report of the California tax commission of 1906 and the report of the Connecticut special commission on taxation of certain corporations of 1913 (especially pp. 6-14).

under the general property tax. As we have already emphasized, the tax on public utilities must correspond not to a property tax which reaches all kinds of property, but to the property tax as we know it, under which there is widespread escape of many forms of tangible and intangible personalty. While not quite so rigid as the property tax, its amount will be fairly regular from year to year. This regularity may be further enhanced, to the advantage of both the government and the utilities, by taking as the base the average of the earnings of several years (e. g., the past five years) instead of a single year. The alternative gross or net tax may be used, therefore, to exact from the public utilities that contribution which is due from them on account of the possession of property, while securing the great advantage of certainty and simplicity, which are lost if the tax is imposed directly upon the property. On the other hand, the rate of net earnings may be so adjusted as to take account of both property and business taxes.

The tax on net earnings may also be made to serve to take some part of the profits of the more favorably situated utilities, as required by the principle of rate regulation. The more exact way to accomplish this end would be by means of an additional tax upon pure economic profits, meaning the profits remaining after allowing a fair rate of interest upon all the capital employed, whether owned or borrowed. While making no positive recommendation, the committee is inclined to favor such a tax and believes that this idea is likely to gain favor as the scientific regulation of public utilities progresses.

3. The tax on real estate (i. e., actual real estate, land and buildings, not technical legal real estate). One further matter must be considered in this connection. That is the question of the taxation of real estate. The simplest way to tax the public utilities would be to impose the alternative gross or net tax as an exclusive tax. No further taxation of the utility's property, either real or personal, need be required. This is the method followed, for example, by Connecticut in the taxation of railroad corporations; a gross earnings tax is imposed in lieu of all other taxation of property used in the railroad business. The alternative gross or net earnings tax may thus be used as the exclusive tax exacted from the public utilities, with rates so adjusted as to meet all the requirements of equality and in large measure also the requirements of rate regulation.

The committee is firmly convinced that with the earnings tax there should be no taxation of the franchise or intangible property of the public utilities, and preferably also no taxation of tangible personalty. It is probable, however, that most states will see fit to continue the taxation of the real estate at least, of the public utilities. In that case the amount of the tax on real estate should

be allowed as a deduction from the alternative gross or net earnings tax, or else adequate allowance for the real estate tax should be made in fixing the rates of the earnings tax. The basic gross or net earnings tax should be the measure of the tax contribution of the utilities, except, of course, in individual cases, where the real estate tax alone (allowed as a deduction) might exceed the entire earnings tax. This rule is clearly required by the principle of equality which has been laid down. It is also necessary to insure the constitutionality of the gross earnings tax when applied to earnings from interstate commerce, a topic which is discussed in the next section. If real estate is taxed at all, it should include only land and buildings, not the right of way.

4. Constitutionality of the gross earnings tax. Doubt is sometimes expressed of the constitutional power of a state to impose a tax measured by gross earnings derived, in whole or in part, from interstate commerce. Such doubt can arise only from misapprehension of the decisions of the United States supreme court. This subject has been thoroughly studied by numerous authorities." The conclusions from the decisions of the Supreme Court are quite clear. They may be stated briefly as follows:

First of all, there is no question of the general principle that all laws which impose taxes directly burdening gross receipts from interstate commerce are in violation of the Federal Constitution and void. The right of a state, however, to impose taxes upon the property of corporations within its borders is unquestioned, even though the corporations be engaged in interstate commerce. Again, a state may value the property of corporations by the "unit rule"; that is, may ascertain the total value of the entire system and then apportion to the state in question a share of the entire property, according to the ratio of the mileage within the state to the total mileage of the system, or according to the ratio of business done

• A careful examination of the whole subject was made by the California tax commission of 1906, which examined a long line of decisions of the United States supreme court. Mr. A. E. Holcomb, in a paper read before the fifth annual conference of the international tax association in 1911, presented a careful summary of the decisions of the supreme court on this matter, written, it should be noted, before the Oklahoma and Texas decisions were rendered. These decisions confirm Holcomb's conclusions. Willoughby in " Constitutional Law," published in 1910, reviews the subject. Finally, the supreme court itself in its opinion in Galveston, Harrisburg, and San Antonio Railway Company vs. Texas-210 U. S. 217-took occasion to review a long line of its own decisions upon this matter. Cf. also the report of the Connecticut special commission on the taxation of certain corporations, 1913, pp. 19-20. Digests of the decisions of the supreme court upon the taxation by the states of corporations engaged in interstate commerce and upon gross earnings taxes were prepared for the committee by Mr. Robert C. Cumming.

within the state to the business of the whole system. Finally, in lieu of the tax on property, a state may impose a tax on earnings, and in reaching such a tax, gross earnings from interstate commerce may be used. It is also possible to use net earnings, and in this case no difficulty arises from the use of earnings from interstate commerce, as was clearly held in the decision in U. S. Glue Co. v. Town of Oak Creek, 247 U. S. 321.

There can be, therefore, no doubt of the legality of a properly drawn tax based upon gross and net earnings. All that is required is that the amount of the tax, if based upon gross earnings and if exclusive, should not be greater than a tax upon the property of the company as compared with taxes imposed upon property generally in the state." Such a tax will be regarded, not as a tax upon earnings, but as a tax upon property, using earnings as a means to reach the property. The committee has been careful to insist that the above requirements be met in the recommendations which it makes.

IV. INTERSTATE APPORTIONMENT, TAX RATES, ETC.

This brings us to the question of interstate apportionment. The committee has only recently reached an agreement on the general plan for the taxation of public utilities, which proposes an arrangement that is novel in certain important respects, particularly in that it provides an alternative gross or net tax, in substitution for a property tax. This plan involves difficult questions of apportionment, and the committee has not yet had the opportunity to test out and check up the precise manner in which the various simple arbitrary rules of apportionment will operate. Since the particular object of the apportionment is to avoid duplicate taxation, are niceties important or is any good rough-and-ready rule enough? Consequently it is not prepared to give a specific recommendation as to which of these rules is best suited to accomplish the task in the most acceptable manner. It, therefore, requests an opportunity

to study this subject further.

It would also like time to develop further the method to be employed by the state in determining the proper rates for the alternative gross or net tax, in order that the burden imposed shall fairly approximate the burden imposed upon other classes of prop

7 In case of a gross earnings tax which is not exclusive, that is, which is imposed in addition to taxes on the property of the corporation, the legal situation is by no means so clear. There appears to be a difference of opinion as to how the Supreme Court might regard a non-exclusive gross earnings tax. This furnishes another strong argument in favor of the exclusive earnings tax.