Now, Mr. Harrington well says that there has been no trouble about the tax on real estate. That is because real estate passes by the law of the state where it is located, hence it is taxed in that state and no other state is in a position to reach it. But personal property has been recognized from the beginning of the republic as passing under the laws of the state of domicile, and it is the passing under, and by virtue of those laws, that it is taxed, and that is where all the trouble has arisen. The state of domicile is in a position to impose a tax upon transfers made under the provisions of its laws, and it has uniformly held that those laws extend, so far as the distribution of the property is concerned, to all personal property, wherever located. That is recognized everywhere and the courts recognize it in connection with the legacy taxes, and there is no logical distinction between tangible personal property and intangible personal property in the application of the legacy tax law, because tangible personal property passes like intangible personal property, under the laws of the state of domicile. It is only when we get into the realm of real estate that a different rule applies in the matter of distribution, and so a different rule applies in the application of the legacy tax law, because the right that is taxed is a right exercised under the laws of the state controlling the devolution of the property.

Now, Mr. Harrington's plan, if it were to be carried out, and carried out logically, would involve at the outset a change in our laws of distribution. If the states were prepared to change those laws and provide that personal property like real estate should pass in accordance with the law of the state in which it is located, then it would be perfectly easy to apply Mr. Harrington's principle. Until they are prepared to do so the states must either adopt the same rule of comity with regard to legacy taxes which they follow with regard to the distribution of the personal property of deceased persons, or the present unsatisfactory and sometimes exasperating conditions are bound to continue.

My time is up and I think perhaps I have covered the point I wish to make.

CHAIRMAN MCKENZIE: I think in view of the fact that we have another very important paper to hear tonight, that we ought to terminate this discussion now, unless there is serious objection on the part of the conference. The next item that we have is the question of the taxation of natural resources. This was postponed from the second session and will now be discussed by Mr. George Vaughan of Arkansas.

GEORGE VAUGHAN of Arkansas: I shall be as brief as possible. I think it will take me about twenty or twenty-five minutes. I hope that you will all remain and discuss the paper, because I certainly want the views of those who differ from me, especially.

TAXATION OF NATURAL RESOURCES

1. Introductory

GEORGE VAUGHAN

Little Rock, Arkansas

By the term Natural Resources is comprehended all that mass of economic goods or available benefits which are the direct heritage of the race-those basic bounties originally bestowed by a munificent Creator upon the children of men.

The processes by which natural resources have come into existence are superhuman as distinguished from the artificial products fashioned by the hand of Man, whose dominion over "the earth and all the things that therein are" is as ancient as it is unchallenged.

Natural resources in the present state of society may be divided into two generic classes. The first class includes those unappropriated benefits, more or less widely diffused, which are owned collectively by the community at large. To this class belong a wholesome water-supply, a salubrious climate, propitious seasons and the cosmic urge of a conquering race. To the second class belong those resources of a physical nature, such as superior coasts and harbors, valuable inland waterways, magnificent watersheds, inviting development of enormous hydro-electric power, also extensive deposits of ores, of coal and precious metals, and finally the virgin forests, capable if duly conserved, of promoting the comfort and protection of generations yet unborn.

The last named class alone-physical products of nature-may be further subdivided into: (1) alienable and consumable, and (2) non-alienable and indestructible. It is to the sub-class-alienable natural resources-that any question of taxation germane to the present conference can properly relate. It shall, therefore, be my purpose to confine this paper, which must be in briefest outline, to those methods now extant, of taxing basic and non-reproducible resources, found under private ownership, as the resultant alone of the slow and imperceptible processes of nature.

At the outset, then, let us note that the subject-matter of our present inquiry is essentially a wasting asset. The supply of these resources, though vast, is limited. Many of them have been accumulated by the gradual operation of natural forces through the centuries of a prehistoric age; yet though "rock-ribbed and ancient as the sun," they are susceptible of rapid depletion and waste. And when they are gone, society has sustained a loss, irretrievable and complete.

We need not here assume, however, the extreme position of advocating a prohibitive ban, under the guise of a tax. To restrain extravagant extraction of mineral deposits or wanton and too rapid

utilization of growing trees, may or may not be advisable as a conservation policy. Yet it is eminently proper for this association to acquaint itself with prevailing modes of taxing this peculiar class of property. We should certainly seek to correct existing inequities, and devise, if possible, improvements more nearly calculated to equate the tax burden of such interests with that borne by the general mass of persons, property and business, whence must come all public funds.

2. Applicability of the ad valorem tax

In the present confused situation over problems of public finance the clamor for new engines of taxation is more disconcerting than enlightening. Novel theories and plans include the separation of state and local taxes; extension of the inheritance tax, the franchise tax, and the income tax; the occupation tax; the severance tax; the sales or turnover tax, and the introduction of sundry excises, whose classification baffles both courts and doctrinaires. Each of these devices has certain merits and all, perhaps appropriate functions. Many, however, have never stood the test of time. Certainly none will be able to entirely supplant that "old stand-by "the general property levy.

No revenue system has ever been so mercilessly condemned as the property tax, nor has any fiscal scheme been more sadly abused. Theoretically, the property tax is at once the simplest and most direct, and in view of the democratic structure of our civil polity, the most easily applied. Yet in practice, through a distorted idea of the magic of the uniformity principle it has been most woefully botched.

No scheme, if meritorious in its possibilities, however, should be rejected because patient effort is required in its fruition. The airplane and the telephone in their inception presented what both critics and laymen pronounced insuperable barriers; but by patience and persistent effort on the part of science, the iridescent dream of the '70s and the wild vagary of the later decade have become realities of today.

The property tax, though despised and berated for its hereditary faults, is destined yet to be the chief cornerstone of the future fiscal edifice. It behooves the membership of our organization, set apart as we are from a less discriminating public, to depart with reluctance from a system which, after all has been said against its past performance, holds yet a hope for the future not vouchsafed by any of its ambitious substitutes.

The shortcomings of the property tax arise for the most part from sources external and superficial. The chief cause of disappointment is due to the excessive commercial development of the community, which has often traveled far ahead of any legislative

program. But, as will be later shown, a path is open whereby the ascertainment of value by the taxing power may be successfully attained on the same scientific basis long in vogue throughout the business world.

3. A broad prospective necessary

The taxation of natural products involves a thorough understanding of fundamental economic facts. When these are comprehended, the application of the ad valorem tax to such plainly taxable objects is facilitated by the use of modern aids familiar to every large-scale business man.

At the threshold of this discussion, let me impress the thought that in the treatment of natural resources, two aspects of value are presented-the actual and the potential-the present and the prospective. The virgin forests of Canada represent a large portion of the potential wealth of that dominion of the British Crown. Likewise the unexplored oil fields of Mexico, the nitrate deposits of Chile and the diamond mines of Kimberly and the neighboring gold fields of the Transvaal constitute respectively the illimitable heritage of those countries enriched by the munificent hand of God.

Natural resources, however, are not liquid, like commercial paper. They have no realizable value, except through the increase of population and the pressure of demand. Eventually the day comes, however, when purchasers, willing to pay a valuable consideration for these units of wealth, appear and cry their bids in civilization's stock exchange.

Commercial cupidity is gradually awakened pari passu with the march of human progress. Unless restrained by a far-visioned national policy, in obedience to the law of supply and demand, all natural resources inevitably gravitate into private ownership. Often the consideration paid for these basic units is a mere song, with no relation to the true potentialities of the properties transferred. As population increases natural resources are depleted often in geometrical progression. This process, of course, involves a certain and steady, though sometimes slow, enhancement of intrinsic worth. 4. Enhancement through assembling of units-integration

An incidental factor is the increased value gained through the mere act of assembling under one control originally separate units. a. City property.-In populous centers an "unearned increment follows the assembling of various small parcels of ground to compose a larger and strategic plot, of sufficient size to justify the erection of a single improvement of great and permanent worth. In cities the product of such assembling of tracts is called "plottage," and its enhanced value is recognized in the business world, as it should be in the taxation laboratory.

b. Timber lands. In the development of timber lands, it is a

well known fact that greater economies are secured by large operations. The larger sawmills seek sufficient accessible stumpage to justify the building of tramroads and other plant facilities for reducing the unit cost of manufacture.

c. Mineral deposits.-In the mining world, the first inquiry after the discovery of a promising deposit of ore, is as to the extent of the local occurrences. Exploration of adjoining territory, to ascertain the quantity as well as the quality of the deposit precedes a decision as to the commercial value of the prospective mine. The ton-unit is given only a tentative valuation until it can be ascertained whether the mineralized area is sufficiently extensive to justify capital expenditure adequate for its economical development. If so, each unit becomes for that reason alone of greater value, and is accordingly appraised and re-inventoried in the catalogue of commerce.

The famous decision of the interstate commerce commission in 1912 abrogated the unlawful practice of a division with proprietory lumber companies of transportation revenues. One hundred taplines owned by lumber companies of the southern pine territory had been receiving millions of dollars for service which the commission held to be that of mere plant facilities. It was said (p. 300):

"While Mr. Foster, president of the tap-line, and also presi dent of the lumber company by which it is owned, was testifying, it appeared that it was the desire to legalize the allowance that led to the incorporation of his tap-line to Landers, and the desire to monopolize the forests and thus control the timber that led the lumber company to retain the ownership of the logging road beyond." The Tap-Line Case, 33 I. C. R. 277. The price paid for stumpage is almost always a measure only of the value placed upon it by the vendor, who if not in a position to operate it, may be willing to part with it for much less than its real value.

In buying from original owners operators rarely pay full prices. but almost invariably what they believe to be a small fractiona! part of the real value.

The larger or normal prices are obtained only by those vendors who are independent or who themselves are operators and know real values and are in position to realize them by development.

From the foregoing it appears that the market value of natural resources, such as a block of timber land, a million feet of stumpage, an oil lease in proven territory or a mining claim of ascertained extent, should be determined for purposes of taxation, with an eye to the real potential value under present or future ownership.