THE TAXATION OF MINES IN MONTANA BY LOUIS LEVINE, PH. D. PROFESSOR OF ECONOMICS. STATE UNIVERSITY OF MONTANA AUTHOR OF "THE LABOR MOVEMENT IN PRANCE." ETC. NEW YORK B. W. HUEBSCH MCMXIX THE TAXATION OF MINES IN MONTANA BY _* LOUIS 'LEVINE, PH. D. PROFESSOR OF ECONOMICS. STATE UNIVERSITY OF MONTANA AUTHOR OF "THE LABOR MOVEMENT IN PRANCE." ETC. NEW YORK B. W. HUEBSCH MCMXIX Copyright, 1919, by B. W. HUEBSCH PREFACE. The author of this essay on mine taxation has endeavored to bring within the compass of an accessible and readable volume the facts and principles' which may be considered the accepted and standard ideas on the subject. There are many phases of the subject, such as the relation of mine taxation to conservation, the theories of the single tax, etc., which the author has in- tentionally avoided because of the purpose which this volume is expected to s'erve. In brief, the purpose is to give to the citizens of Montana the available information on the situation in the state as well as the elementary and generally undisputed eco- nomic principles involved. The essay is intentionally informa- tive. It is not to be interpreted as an expression of the author's ideas on the subject. In general, it may be said to point the way to the solution of the problem in Montana along the mod- erately progressive lines followed by other states. The author is indebted to many persons for assistance in the preparation of this monograph. He wishes particularly to ac- knowledge his 1 obligations to Professor E. R. A. Seligman and to Dr. Murray Haig of Columbia University for reading the man- uscript and to Professor J. H. Underwood of the Univer- sity of Montana for many helpful suggestions. The author also takes' this occasion to express his sincerest appreciation of the many kindnesses and of the generous assistance given him by the state officials at Helena, by members of the State Temporary Tax and License Commission, by the county and city officials of Miss'oula, Butte, and Helena, and by many others. Missoula, December 24, 1918. CONTENTS Page PREFACE 3 Chapter I THE PROBLEM 7 II How THE MINES ARE TAXED 18 III Do THE MINES BEAR AN ADDITIONAL BURDEN OP TAXATION? 26 IV TAXES PAID BY MONTANA MINES .... 38 V WHAT Is "NET PROCEEDS"? 49 VI THE ANACONDA COPPER MINING COMPANY . 57 VII THE DEFECTS IN THE MONTANA MINE TAX LAW 74 VIII THE EXHAUSTIBILITY OF MINERAL RESOURCES 78 IX THE ASSUMPTION OF RISK IN MINING . . 98 X THE ASSESSMENT AND TAXATION OF MINES 114 XI PRACTICAL SUGGESTIONS 139 CHAPTER I. THE PROBLEM. The tax system of Montana has been the subject of continued criticism for many years. In January, 1889, ten months before Montana was admitted to statehood, Governor Preston H. Leslie, in his message to the last territorial legislature, penned the following words: "If you will take the pains to study the assessed values fixed upon the same clas's of property in different parts of this territory, there will be seen such a glaring differ- ence as to shock all sense of fairness and every principle of justice. ' ' Governor Leslie recommended that boards of equalization be organized ' ' with the power to revise, harmonize and equalize the values for assessable purposes' all over the territory." In July, 1889, the Constitutional Convention met and framed the Con- stitution which, with minor amendments, has been the supreme law of Montana since. During the following few years the legislative bodies of the state laid the foundation of the political and legal structure of the state. The Constitution and the laws of the state made provision for boards of equalization. But re- gardless of these boards, inequalities of taxation did not dis- appear. On the contrary, as time went on, the inequalities be- came more "glaring," and called forth more critical comments. In 1899, ten years after Governor Leslie's sharp words, Gov- ernor Robert B. Smith, in his biennial message to the legislature, made a sweeping indictment of the entire tax system of the state. It is interesting to quote from his mes&'age at some length because the accusations have not become entirely antiquated. "Under the present system for the assessment of bank stocks, notes and solvent credits [wrote Governor Smith], and for the levy and assessment of cash on hand, the attempt to make an assessment has so far proven only a farce There are several express companies doing a large and lucrative busi- 8 MINE TAXATION IN MONTANA ness in the state of Montana that pay taxes simply upon a horse and wagon in the several cities of the state." And further : "Under the present system of taxation the only person who bears his full share and proportion of taxes is the farmer with a few acres of land or the citizen who owns a humble home in town or city. These people pay taxes upon the full value of their property. The corporations and the wealthy classes of our people evade taxation upon fully one-half of all they possess." Governor Smith was a Populist. But his successor, Governor J. K. Toole, who was a Democrat and who was called three times to the highest office in the state, was no less explicit in his con- demnation of the tax situation in the state. Speaking to the legislature in 1903, he s'aid : * ' The burdens of taxation are most unequally distributed now. Millions of dollars of money and property escape taxation in this state year after year. " In 1904, the Democratic party demanded in its platform ' ' a constitutional amendment empowering the State Board of Equalization to equal- ize property assessments in the state," and thereby implicitly admitted that the assessment and taxation of property in the state resulted in inequalities. The attack of the Democratic party was directed chiefly against the railroads of the state. In their platform of 1908, the Democrats congratulated themselves on the fact that "every material advance in the assessment of railroad property from the sum of $3,000 per mile to the present rate of assessment has been accomplished during Democratic ascend- ancy," and they renewed their demand made in the platform of 1906 "that the property of railway companies be assessed for taxation at its 1 full cash value as the law requires. ' ' The declarations of the Democratic party, so explicit in rela- tion to the railroads, made no reference to the other corporations of the state. But in 1912 the Progressive party of the state, under the leadership of Senator J. M. Dixon, changed the line of attack and fixed its guns on the Amalgamated Copper Mining Co. and on the corporations of the state in general. In his keynote speech to the state convention of the Pro- gressive party, Senator Dixon referred to the Amalgamated Copper Company in the following words : ' * These gentle- THE PROBLEM 9 men are paying on a basis of about one-eighteenth of their real valuation They should be paying about one-half of the taxes of the state, on our present total assessment. Then your taxes would be reduced to just one- third of what they are now. ' ' The Progessive party adopted a platform which read : "We declare ourselves as being unalterably in favor of a complete reform of taxation laws and methods in Montana, to the end that there shall be a fair and equitable assess- ment of all classes of property. We believe that under present conditions railroads, the Amalgamated Copper Com- pany, and other corporations are avoiding the payment of their just proportion of the taxes " In the face of this violent attack on the tax system of the state the Democrats again formulated their demand for "com- missions with full power to adjust and equalize the assess- ment of property for taxation purposes." The platform of the Republican party had nothing at all to say about taxation. The Democrats were successful in the state elections of 1912, and the Thirteenth Legislative Assembly passed a law creating a State Tax Commission which was to consist of the Governor, Secretary of State, Attorney General, State Auditor, State Treasurer, and one other member to be appointed by the Gov- ernor and known as State Tax Commissioner. In 1914 the State Tax Commissioner published his first and last biennial report in which many defects of the tax procedure in the state were discussed. The Tax Commissioner pointed out especially that considerable tracts of land in various counties were escaping taxation, and that lands of the same quality were most un- equally assessed. The Commissioner confirmed in his report the opinion prevalent throughout the state "that the great funda- mental defect in our system is the lack of state equalization," and urged the necessity of central supervision over the assess- ment of property in the state. His idea seemingly had the support of the Democratic party which declared in its platform of 1914 for "the extension of the powers of the State Tax Com- mission and the State Board of Equalization, so as to bring about a more equitable system of taxation in this state." The Four- teenth Legislative Assembly, however, which consisted of a Dem- 10 MINE TAXATION IN MONTANA ocratic House and a Republican Senate, abolished the State Tax Commission. During the campaign of 1916, the question of taxation was again a serious issue. The Republicans, now reunited with the Progressives, declared in their platform for "an equitable and just distribution of the burdens of taxation" and pledged their candidates ' ' to secure that condition either by legislation or con- stitutional amendment." The Republicans also declared spe- cifically in favor of "a license tax upon the net profits of mines, ' ' and thus helped to center attention once more upon the question of mine taxation. The Democrats declared them- selves in favor of a "non-partisan commission to make a study of present methods of taxation and to draft such constitutional and statutory amendments as may be adequate to equalize tax- ation." The discussion of the tax situation in the state reached its climax during the session of the Fifteenth Legislative Assembly. Governor Sam V. Stewart started the discussion by calling at- tention in his message to the legislature to the inadequate con- dition of state finances, to the large deficit, and to the necessity of finding new sources of state revenue. Both the House and the Senate appointed "Tax Investigation Committees." The report of the "Tax Investigation Committee of the Senate," though brief, summed up the situation in the state in a manner which deserves especial attention. "We find [wrote the Committee] that there is great in- equality in the assessment in the several counties of the same class of property, such as land, livestock, banks, etc., which are assessed on a much higher percentage in some counties than in others That the large mining com- panies, the hydro-electric companies, the express companies, and the Pullman Car companies are not paying their pro- portionate share of the State's taxes A great quantity of wealth within the State escapes all burden of taxation, such as wholesale implement houses, moving pic- ture films, and private fortunes not represented by tangible, real or personal property " The Committee continued: ''After a comparison of the foregoing figures your com- mittee has reached the conclusion that suitable legislation THE PROBLEM 11 should be enacted to reach those business enterprises which are shown herein to pay little or no taxes, also that some method should be employed to equalize the great dispro- portion herein shown between the value and income of the mining industry and the hydro-electric companies and the value and income of the other principal industries of the State." Though the reports of the legislative committees arraigned the inequalities of taxation in the state in general, their emphasis' was clearly on the disproportionate share of taxation borne by the large corporations, especially by the mining companies, and by the other industries of the state. At any rate in the minds of the people of the state, the issue became crystallized as 1 one between the large mining companies and the small property own- ers, especially the farmers. In the House, Representative Dodds introduced a bill to impose a tax of six per cent on the net proceeds of mines, and it was s'aid that this proposal had the approval of some dozen members from the eastern part of the state who represented the interests of the farmers. All radical measures which had as their purpose the imposition of heavier taxes on the mining companies', were fully supported by the Daily Missoulian, then edited and published by former Senator Joseph M. Dixon. On the other hand, the Butte Miner, the Anaconda Standard, and other large dailies of the state, op- posed all legislation of this character on the ground that the mining companies were paying their full share. "From remarks which have often been dropped in Helena within the past week, ' ' wrote the Anaconda Standard in an editorial of January 15, 1917, "the natural inference would be that mining companies are at present paying little, if any, taxes, and are not beginning to bear their just proportion of the cost of conducting the state 's government " In reply to this inference, the editorial asserts that the Anaconda Company and all other mining com- panies "are already paying their fair and just proportion of the taxes of the state." In an article entitled "Sheep and Mines and Taxes," the Butte Post of January 15, 1917, hinted at the evasion of taxes by the agricultural and other interests of the state. And the Butte Miner wrote in its editorial of Jan- uary 20, 1917, that "agitators have made it a business to go 12 MINE TAXATION IN MONTANA through the agricultural sections of the state for years past peddling misinformation concerning this subject [i. e., mine taxation]," that in reality the mining industry was bearing "an extraordinary tax .... not levied against any other in- dustry in Montana," and that "the miner has become so ac- customed to paying his extra assessment that he no longer thinks of objecting to this discrimination against him." The Butte Miner warned the people that there was "a limit to the good nature and patience" of the miner. At the same time the Butte Miner and the Anaconda Standard approved the steps taken by the mine owners 1 and other business men to organize for the purpose of opposing * * all bills discrim- inating against the mining industry in the matter of taxation." The newspapers reported that a state-wide association of mine owners, mine operators, leasers, and prospectors had been or- ganized. The Committee, appointed by the association and com- posed of leading mining men and lawyers, sent out circular letters and telegrams to commercial bodies, rotary clubs, mining men, and others "in related industries," all over the state, in- viting them to form local branches' of the association and to "assist in the protest to the legislature against the imposition of the proposed special license tax." Mass meetings were held in Butte and other cities to arouse the people to a realization that this was 1 "a critical time for the mining industry," and special speakers were sent to the principal cities of the state to create sentiment against the proposed measures of mine taxation. Mr. C. F. Kelly, then vice-president of the Anaconda Copper Mining Co., Mr. L. 0. Evans, Mr. Bruce Kremer, and others appeared before the joint session of the Tax Investigating Committees of the Senate and House to present the case of the copper com- panies and other corporations. The result of all this agitation was the defeat of the Dodds bill and of other bills which aimed specifically at the mining companies. To insure the necessary additional revenue, the legislature passed a corporation license tax law imposing a tax of one per cent on the net income of all corporations in the state, except those specifically exempted. In opposing this bill, Mr. Ronald Higgins, leader of the Republican minority, made the following remarks: THE PROBLEM 13 "The question of taxation is a burning issue in this state at the present time. I think it is incumbent on this Legisla- ture to save the mining interests in spite of themselves be- cause two years from now the people of the state will put a tax on them which will be confiscatory We know that the mine representatives say that the mines are paying their share, but an overwhelming majority of the people of Montana Jmow that the mines do not pay their just share " The Fifteenth Legislature also passed a law creating a tem- porary Tax and License Commission of three members to be appointed by the Governor for the purpose of making a thorough investigation of the tax situation and of reporting to the legisla- ture in 1919. During the fall and winter of 1917-18, this Com- mission composed of Mr. C. R. Leonard of Butte, Mr. David Hilger of Lewistown and Mr. William Lindsay of Carbon County held several public hearings. But the public interest in taxation was maintained chiefly by the farmers of the state. The Montana Equity News, published by the Montana Equity Society, devoted considerable space to articles on taxation. An article which ap- peared in the issue of the News for September 29, 1917, with the headline "Fanners Can't Dodge Taxes in Montana Like Corporations, ' ' is 1 characteristic of the style and point of view of the paper. During the annual convention of the Montana Equity Society held at^Great Falls in February, 1918, an entire day was devoted to the subject of taxation. All references to the in- equalities of taxation in the state, and especially to the evasion of taxes by the corporations, were met with enthusiastic approval by the several hundred delegates to the convention and their friends. To illustrate the spirit of the convention, it is suffi- cient to quote from the speech delivered by Mr. Carl W. Rid- dick, then assessor of Fergus County and now representative in Congress from eastern Montana. Said Mr. Riddick: "Just as surely as I stand before you today, the tax laws of Montana are going to be revised by the next session of the Legislature. Unless we are on the job, they will not be revised in the interests of the farmers The mining interests wrote the tax laws in an early day, and they favored themselves. The mining interests own two-tenths of the property of the state, 14 MINE TAXATION IN MONTANA and they pay but one-tenth of the taxes . . . . , and the only reason for this is that we sit idly by and permit the mining interests to run our state house and our Legisla- ture. " A few weeks before the meeting of the Equity Society, a com- mittee of five had been formed by citizens of Fergus County for the purpose of calling a state tax conference. This con- ference, the first ever held in the State of Montana, was called at Lewistown, and lasted three days beginning March 12, 1918. The stormiest sessions of the conference were those devoted to the discussion of mine taxation. The mining interests of the state were well represented. Mr. L. 0. Evans, chief counsel of the Anaconda Copper Company, delivered an elaborate address in which he presented an array of figures to prove that the mines were bearing their full share of the tax burden. In the spring of 1918 there were rumors that the question of mine taxation would be the principal issue in the fall campaign. It was expected that the Non-Partisan League would initiate a bill amending the article of the constitution on the taxation of mines and imposing a special tax on the mining industry. There can be no doubt that if such a bill had been initiated, the ques- tion of mine taxation would have been placed before the voters of Montana as the principal issue of state politics. The Non- Partisan League did not act upon the suggestion to initiate such a bill, but the platform of the League formulated two planks on taxation. One was in favor of exempting farm improvements' from taxation; the other demanded the "equal taxation of rail- roads, mines, telegraph, telephone, electric light and power com- panies, and all public utility corporations. ' ' The other two parties, though less specific, expressed themselves in favor of improving the tax system of the state. The plank on the "Re- vision of Montana Tax Laws'" of the Republican party reads as follows : "The Republican members of the Legislature will give most careful consideration to such recommendations as will be made by the Montana State Tax Commission. Our tax laws should be revised to better fit the present day con- dition of Montana, with a view of distributing the tax bur- den more equitably between all industries and all people, THE PROBLEM 15 in order that each shall be required to contribute no more and no less than a just share. Jealous care will be exer- cised that large estates, large private fortunes and largest vested interests shall contribute their full share of the revenues required to maintain our state government." The platform adopted by the Democratic State Convention was similar in spirit. It read in part: "Awaiting the report and recommendations of the tax commission created by the last legislative session with con- fidence that it will point a way for more equal distribution of tax burdens within the state, the Democratic members of the Legislature are pledged to legislation or constitutional amendment to carry out such recommendations as will bring about equal taxation of mines, public utilities, farms, and all other classes of property." The historical survey sketched in the preceding pages shows clearly that for at least a decade the necessity of reforming the tax system of the state has 1 been fully recognized. Nevertheless, with the exception of an amendment increasing the powers of the State Board of Equalization, little has been done in the matter. There has been too much politics in the handling of taxation in Montana, and too much fear, on the part of corpora- tions and of individuals, of frank and scientific discussion of tax problems. As a result, the problem of taxation is 1 still before the people of the state in its most rudimentary form. It is still a question of eliminating gross inequalities as between counties and between classes of property. There are s'everal phases of the problem which must be clearly distinguished. There are in- equalities of taxation in Montana with which other states have wrestled in the past and are wrestling still. Such inequalities are inherent in the system of the general property tax and can be eliminated to some extent only by modifications' in that sys- tem. There are other inequalities which are the result of an inadequate tax administration. They can and should be rem- edied by reforms in methods of assessment and by the establish- ment of a permanent tax commission with adequate powers of supervision and control. But Montana suffers also from in- equalities of taxation between classes of property and industries which are the result of antiquated or one-sided laws. The method 16 MINE TAXATION IN MONTANA of taxing corporations in Montana was adopted about thirty years ago. While most states' in the country have studied the problem of corporate taxation and have made necessary changes in their laws, Montana has held on to the past. The problems arising out of this situation are the most serious and complex ones. The number of corporations' in Montana is large, and they cover the entire field of industry, trade, and finance. To devise an adequate system of corporate taxation will require the best efforts of a permanent tax commission for a considerable time. But there is one phase of corporate taxation which is of imme- diate interest in Montana. That is the taxation of mines. Rightly or wrongly, there is a wide-spread impression throughout the state that the mining industry has not paid and is not now paying its proper share of taxes. This impression is the cause of the feeling prevalent throughout the state that the small farmer, or business man, is the victim of injustice sanctioned by the con- stitution and laws of the state. This feeling is responsible for the recurrent outbursts against the mining companies and for the periodical attempts to tax the mines in some special and drastic way. It is' also the cause of much of the political ferment in the state and of the friction between the farmers and other groups of the population. The keen feeling on the subject notwithstanding, there is very little exact understanding of the problem in the state. Discus- sion on both sides has been partisan and has generated much heat, s'hedding little, if any, light. Representatives of the mining companies have been inclined to pile up arrays of figures and to present impressive statistics of taxes paid by their companies. The opponents of the mining companies, on the other hand, have pointed an accusing finger at the large profits made by the mining companies from year to year. Both sides have permitted temporary partisan considerations to overshadow the real prob- lems involved. The supreme task, therefore, is to spread enlightenment on the subject and to place within reach of all the true facts and the generally recognized principles which are involved in the issue. The presentation of such facts and principles' is attempted in the following pages. It is an effort to contribute to the in- THE PROBLEM 17 telligent discussion of the problem in the state. The author has the sincere hope that this study may help to form an enlightened public opinion on the subject and thereby to advance the solution of one of the most difficult problems of the state. CHAPTER II. How THE MINES ARE TAXED. The method of mine taxation which is in force in the state of Montana is known as the "net proceeds" method. The so-called net proceeds of the mines are taxed as personal property. In ad- dition, the surface of the mines and the improvements are taxed to a limited extent. This method is provided for in Section 3 of Article 12 of the Constitution. Sections 2563 to 2571 in- clusive of the Revised Codes of 1907 merely lay down the reg- ulations by means of which the purpose and provisions of the Constitution may be carried out. In the following pages the provisions of the Constitution and of the statutes are summarized in a non-technical way. The assessment of mines' is under the jurisdiction of the local assessor. The assessor of each county is responsible for the as- sessment of all the mines within his county, and makes the assessment in accordance with the law. The State Board of Equalization furnishes to every local assessor a special book called the "Assessment List of the Net Proceeds of Mines." This book specifies the questions which are to be answered by the owners of mines and which are required by statute. In this way the assessment of mines is made uniform throughout the state. According to the reports of the Geological Surve3 r , there are at least twenty counties in Montana in which mining operations are carried on. There are thus twenty county assessors upon whom it devolves to make an assessment of the mines within their counties. Each one of these twenty county assessors' is guided in the performance of his duties by the form of the assessment book prepared by the State Board of Equalization. But aside from this, the local assessor is entirely independent in the per- formance of his task. It is the duty of the county assessor to obtain a statement from every person, corporation, or association engaged in mining in his county. The statement must be made out annually between 18 HOW THE MINES ARE TAXED 19 the first and tenth day of June for the year preceding the first day in June. The statement must be verified by the oath of the owner, or of the superintendent or manager, of the mine or mining corporation. The owner or managing agent is required by law to deliver the statement to the assessor of the county in which the mine or mines are situated. Each statement made by the owner or managing agent of the mine must contain the name of the owner of the mine and a description of the mine and of its location. This description in- cludes a statement of the number of acres which the surface of the mine occupies. The Constitution provides that such surface should be taxed "at the price paid the United States therefor." This means' five dollars per acre for quartz mines, and two and a half dollars per acre for placer claims. This valuation is a fixed one, regardless of the value of the mine. However, in case "the surface ground, or some part there- of, of such mine or claim is us'ed for other than mining purposes, then said surface ground, or any part thereof, so used for other than mining purposes, shall be taxed at its value for such other purposes, as provided by law." The meaning of this provision is clear. In case the surface of a mining claim is used as any other piece of ground for the erection of dwellings' or stores or factories or other buildings not used for mining, then that surface acquires a value which is entirely independent of mining. It is then no longer a mining claim. It is real estate and must be taxed as such. The im- portance of this provision may be grasped when it is remem- bered that a very large part of the city of Butte is built upon the surface of mining claims'. To tax such land at the price of mining claims, that is at five or two and a half dollars per acre, would be preposterous. But when such surface ground is taxed at the value acquired by its use for other than mining purposes, such taxation has no relation to the mine. If an owner of a mine uses' several acres of the surface ground of his mine to build homes for his workers or a store or a hotel, such surface ground is put to a use which has a value of its own and is in no relation to his mine for purposes of taxation. Taxes paid on 20 MINE TAXATION IN MONTANA such surface ground cannot be credited to the mine. In so far as the claim is used exclusively for mining purposes, the rate of taxation remains five or two and a half dollars per acre, or "the price paid the United States therefor." Besides the tax on the surface ground, the owners of mines are also assessed for ''all machinery used in mining, and all property and surface improvements upon or appurtenant to mines and mining claims which have a value separate and inde- pendent of such mines or mining claims. " Such is the provision of the Constitution which is also embodied in Section 2500 of the Re- vised Codes of 1907. Section 2570 of the Revised Codes makes this provision more emphatic by declaring that ' ' nothing in this chap- ter contained must be construed so as to exempt from taxation the improvements, buildings, erections, structures, or machinery placed upon any mining claim, or used in connection therewith, or supplies used either in the mills, reduction works or mines.'* This means that machinery, such as compressed air turbines, engines 1 , etc., is assessed as machinery in factories would be ; that supplies, such as powder, dynamite, timber, etc., are assessed as merchandise and supplies would be in any other business; and that buildings 1 , such as office buildings, power houses, smelters, accommodations for workers, etc., are assessed as improvements in accordance with the value they would have apart from mining operations. All such supplies and buildings and machinery, to- gether with the surface ground, make up the real and personal property for which the mining industry is assessed, outside the net proceeds of the mines. The net proceeds form the most important item in the assess- ment of the mining industry in Montana. The Constitution does not specify how the net proceeds should be taxed. The Constitu- tion merely provides 1 that "the annual net proceeds of all mines and mining claims shall be taxed as provided by law." The method of taxing the net proceeds is laid down in the Statute (Section 2500 of the Revised Codes of 1907) which provides that "the annual net proceeds of all mines and mining claims shall be taxed as other personal property." This means that the rate of taxation applied to personal property in the county and in the state is imposed also upon the net proceeds of the mines. HOW THE MINES ARE TAXED 21 The net proceeds are regarded for purposes of taxation as per- sonal property. The statute also specifies the method of determining the net proceeds of a mine. "The Assessment Book," prepared by the State Board of Equalization and used by the county assessor, contains special columns with headings for such data as should help the assessor to determine the net proceeds. The owner or manager of the mine is required to state the total number of tons of ore extracted during the year and the gross yield or value in dollars and cents per ton of the ore. These two items furnish the gross value of all the ore extracted during the year. From this gross value certain expenditures are deducted: first, the cost of extracting the ore from the mines; secondly, the cost of transporting the ore and mineral to the mill or reduction works; thirdly, the cost of reducing the ore and of converting it into money. The expenditures allowed for deduction include all money expended for labor, machinery, and supplies needed and used for mining operations, for transportation, for reduction, and for the "extraction of the metals and minerals." They also include all moneys expended during the year for improve- ments in and about the mine, and for the construction of mills and reduction works used and operated in connection with the mine. The only items of expenditure incurred during the year which are not to be deducted from the gross value are ' ' the sal- aries or any portion thereof, of any persons or officers not actually engaged in the working of the mine or personally su- perintending the management thereof." The net proceeds are thus derived by subtracting from the gross value of the ore extracted during the year the cost of extracting, reducing, refining, and selling the ore, and the cost of improvements made during the year, with the exception of such salaries as are paid to persons not actually engaged in the working or superintend- ing of the mine. It is clear that the preparation of the statement of the net proceeds of a mine is a complex process. Experience in many states has shown that the amount of net proceeds may be mate- rially reduced either by understating the gross value or by including improper items of expenditure. The statute gives the county assessor the right "at any time to exam- 22 MINE TAXATION IN MONTANA ine the books and accounts of any person, corporation, or association engaged in mining in order to verify the statement made by such person, corporation, or association, and if from such examination, he finds such statement false, he must assess the net proceeds in the same manner as if no statement had been made or delivered." That is, the assessor must list and assess the property, according to his knowledge and information. In practice, however, the as- sessors' seldom, if ever, avail themselves of this right. As a rule they merely receive and record the statements' prepared for them by the mine owners or mining companies. Such is the law by which the assessment and taxation of the mining industry is regulated in the state of Montana. For those who wish to familiarize themselves with the wording of the law the article of the Constitution and the sections of the Code re- lating to the taxation of mines are reproduced. Constitution : Article XII, sec. 3 : All mines and mining claims, both placer and rock in place, containing or bearing gold, silver, copper, lead, coal, or other valuable mineral deposits, after purchase thereof from the United States, shall be taxed at the price paid the United States therefor, unless the surface ground, or some part thereof, of such mine or claim is used for other than mining purposes, and has a separate and independent value for such other purposes, in which case said surface ground, or any part thereof, so used for other than mining purposes, shall be taxed at its value for such other purposes, as pro- vided by law ; and all machinery used in mining, and all property and surface improvements upon or appurtenant to mines and mining claims which have a value separate and independent of such mines or mining claims, and the annual net proceeds of all mines and mining claims shall be taxed as provided by law. Section 2500. Taxation of Mines : All mines and mining claims, both placer and rock in place, containing or bearing gold, silver, copper, lead, coal or other valuable mineral deposits, after purchase thereof from the United States, shall be taxed at the price paid the United States therefor, unless the surface ground, or some part thereof, of such mine or claim is used for other than mining purposes, and has a separate and independent value for such other purposes, in which case said surface ground, HOW THE MINES ARE TAXED 23 or any part thereof, so used for other than mining purposes shall be taxed at its full value for such other purposes; and all machinery used in mining and all property and sur- face improvements upon or appurtenant to mines and min- ing claims which have a value separate and independent of such mines or mining claims, and the annual net pro- ceeds of all mines and mining claims shall be taxed as other personal property. ASSESSMENT OF NET PROCEEDS OP MINES. Section 2563. Owners of mines must make statement. Section 2564. Statement, what to contain. Section 2565. What deductions are to be made. Section 2566. Assessment book of the net proceeds of mines, what to contain. Section 2567. Duties of the assessor and other officers. Section 2568. Failure to make statement ; duty of assessor. Section 2569. Right of assessor to examine books, etc. Section 2570. Improvements, etc., not exempt. Section 2571. Tax, how collected, and tax a lien. 2563. (#3760) Owners of mines must make statement. Every person, corporation or association engaged in min- ing upon any quartz vein or lode, or placer mining claim, containing gold, silver, copper, coal, lead or other valuable mineral deposits, must, between the first and tenth days of June in each year, make out a statement of the gross yield of the above named metals or minerals from each mine owned or worked by such persons, corporation or association during the year preceding the first day of June, and the value thereof. Such statement must be verified by the oath of such person, or the superintendent or managing agent of such corporation or association, who must deliver the same to the assessor of the county in which such mine or mines are situated. 2564. (#3761) Statement, what to contain. The statement mentioned in the preceding section must contain a true and correct account of the actual expendi- tures of money and labor in and about extracting the ore and mineral from the mine and transporting the same to the mill or reducing works and the reduction of the ore and the conversion of the same into money, or its equivalent, during the year. 24 MINE TAXATION IN MONTANA 2565. (#3762) What deductions are to be made. In making the statement of the expenditures mentioned in the preceding section, tjiere must be allowed all moneys expended for necessary labor, machinery and supplies need- ed and used in the mining operation, for improvements nec- essary in and about the working of the mine, for reducing the ores, for the construction of mills and reduction works used and operated in connection with the mine, for trans- porting the ore and for extracting the metals and minerals therefrom; but money invested in the mines or improve- ments during any year except the year immediately pre- ceding the statement, must not be included therein. Such expenditures do not include the salaries, or any portion thereof, of any persons or officers not actually engaged in the working of the mine, or personally superintending the management thereof. 2566. (#3763) Assessment book of the net proceeds of mines, what to contain The assessor must prepare, at the same time he prepares the general assessment book, another assessment book, called "The Assessment Book of the Net Proceeds of the Mines" alphabetically arranged, unless otherwise directed by the State Board of Equalization, in which must be listed the net proceeds of all the mines in his county, and in which must be specified, in separate columns and under the appropriate head : 1. The name of the owner of the mine. 2. Description and location of the mine. 3. Number of tons extracted during the year. 4. Gross yield or value in dollars and cents. 5. Actual cost of extracting same from mine. 6. Actual cost of transportation to place of reduction or sale. 7. Actual cost of reduction or sale. 8. Cost of construction and repair of mines and reduc- tion works during the year. 9. Net proceeds, or value in dollars. 10. Total amount of tax. 2567. (#3764) Duties of the assessor and other officers The duties of the assessor, county clerk, state board of equalization, and board of county commissioners, as to the assessment of the net proceeds of mines, the statements and returns to be made, the equalization thereof, and other HOW THE MINES ARE TAXED 25 official acts, are the same as those mentioned in Chapter III of this title, in regard to the assessment of other property. 2568. (#3765) Failure to make a statement; duty of asses- sor If any person, corporation, or association engaged in mining as mentioned in this chapter, refuses or neglects to make and deliver to the assessor of the county where the mines are located, the statement mentioned in this chapter, such assessor must list the property and assess, according to his knowledge and information, the amount of such tax in the manner provided by law for the assessment of other property where no statement is furnished. 2569. (#3766). Right of assessor to examine books, etc The assessor, at any time, has the right to examine the books and accounts of any person, corporation or association engaged in mining, as mentioned in this chapter, in order to verify the statement made by such person, corporation, or association, and if from such examination, he finds such statement false, he must assess the net proceeds in the same manner as if no statement had been made and delivered. 2570. (#3767) Improvements, etc., not exempt. Nothing in this chapter contained must be construed so as to exempt from taxation the improvements, buildings, erec- tions, structures, or machinery placed upon any mining claim, or used in connection therewith, or supplies used either in the mills, reduction works or mines. 2571. (#3768) Tax, how collected, and tax a lien. The tax mentioned in the preceding sections must be collected and the payment thereof enforced as the collection and enforcement of other taxes are provided for, and every such tax is a lien upon the mines or mining claims from which the ores and minerals are extracted, which lien at- taches on the first Monday of March in each year, and the sale thereof for delinquent taxes may be made as provided for the sale of real estate for delinquent taxes. CHAPTER III. Do THE MINES BEAR AN ADDITIONAL BURDEN OF TAXATION? The method of taxing mines described in the preceding chapter has given rise to two views on the subject. One is that the mines' of the state are especially favored by the law in comparison with other forms of property. The other is that the mining industry has from the very beginning been singled out by the law for revenue purposes and that it has been made to bear, and does still bear, an additional burden of taxation, as compared with other classes of property in the state. The latter view was ably presented by Mr. C. F. Kelly, vice- president of the Anaconda Copper Company, in an address de- livered before the Joint Legislative Committees on tax investiga- tion on January 18, 1917, and since republished in pamphlet form under the title of Mining Taxation in Montana,. In that address Mr. Kelly claimed that ' i so far from having in mind the proposition of exempting mines from taxation, the purpose, on the contrary, was to impose additional burdens of taxation upon mines over and above that imposed upon any other form or species of land." Mr. Kelly asserted that such was the evident intention of the law, because in addition to taxes on the surface of mines and on improvements and machinery, the law imposes a special tax on the net proceeds of mines. Mr. Kelly's argu- ment may be best summarized by the following quotations from his address: "So far as the surface of mining property is concerned, it is precisely in the same situation as is any other real es- tate, taxed at a price commensurate with its value for pur- poses incidental to the working of the mine. . . . Beyond the surface .... every dollar's worth of property that is placed upon the surface of a mining claim, whether it is machinery, a mining improvement, a building, or what not, is under the law taxable as is all of the property in the state. Now [and this is Mr. Kelley's most significant statement] I submit as a fundamental proposition that when 26 DO MINES BEAR ADDITIONAL BURDEN 27 you have taxed the surface of a mining claim at its full value for the purpose for which it is used, or is capable of being used, and when you have taxed the improvements that have been made upon that surface, you have gone as far in the matter of taxation as the law reaches any other class of property in this state." 1 From this point of view, the tax upon net proceeds, which is 1 levied in addition to the taxes on the surface and the improve- ments, is a special tax imposed upon mines only and not levied upon crops or any other form of property, and therefore repre- sents an additional burden upon the mining industry of the state. Mr. Kelly explains this discrimination against mining property in Montana by the fact that the mines were originally the only source of revenue in the state and had to be drawn upon to fur- nish the necessary means of government. Writes Mr. Kelly: "It never occurred to the framers of the constitu- tion that they were putting mines in a specially favored class On the contrary, they were taxing what was then the valuable property in the state of Montana, the only property which furnished a source of revenue, and constructing a revenue measure, they penalized it to the extent of making it primarily responsible for the burdens of government." 2 To prove that his view is the true interpretation of the law, Mr. Kelly quotes from the decision of the Supreme Court in the case of the Northern Pacific Railway Company versus Mjeld, 48 Montana, page 287 at page 296. The important sentence in this decision, which Mr. Kelly italicizes, is as' follows : "The problem before the constitutional convention was, not how to exempt mining property from taxation, but rather how to compel it to respond to the reasonable de- mands of the state for revenue and at the same time protect it against such exactions as would or might discourage prospecting or development." Upon the basis of this quotation and of his general interpreta- tion of the law, Mr. Kelly reaches the following conclusion : 1 C. F. Kelly, Mining Taxation in Montana, pp. 9-10. 2 Ibidem, pp. 10-13. 28 MINE TAXATION IN MONTANA "Upon the successful mining venture there was levied, in addition to the taxes which all other property bears, a net proceeds tax in other words a license tax so that today, and every day since the formation of the constitution of this state, the mining industry is, and has been, the only great industry of the state, which has been upon a substantial license basis." * Such is the argument of those who claim that the mining in- dustry in the State of Montana not only bears, and always has borne, its share of taxes, but more than its share. According to the newspapers of the state, Mr. Kelly's address made a pro- found impression upon the members of the legislative committee and influenced subsequent legislation. The argument was re- peated by Mr. L. O. Evans, counsel for the Anaconda Copper Company, at the State Tax Conference held at Lewistown March 12-14, 1918. This argument may, therefore, be considered as the best and strongest expression of those who believe that the mines of the state bear an extra burden of taxation. The men quoted above are undoubtedly, by their position and legal training, the best qualified and most authentic spokesmen of the mining in- terests' in the state. Nevertheless, it cannot be too strongly emphasized that their argument is completely at variance with the generally recognized principles and methods of taxation. The fallacy of the argu- ment is evident as soon as one analyzes the purpose of taxation and the methods by which our public revenue is raised. Mr. Kelly, in his 1 address quoted above, realized that it was essential to examine his general statements in the light of fundamental principles. In two places in his address, he made an attempt to do so. These passages of his address are interesting and intro- duce us to the heart of the problem. Said Mr. Kelly : "It is a basic principle of all government that as each citizen enjoys the benefits derived from becoming a constituent member of the state in the pro- tection of his life, his liberty and his property, so also should each citizen of the state contribute proportionately to the support and maintenance of that government. Upon this principle is founded all justice in taxation " 1 Ibidem, PP- 10-13. DO MINES BEAR ADDITIONAL BURDEN 29 And further: "An authority whose word is final has defined taxes as 'the enforced proportional contributions from persons and property levied by the state by virtue of its sovereignty for the support of government and for all public needs/ I wish to emphasize the word 'proportional,' for the pillar upon which the entire superstructure rests is the funda- mental requirement that taxes shall be levied by some rule of proportion which is intended to insure uniformity of con- tribution and a just apportionment of the burdens of gov- ernment." x Such are the principles which Mr. Kelly cites in substantiation of his general argument. One may accept the definition of a tax quoted by Mr. Kelly. One may also agree with Mr. Kelly in laying the emphasis on the word " proportional. " The ques- tion, however, is, what is "the rule of proportion" by which taxes should be levied. Mr. Kelly has nothing more to say on the subject throughout his address. From the passages quoted above it would seem that, in his view, each citizen should pay in pro- portion to "the benefits derived from becoming a constituent member of the state in the protection of his life, his liberty and his property. " If this is correct, Mr. Kelly holds what is known as "the ben- efit theory of taxation," that is, the view that each citizen should pay taxes 1 in proportion to the benefits derived by him from government. There are many "authorities" who could be quoted in support of this view. However, their word is not "final." The whole trend of thought in public finance has been away from the "benefit theory" in the direction of the "faculty theory." The "benefit theory" has been abandoned by most students of public finance because of its inherent difficulties and contradic- tions. It is impossible to measure the advantages 1 conferred upon any one individual by any of the activities of the state. Many of the most essential functions of the state, such as education, sanitation, etc., are of the greatest benefit to those who are least able to pay for them. In general, the "benefit theory" is based upon an individualistic conception of government which 1 Ibidem, PP. 5-6. 30 MINE TAXATION IN MONTANA has become entirely inadequate under the new conditions of our social life. The ' 'faculty theory of taxation" is based on the idea that all members of society have common interests for the realization of which they must contribute in proportion to their ability to pay. Adam Smith long ago expressed the idea that "the sub- jects of every state ought to contribute towards 1 the support of the government as nearly as possible in proportion to their respective abilities. ' ' At the present time, the weight of authori- tative opinion in the field of public finance is on the side of the "faculty" or "ability" theory. It is recognized as being in greater harmony with the modern conception of the state, with the interests of society, and with the ethics 1 of Christianity. But aside from theories, the idea that all persons should pay taxes in proportion to their ability is at the basis of the tax system prevailing in the United States. As is well known, the foundation of our tax system is the general property tax. It is used in every city, county, and district. There are only a few states in which it is not used to supply revenue for the state or central government. It is, in short, as one writer has said, "the structural iron which holds the building together the largest single source of revenue universally regarded as the tax for all purposes. " l In the State of Montana, the general property tax contributes by far the largest part of all taxes col- lected for all purposes. Now, the general property tax is based upon the theory that "every man should pay taxes according to his ability and that his ability is approximately measured by a valuation of all property owned by him on a given date," or as another writer puts it, the "popular and plausible" assumption which is at the basis of our state and local taxation is that as all property is protected by the state and as all persons owe alle- giance to the state, all persons and property "must contribute to the requirements of the state for revenue in proportion to their ability. ' ' 2 The idea is very old in the United States. Mr. "Wells quotes from the general laws of Massachusetts' of 1660 the follow- ing lines : ' * The court considering the necessity of an equal con- tribution to all common charges in town, doth order, etc 1 Carl C. Plehn, Introduction to Public Finance (1916), p. 248. 2 D. A. Wells, The Theory and Practice of Taxation, P- 394. DO MINES BEAR ADDITIONAL BURDEN 31 And every such inhabitant, who shall not contribute, proportion- ally to his ability to all common charges, etc. ' ' 1 The Constitution of Montana lays down the rule of uniformity and equality which, in accordance with the spirit of all American state constitutions, means that taxes should be paid in proportion to- ability. This disciission of the theory of taxation must necessarily be brief, but it is important to make clear that Mr. Kelly and his associates cannot claim "finality" for their views. But in so far as the general argument of this chapter is concerned, it makes little difference which theory of taxation one holds. Whether taxes should be paid according to benefits derived or to ability, the supreme question is, how should benefits or ability be meas- ured. This is a very complex and difficult problem which cannot be fully discussed here. Besides, the question before us is, not what is the true theory of the subject, but what is; the actual practice ; not what should be, but what really is. And this is a question which can be more readily answered. Whatever the theory of taxation implied in the laws of Mon- tana, their undoubted intent and purpose is to secure uniformity and equality. Furthermore, there can be no doubt that accord- ing to the laws of Montana, the means of securing equality is to levy taxes in proportion to the value of property. Whether the framers of the Constitution and the law-makers of Montana believed that taxes should be paid in proportion to benefit or in accordance with ability, they undoubtedly felt sure that a per- son's ability to pay or the benefits derived by him from the state are measured by the amount and value of property owned by him. This then is "the rule of proportion" which is clearly expressed in the law. Equality of taxation is attained when each class or kind of property pays taxes' in proportion to its value. Individuals or corporations can claim to have paid a pro- portionate share of taxes only when they have paid in proportion to the value of their property. The law of Montana requires that taxable property should be assessed at its full cash value (section 2502 of the Revised Codes') . Section 2501 of the Revised Codes specifies that the terms "val- ue" and "full cash value" mean "the amount at which the property would be taken in payment of a just debt due from a 1 Ibidem, p. 244. 32 MINE TAXATION IN MONTANA solvent debtor. ' ' In other words, the value of any piece or form of property for purpos'es of taxation is the selling or market value. This is clear from all the references made in the Code to value and valuation. The only problem which the law-makers had to wrestle with was how and by what methods could the value of various forms of property be determined. The answer to this problem is embodied in those articles of the Code which relate to the assessment of property. The meth- ods of assessment laid down in these articles are as different as the kinds of property to be assessed. Banking corporations, for instance, are assessed, not only on their real estate, but also on the capital stock. In the case of railroads, the assessment covers not only the roadbed, rolling stock, rails, roadway, but also the right of way and the franchises. Private bankers are assessed for * ' the amount of capital invested either in real estate or cash, the amount of surplus, and undivided profits. ' ' Some corpora- tions are assessed on their real and personal property, including capital stock and franchises. Land is assessed on the basis of its use, such as hay lands, irrigated land, grain lands of first and second class, and so on. It cannot be claimed that the methods' of assessment laid down in the Code are the best that could be devised. On the contrary, they are in many ways antiquated. They have not been changed in a generation and fall far below the new methods that have been developed in other states. But that is another question which has no bearing on the subject considered in this chapter. The important point which should be clear from tlje above ana- lysis of the Code is that different ways of assessing property were adopted by the law-makers of the state because they knew that the true value of different classes of property was made up of different elements. What they strove for in every case was "the true cash value." What they tried to do was to devise a special method of assessment which would get at "the true value" of each class of property. It is from this point of view that the assessment of mines must be considered. The method prescribed by the Constitution and the statutes consists in obtaining the value of a mine by summing up the price paid the United States for the surface, the value of the improvements, and the net proceeds for one year. This may DO MINES BEAR ADDITIONAL BURDEN 33 be illustrated by the assessment of the mining industry in Silver Bow county for the year 1917. In that year, the total assess- ment of mining claims in the county was $149,850; the assess- ment of improvements was $1,098,120 ; mining and manufactur- ing machinery amounted to $2,021,600; while the net proceeds in the county were $44,282,500; that is, the total assessment of mining in Silver Bow county in 1917 was $47,552,070. If the net proceeds had been deducted, the assessment of mining property in the county would have amounted to $3,269,570. That is, the assessment of mining claims, lands, improvements, and all ma- chinery in and about the Silver Bow mines in 1917, was a little over three million dollars. According to Mr. Kelly's statement quoted above, when the mines have been assessed for their surface at a fixed price and for their improvements, they have been fully assessed as com- pared with all other forms of property. In other words, three million dollars in his opinion was the real value of the great mining industry of the Butte district in 1917, and the taxes paid on every dollar over and above the three million was 1 an extra burden placed on the mines in a spirit of discrimination. The statute declares that the true value of property means the amount at which the property would be taken in payment of a just debt due to a solvent debtor. Do Mr. Kelly and his associates mean to say that they would be willing to dispose of all the mining property in Silver Bow for three million dollars ? It is evident that by fixing the value of a mining claim at the price " paid. the United States therefor," the Constitution once for all stopped that economic process by which the value of prop- erty is determined. When a homesteader has improved his land by means of careful tillage and scientific farming and proper fertilization, the increased income producing capacity of his land is reflected in the value placed upon it by the market. The homesteader is taxed on this new value created by him. He is 1 not taxed on the price "paid the United States therefor." The new value of his land is in the surface, the possession of which makes possible the utilization of all the potentialities of the soil. The same is 1 true of a mine. The surface of a mine may be rough and mountainous and unattractive in every way, but the posses- sion of that surface is essential to reach the wealth stored under- 34 MINE TAXATION IN MONTANA ground. When ore is discovered, the value of that claim, as a claim, rises proportionately. The balance sheet of any mining company clearly shows it. But the Constitution of the State of Montana forbids the assessor from incorporating that increased value in the assessment of the mine. Regardless of the immense treasures' to which the surface of a claim may lead, the assessment must remain five or two and a half dollars per acre. This is a fundamental difference between the assessment of mines and other property. To make up for this, the Constitution and the laws of Montana provide for the assessment of net pro- ceeds. The tax on net proceeds is not in addition to the taxes on surface and improvements'. It is merely a device for ob- taining as nearly as possible the true value of a mine. The law simply implies that a mine is a form of property, totally dif- ferent from other kinds of property; that it is impossible to assess it in the manner in which land or banks' or gas companies are assessed ; and that it is necessary, therefore, to have recourse to a different device which should be as well adapted to this form of property as possible. The device is to assume that the true value of a mine equals approximately the net proceeds of the year plus the nominal price paid for the surface and the value of the improvements. The real issue between those who defend and those who criti- cize the system of mine taxation in Montana is just this : is the method prescribed by the Constitution and the laws the best method possible for obtaining the true value of the mines? It cannot be too emphatically stated that no other issue is involved in the discussion of mine taxation. It is not a question at all whether the mines are exempt from taxation. They are not, and there is no reason why they should be. But is 1 the assess- ment of the mines based on sound principles, and does it achieve its purpose? This is the question which demands an answer and which will be discussed in a subsequent chapter. "Whatever answer may be given to this question, it is necessary to dispel the impression, if such exists anywhere, that the mining interests have at any time been subject to unfavorable dis'crim- ination in the State of Montana. That statements to that effect, such as were quoted above, should be made by responsible and intelligent persons is an illustration of the manner in which the DO MINES BEAR ADDITIONAL BURDEN 35 question has been discussed in the state. An impartial con- sideration of the evidence leads to quite the opposite conclusion. In territorial days, with the exception of the period from 1872 to 1879, mines and mining claims were entirely exempt from taxation. The territorial legislatures showed their solicitude for the mining industry, not only by exempting it from taxation, but by repeated memorials to Congress* for legislation which would favor its development. Even the last territorial legisla- ture in 1889 sent a- memorial to Congress which is worth quoting, because it illustrates so well the spirit of solicitude referred to above. The memorial reads as follows : "That the mining of minerals being the chief industry of our territory, and notwithstanding the fact that last year our mineral product approximated forty millions of dollars, we consider the industry prac- tically in its infancy, and such being the facts it will be readily seen that we offer an almost unlimited field for the profitable investment of capital, and to that end we most respectfully urge favorable action by your honorable body upon Senate Bill 1176, and thus open the field to the free and untrammeled introduction of foreign capital for the purpose of further developing our mining industry." The above memorial was sent to Congress in 1889. The Con- stitutional Convention was held a few months later. A few of the men who sat in the last territorial legislature were delegates to the Constitutional Convention. The Committee on Taxation had among its members men whose loyalty to the mining interests cannot be questioned. It is inconceivable that such a Constitu- tional Convention should have been inspired by a desire to ' ' pen- alize ' ' the mining industry and to impose on it the whole burden of taxation. No evidence can be adduced to support such an in- terpretation. On the contrary, even the decision of the Supreme Court, quoted by Mr. Kelly in support of his contention, proves just the opposite. The Supreme Court specifically says that the problem before the Constitutional Convention was how to compel the mining industry to respond to the reasonable demands of the state for revenue, "and at the same time protect it against such exactions as would or might discourage prospecting or develop- ment." The Court further says that the framers of the Con- stitution acted deliberately with the purpose of subjecting mines 36 MINE TAXATION IN MONTANA and mining claims to what in their judgment was the "equitable proportion of the burden of governmental expense." There is not the slightest reference in this decision to any desire to "penalize" the mining industry. The words of this decision are as clear as they can be. But there is on record another decision of the Supreme Court which throws additional light on the subject. In the case of the State versus Sing, 18 Montana, page 139, Justice De Witt of the Supreme Court of Montana s'aid: "Mines and mining claims in the state are lib- erally protected from what might be deemed excessive taxation." The opinions of the Supreme Court are sufficient proof of the real meaning and intent of the law on mine taxation. But it may not be amiss to quote the opinions 1 of two citizens, of whom Montana is justly proud, and who on account of their intimate connection with all phases of Montana political life were in a peculiarly favorable position to know. The first quotation is from the message to the legislature delivered on January 7, 1901, by Governor J. K. Toole, and is as follows : "It was the purpose of the framers of the State Con- stitution to stimulate the explorations and developments of our mineral resources, and to that end they exempted min- ing claims from taxation beyond the price paid to the United States for the same, and in lieu thereof subjected their net proceeds to taxation" 1 Governor Toole thought that the provision was "wise and salutary" contributing largely to the creation of great prop- erties within the state. But another citizen of the state, one who is justly regarded among its founders and whose name and memory are cherished, took a different view on the subject. In his dedication speech on the completion of the new State Capitol, Colonel W. F. Sanders took occasion to make the following statement : "Claiming for these founders of our Commonwealth all that is their due, it were too much to affirm that they were not subject to the infirmities of human nature and made no mistakes. To the end that they might be corrected, they would choose that the more important of them be mentioned even on a congratulatory occasion like this. With the cour- 1 Italics mine. DO MINES BEAR ADDITIONAL BURDEN 37 age which was a conspicuous trait in their character to assist a hazardous, hopeful infant industry, they took upon themselves a portion of its burdens by absolving it from its share of taxation. x When thus delivered the interest and amount was small, but it has now grown to colossal propor- tions and is one of our chiefest and most remunerative re- sources. But the advantage thus given has not been relin- quished, and what in its nature and purpose was designed to be temporary, by the forethought and adroitness of greed, has been taken from the domain of legislation and become inwoven in constitutional enactment as a permanent policy of the state. * It does not require a wide knowledge of human nature to discern that when the ownership of private property does not carry with it the equal burden which that ownership implies, a disregard of the sanctities of title is begotten, which may wreak abounding mischief. Absolute equality of taxation of property is the primal essential of justice unless it is desired to cultivate a superior class to own the property and a proletariat or peasantry to be- come their serfs. The irony of the situation is not belittled by the fact that the property so absolved from taxation in the nature of things makes disproportionate and increas- ing demands on the money and solicitude of the Common- wealth. Matters will not assume a normal condition until a Constitutional provision ordains that every piece of prop- erty not of Public Ownership shall according to its value bear its equal burden of taxation. This seems too plain to admit of discussion." 2 Governor Toole and Colonel Sanders are not to be classed among "the agitators." Their opinion corroborates 1 the inter- pretation placed upon the law by the courts. Their statements are additional evidence that the intent of the Constitution was not to ' ' penalize ' ' the mining industry but to encourage it. 1 Italics mine. 2 Historical Society of Montana, Vol. IV, pp. 141-2. CHAPTER IV. TAXES PAID BY MONTANA MINES. The representatives of the mining interests maintain that ' * the mining industry in this state has heretofore borne its proportion- ate share of the taxes 1 of the state." 1 Others deny it. The question cannot be answered by mere quotations of opinion on either side. To reach a definite conclusion, the known facts in the case must be summoned to furnish the evidence. The basis of taxation is the assessment of property. Under the general property tax all property, real and personal, pays a uniform rate on its assessment. Under the laws of Montana, the net proceeds of mines are personal property and are taxed at the s'ame rate as other personal property in the state. A comparison of the assessment of different classes of property may serve as an indication of the burden of taxation borne by the respective kinds of property. The abstracts published by the State Board of Equalization on the basis of the reports sent in by the county assessors do not classify the data in sufficient detail. In many counties all or a large part of the land is unclassified, and improvements are lumped under one heading. To obtain an exact classification of the total assessment of the state by kinds' of property or in- dustries is therefore impossible. But the official figures which are at present available and the statistics collected by the present Temporary Tax and License Commission enable one to calculate the assessment of certain in- dustries closely enough to make some valid comparisons. The following tables are based on such figures obtained from the State Board of Equalization, from reports of assessors, and from the data collected by the Temporary Tax Commission. In these tables, the assessment of mining includes the assessment of min- ing claims and improvements thereon, coal lands and improve- ments thereon wherever separately stated, mining ditches, smelt- ers and smelter lands, stored ore and bullion, all mining and 1 C. F. Kelly, Mining Taxation in Montana, P. 4. 38 TAXES PAID BY MONTANA MINES 39 manufacturing machinery, and net proceeds. It is* true that here and there a county assessor may not report separately the improvements on mining claims. But this is* offset by the items included in the above classification which credits mining with all the assessed manufacturing machinery in the state and with a part of the farming machinery which some assessors neglect to enter separately. On the basis of these data it is possible to compare the assessment of the chief classes of property in Mon- tana for various years. Table I presents the assessment of farming and grazing lands and of mining in relation to the total valuation of the state for the years 1917-1918. TABLE I 1918 1917 Kind of property Total assessment Per cent of total Total assessment Per cent of total All property in state $589,304,187 100. $582,286,529 100. Farm and grazing lands and improvements 191,792,730* 32.5 178,033,237* 30.6 Mining inclusive of net proceeds 36,162,436f 6.2 62,012,058f 10.6 * These figures were obtained by adding the following items: (a) the as- sessment of farm and grazing lands as reported by the State Tax Commission; (b) 50 per cent of the assessed improvements on all such lands; this is a very conservative estimate of the assessed value of improvements which may unqualifiedly be credited to farming and grazing lands, and (c) the assessed value of improvements on lands title to which is vested in another than person so listing it. t The totals for mining include the assessed valuation of the smelters at Anaconda and Great Falls which were reported to the State Tax Commission as equal to $6,680,000 and to $8,795,000 in 1917 and 1918 respectively. These figures probably include other improvements owned by tne mining companies and therefore offset omissions of some mining properties not properly listed by the assessors. Though the figures in Table I contain such estimates, they have a comparative value. It is difficult to separate farm and grazing lands from all other real estate for the years preceding 1917. But the assess- ment of several other classes of property is ascertainable and is presented in Table II. 40 MINE TAXATION IN MONTANA TABLE II Tear Total valua- tion of state City and town lots and im- provements Railroads Livestock Mining in- clusive of net proceeds! 1917 $582,286,529 $89,586,247 $87,651,336 $65,685,652 $62,012,058 1916 487,898,353 81,297,786 85,816,429 52,384,484 43,710,854 1915 439,785,918 79.237,366 84,740,925 46,236,493 24,759,863 1914 412,361,919 76.201,650 80,386,550 40,009,275 26.178,435 1913 382,807.277 I 72.314.101 77,965,590 38,377.221 27,759,234 1912 346,550,5851 68,632,991 68,481,299 33,900,269 26,405,702 1911 331,670,418 I 66,957,014 66,975,126 35,139,271 20,341,953 1910 309,673,699 62,250,560 65,696,246 37,123,378 21,147,666 1909 280,401,064 58,537,087 58,422,849 36.864,680 19,663,386 1908 248,774,792 53,899,318 45,942,989 33,013,809 16,802,228 1907 251,882,437 52,228,494 43,816,035 * 32,531,152 30,644,620 1906 233,953,571 48,043,382 41,914,936 * 32,137,547 29,903,724 1905 209,912,340 46,161,301 37,826,193 * 31,333,144 20,776,069 1904 201,748,063 45,940,426 37,714.176 * 28.892.629 18,567,813 1903 201,333.315 45,213,051 36,327,585 * 35,812,871 17,909,233 1902 185,725,657 44,290.131 32,772.594 * 32,561,515 15,775,938 1901 166,787,593 42,138,515 16,259,424 * 28,264,217 24,381,382 1900 153,401,594 39,895,823 15,612,936 * 26,281,473 22,002,224 1899 142,117,655 38,700,114 15,584,453 * 23,705,794 16,255,197 1898 133,969,519 36,947,697 14,398,881 * 22,229.761 14.987,525 t It was possible to obtain the assessed value of the smelters at Anaconda and Great Falls for 1913 and 1914, which was $5,379,000 and $5,483,000 re- spectively and for 1917-1918 as indicated in Table I. For the years 1898- 1906, the value of the smelters in this table was taken as equal to the report- ed value of improvements on real estate (other than city and town lots) in Cascade and Deer Lodge counties which rose from $2,717,000 in 1898 to $4,429,000 in 1906. For the years 1907-1912 for which such figures are not available the assessed value of the smelters was taken as equal to $5,000,000, and for the years 1915-1916 as equal to $6,000,000 and $6,500,000 respectively. In all these estimates the mining industry is given the benefit of the doubt in order to offset any underestimation which may have resulted from in- adequate classification by assessors. On the whole the figures are believed to give a comparative view of the situation. * Includes depots, but does not include railroad lands or other railroad property. These figures may be more easily grasped when reduced to five year averages which are given in Table III. TABLE III. Average Average annual as- Average Average annual as- Average an- sessment of annual as- annual as- sessment Period nual assess- city and sessment sessment of mining ment of state town lots of rail- of live- inclusive and im- roads stock of net provements proceeds 1913-1917 $461,027.999 $79,727.430 $83,312,166 $48.538,625 $36,884,089 1908-1912 303,414,111 62,055,394 61.103.722 35,208,281 20,872.187 1903-1907 210,765.944 47,517,331 39,539,785 32,141,468 23.560,292 1898-1902 156.400.402 40.394,456 18,925,657 26,608,552 18,680.453 TAXES PAID BY MONTANA MINES 41 The above table shows that during the twenty years under con- sideration the average valuation of the state increased about three times ; that the assessment of railroads was 1 over four times larger during 1913-1917 than- during 1898-1902, but that the greatest increase in the assessment of railroads occurred between 1901 and 1903 ; and that city realty, livestock and mining were assess'ed about twice as high during 1913-1917 as during 1898- 1902. Confining the comparison to the fifteen years 1903-1917, one finds that while the assessment of railroads increased as rapidly as the total valuation of the state, such classes of prop- erty as livestock, mining, and city realty did not quite keep pace with the general movement. As the one other large class of property in the state is farming and grazing lands and improve- ments thereon, it would seem that the increase in the assessment of such lands must have been more rapid than the average in- crease in the total assessment of the state. This can be explained in considerable measure by the steady growth of agriculture in the state since 1900. But there can be little doubt that this disproportionate increase is to some extent the result of in- adequate tax administration. For instance, in the case of live- stock, a comparison of the assessments in Montana with the true valuations calculated by the U. S. Department of Agriculture shows that in 1906 the assessment of livestock was over 60 per cent of reported true value, and that from 1910 to 1915 the assess- ment decreased from 49 to 44 per cent of reported true value. There was some increase in 1916 and 1917, but the trend for the fifteen years, 1903-1917, was in the direction of relatively smaller assessments of livestock which were not warranted by any corresponding decrease in the true value of livestock reported by the Department of Agriculture. It is probable that if figures were available for other classes of property, a similar condition would be revealed. The facts shown in Table III may be made clearer by reducing the figures to a percentage basis as is shown in Table IV on the following page. 42 MINE TAXATION IN MONTANA TABLE IV. Percenta ge of total assessmenl . of state Class of property 1913-1917 1908-1912 1903-1907 1898-1902 Total assessment of state 100. 100. 100 100 City and town lots and improve- ments ... 17.3 205 216 258 Railroads 18.7 20.1 17.9 121 Livestock 105 116 146 170 Mining inclusive of net proceeds 8.0 6.9 10.7 11.9 Table IV shows that the assessment of railroads formed an ever larger percentage of the total assessment of the state from 1898 to 1912; but that during 1913-1917 the proportion de- creased. On the other hand, the assessment of city real estate and livestock formed a constantly decreasing proportion of the total assessment of the state. This is' in accord with the conclu- sions reached above. The figures presented above show that no definite tendency can be discerned in the assessment of the mining industry. It varies from year to year and from period to period. This is' the result of the method of assessing mines which makes the net proceeds the most important item in the valuation of a mine. The wide range of the fluctuations to which the assessment of the net proceeds' of mining is subject may be seen from the fact that in 1918 the total net proceeds of the state were equal to $17,355,196 as against $45,519,461 in 1917. The decrease thus amounted to $28,164,265 or about 62 per cent. A more detailed statement of the fluctuations in the assessment of net proceeds is presented in Table V which follows. TAXES PAID BY MONTANA MINES 43 TABLE V. Tear Total assess- ment of state Mining claims filed or patented Improve- ments on same Net proceeds Per cent of net proceeds of to- tal assessment of state 1017 $582,286,529 $720,998 $1,709,134 $45,519,461 7.8 1916 487,898,353 725,778 1.462,475 28,605,355 5.9 1915 439,785,918 669,843 1,478,295 10,855,342 2.5 1914 412,361,919 655,625 1,409,546 11,517,166 2.8 1913 382,807,277 634,072 1,287,905 14,509,695 3.8 1912 346,550,585 590,634 1,285,423 12.116.283 3.5 1911 331,670,418 650,807 1,354.320 6,203,590 1.9 1910 309,673,699 641,682 1,389,990 8,117,602 2.6 1909 280,401,064 594,329 1,323,805 6,983,713 2.5 1908 248,774.792 515,801 1,216,717 4,731,884 1.9 1907 251,882,437 632,496 1,139,977 20,358,119 8.1 1906 233,953,571 600,432 1,315,360 19,264,423 8.2 1905 209,912,340 528,679 1,231,377 10,532,425 5.1 1904 201,748,063 444,863 1,411,327 7,861,624 3.9 1903 201,333,310 402,137 1,381,927 8,056,355 4.0 1902 185,725.657 407,440 1,908,928 5.948,558 3.2 1901 166,787,588 407,325 1,918,014 16.281,271 9.8 1900 153,401,594 411,690 2,140,466 14,168,708 9.2 The fluctuations in net proceeds are chiefly the result of gen- eral market conditions, prices, cost of production, labor trou- bles, etc. But the total amount of net proceeds in any one year may also be affected by the amount of development work and improvements carried out by the mining companies. As the law allows the deduction of all sums spent in this 1 way from gross proceeds, it may happen that even during a prosperous year the amount of net proceeds should be considerably re- duced by such work of development and expansion. This is clear from Table VI which shows 1 the manner in which the pro- portion of net to gross proceeds fluctuates. TABLE VI. 1916 1915 1914 1913 1912 Gross proceeds of mines in Montana*. Net proceeds assessed Per cent $145,325,000 28,605,355 19.6 $87,000,000 10,855,342 12.4 $47,849,747 11,517,166 24.07 $61,900,546 14,509,695 23.4 $64,754,613 12,116,283 18.7 * Includes gold, silver, copper, lead and zinc mines. 44 MINE TAXATION IN MONTANA It is also clear from the above tables that the assessment of the surface and improvements of mines is 1 largely nominal. It amounted to $2,552,156 in 1900 and to $2,188,253 in 1916. Even the assessment of the surface, improvements, smelters, min- ing ditches, and all machinery (including that in manufacturing establishments) yields 1 a small total indeed: $13,249,539 for 1913; $14,661,269 for 1914; $13,904,521 for 1915; $15,105,499 for 1916; and $16,492,597 for 1917. These figures refute the claim that the mining, industry would be adequately taxed if only the surface and the improvements were assessed. On the contrary, these figures' show that the assessment of the mines, exclusive of net proceeds, is not comprehensive and does not represent the real value of the mining industry. This becomes clearer when it is remembered that the surface and improvements, including machinery, of all mines in Silver Bow County, which produces all but a small part of the mineral output of the state, were assessed at' $2,512,390 in 1913; $2,546,- 905 in 1914; $2,670,765 in 1915; $2,701,990 in 1916; and at $3,269,570 in 1917. The figures for 1918 confirm the statements made above. The assessment of the mining industry is again below that of the preceding two years, 1917 and 1916. The decrease is 1 the result of a sharp decline in the net proceeds which in 1918 amount to $17,355,196 as against $45,519,461 in 1917 and $28,605,355 in 1916. As a result, the proportion of mining assessment to the total assessment of the state is 1 much lower than in 1917 and 1916, and the percentage of the total assessment borne by other classes of property is increased proportionately. The assessment of different classes of property is the only available index of the comparative burden of taxation borne by such property. No data arc accessible which would show either the amount of taxes paid by different classes of property or their respective earnings. The Tax Investigation Committee appointed by the legislature in 1917 attempted such a compari- son for the year 1916 and prepared a table for that purpose, which appears on the following page. TAXES PAID BY MONTANA MINES 45 TABLE VII. Property or Industry Assessed valuation Per cent of total assess- ment of state Gross proceeds Net proceeds Total taxes paid for all purposes Railway industry (2 counties miss- ing) $ 83,939,723 15.29 $ 60,199.998 $28,270,875 $2,335,047 Other railroad property 13,229,672 2.71 none none 288,019 Mining industry ( including net proceeds) All mining prop- erty 41,856,095 42,918,260 8.57 8.79 146,500,000 28,605,355 1,292,296 1,325,792 Livestock and wool 52 384 484 1073 54 187 960 Farm lands and improvements 156,818.411 32.14 81,154,190 Banks 11,412,391 2.33 Telephone Co.'s.... 1,364,319 0.279 50,471 Telegraph Co.'s 570,113 0.117 14,722 Express Co.'s 157,784 0.032 174,853 5,446 Power Co.'s 10,140,412 2.078 287,523 On the basis of these figures obtained by the Tax Investigation Committee it is possible to make a few comparisons as is shown in Table VIII. TABLE VIII. Property or industry $100 of as- sessed valu- ation $100 of gross proceeds $100 of net proceeds Railway industry (2 counties missing) Telephone companies $2.70 3.69 $3.88 $8.25 Express companies 3.45 311 Power companies 2.83 Mining industry (inclusive of net proceeds ) 308 882 451 Amount of taxes paid on The only valid comparison which may be made on the basis of the above table is that of the amount of taxes paid on every hundred dollars of net proceeds. Table VIII shows that the mining industry compares well in this respect with the express companies, but that it lags behind the railroads. This table 46 MINE TAXATION IN MONTANA confirms in another way the conclusions' reached above by com- paring the assessments of these industries. The data at hand do not permit comparisons with other classes of property within the state. The relative tax burden borne by the mining industry in Montana may also be gauged by comparing conditions in the principal mining states of the country. As all mines must compete in the same market, the comparison is entirely justified. The figures presented in the following tables are taken from L. E. Young's Mine Taxation in the United States and are for the year 1909. In view of the predominance of one or the other mineral in various states, the figures are compared for different classes of mines separately as follows : TABLE IX. COPPER MINES. State Value of product Expenses not includ- ing- taxes Surplus before taxes are paid Taxes paid Per cent )f surplus paid in taxes Michigan $30.165,443 $23,508,650 $6.656,793 $950,821 14.28 Idaho 416,086 300,866 115,220 9,674 8.42 Arizona 31 614,116 24,979,482 6,634,634 404,046 6.09 Montana 45,960,517 37,678,032 8,282,485 395,577 4.78 Utah 8.843,099 2,082,984 66,190 3.18 TABLE X. GOLD AND SILVER MINES. State and class of mines Value of product Expenses not includ- ing taxes Surplus before taxes are paid Taxes paid Per cent )f surplus paid in taxes DEEP MINES Montana $ 3,002,328 $ 2,978,814 $ 23,514 $ 17,309 73.63 California 9 690,956 9 344 688 346 268 122 656 35.43 Idaho 7 926 602 6 439 546 1 487 058 143 237 963 Nevada 17.807,945 11,391,815 6,416,130 212,663 3.32 Utah 8.541,522 5,980,378 2,661,144 84,125 3.16 GOLD PLACERS Oregon 159.002 117,559 41,443 3,238 7.81 Colorado 448,586 248,521 200,065 13,111 6.56 Montana 502,653 398,296 104,357 4,988 4.78 California 8,751,032 5,517,855 3,233,177 91,000 2.82 TAXES PAID BY MONTANA MINES 47 The above tables show that at least in the year 1909 the tax burden borne by the mining industry as a whole was 1 lighter in Montana that in Michigan, Arizona, Colorado, and in a number of other states which are inferior to Montana in the amount of either gross or net earnings from mines. The statistics also reveal the fact that the tax burden in 1909 fell most heavily on gold and silver deep mines, while it was much lower for copper mines than for the mineral industry of the state as a whole. Several of the states which show a relatively low percentage of taxes paid to surplus in the above tables have since recognized that their mines were not bearing their share of the tax burden. The Utah Board of Equalization in its biennial report for 1915-16 wrote that the producing mines in the state were "paying less taxes, according to their values', than are the mines of any other state in the Union, far less than their fair share of the public burden." 1 The Colorado State Tax Commission in its report for 1916 demanded that mines be assessed as all other property at their "true cost value." The greatest step forward, however, has been made in Arizona where the State Tax Commission has for the past five or six years applied its greatest efforts to the problem of mine taxation. The assessment of mines' in Arizona increased from $45,145,084 in 1912 to $216,879,796 in 1916 ; it formed 31.7 per cent of the total valuation of the state in 1912, and 44.2 per cent in 1916. The relative assessment of the in- dustry in the two states in 1916 may be presented in the follow- ing table. TABLE XI. Montana Arizona Gross proceeds from mines $146 500 000 $ 82036342 Net proceeds reported 28,605,355 41,845 604 Assessed valuation of mining 43 710 854 171 888 616* Assessment per $100 of gross proceeds Assessment per $100 of net proceeds 29.8 1528 209.5 4108 * Producing mines only. 1 Boards of Equalization of Utah, Report for 1915-16, P. 73. 2 State Tax Commission of Colorado, Reports for 1916, P- 13. 48 MINE TAXATION IN MONTANA Comparing the proportion of the assessed valuation to net proceeds only, one finds that in 1916 the mines of Arizona were assessed about -three times as heavily as the mines of Montana. The significance of this comparison is 1 enhanced by the fact that some of the mines in Arizona and Montana are under the same ownership and control. CHAPTER V. WHAT Is ' ' NET PROCEEDS ' ' ? Net proceeds form the most important single item in the total assessment of the mining industry in Montana. This condition makes it imperative to form a clear idea as 1 to the meaning and nature of ' 'net proceeds. ' ' Some use the term in the sense of net profits. The representatives of the mining industry are vig- orous in drawing a distinction between net proceeds and net profits, but they give no definition of the former. 1 It is neces- sary to attempt an elucidation of the term in order to free the discussion of obscure elements. The modern science of accounting does not use the term "net proceeds." In any profit and loss account, which a well con- ducted firm or corporation would prepare, the items would in- clude gross earnings, cost of manufacture or operation, gross profits, net profits, fixed charges, etc. Of course the form of accounting is usually adjusted to each particular business in order to express the essential facts. Accountants strive to main- tain flexibility in their systems, and the forms used by them vary from business to business. 2 But there is a general scheme which underlies all accounting forms. An idea of the essential elements of an income account may be obtained from an exam- ination of the statements reproduced below. Statement I is the income account of the Westinghouse Electric and Manufacturing Company for the fiscal year ending March 31, 1911. Gross Earnings (shipments billed) ..$38,119,312.01 Cost of Shipments (factory costs including all expenditures for patterns, dies, new small tools, and other better- ments and extensions ; also inventory adjustments and all selling, administrative, general and development expenses) 32,510,546.87 Net Manufacturing Profits $ 5,608,765.14 1 L. O. Evans, Butte Miner, March 14, 1918. 2 H. R. Hatfleld, Modern Accounting, p. 278. 49 50 MINE TAXATION IN MONTANA Other Income: Interest and Discount 272,055.25 Dividends and Interest on Sundry Stocks and Bonds Owned 615,299.40 Miscellaneous Royalties, etc 628,177.13 $ 1,515,531.81 Total Income $ 7,124,296.95 Deductions from Income: Interest on Bonds and Debentures $ 1,076,553.71 Interest on Collateral Notes 416,000.00 Miscellaneous Interest 92,933.04 Property and Plant Depreciations Charged Against the Income 531,668.19 Proportion of Expenses Incidental to Bond and Note Issues 76,666.66 Miscellaneous 209,369.37 $ 2,243,190.97 Net Income Surplus for the Year $ 4,881,105.98 1 Statement II is a recent income statement of the Union Pacific Railroad Company which follows the form prescribed by the Interstate Commerce Commission. Freight Revenue $59,253,344 Passenger Revenue 18,817.047 Mail, Express arid all other Transportation Revenue 6,726,317 Incidental Revenue 2,161,587 Total Revenue $86,958,295 Maintenance of Way and Structures $10,900,925 Maintenance of Equipment , 12,101,212 Total Maintenance $23,002,137 Traffic Expenses 2,061,971 Transportation Expenses 23,108,140 Miscellaneous Operations Expenses 1,313,189 General Expenses 2,811,421 Transportation for Investment-credit 160,143 Total Operating Expenses $52,136,715 Taxes ... 4,641,474 Total Operating Expenses and Taxes $56,778,474 Revenues over Operating Expenses and Taxes $30,180,106 Other Operating Income 1,296,138 1 Ch. W. Gerstenberg, Materials of Corporation. Finance, pp. 629-30. WHAT IS "NET PROCEEDS" 51 Total Operating Income $31,456,244 Fixed and Other Charges 15,028,285 Surplus from Transportation Operations after deducting all Fixed and Other Charges $16,427,959 Income from Investment and Other Sources 11,964,064 Total Surplus $28,392,023 Less Dividends on Preferred Stock at 4% per Annum 3,981,740 Surplus after Deducting Dividend on Preferred Stock $24,410,283 Equivalent on Common Stock to 10.98% Amount Required to pay Dividend on Common Stock at rate of 8% per Annum 17,783,328 Surplus after Deducting all Fixed and Other Charges and Dividends on Preferred and Common Stock $ 6,626,955 An analysis of the above two statements shows the essential elements of any profit and loss account. A well known writer on corporation finance has presented them in the following abstract form: 1. State gross earnings. 2. Deduct operating or manufacturing expenses including selling, administrative, maintenance, and depreciation. 3. The result is net earnings from operation. 4. Add income from other sources. 5. The result is total net income. 6. Deduct taxes', interest, rentals, sinking fund charges, and other fixed charges. 7. The result is surplus for the year applicable as earnings on shareholdings. 8. Deduct preferred dividends. 9. Deduct common dividends. 10. The result is surplus from the year's operation to be credited to surplus 1 account. 1 Necessarily, the character of the statement will depend upon what is included in each item. The Westinghouse Company, for instance, includes betterments and extensions in its manufac- turing costs. Accountants generally agree that betterments and extensions which are of a "substantial and permanent character" 1 William H. Lough, Business Finance, pp. 417-8. 52 MINE TAXATION IN MONTANA should be included in capital account. 1 This is an item which varies frequently. The other items are more or less alike in all statements. Regardless of the differences in the nature of the mining in- dustry, the income statements of the principal mining corpora- tions of the country differ but slightly, if at all, from the gen- eral form outlined above. For purposes of illustration it is desirable to present statements of several mining companies. RAY CONSOLIDATED COPPER COMPANY. Statement of Operations for the year ended December 31, 1917. Operating Revenue: Copper produced $21,246,999.16 Silver produced 6,518.46 Gold produced 24,553.28 $21,278,070.90 Operating Expenses: Mining and Milling .' $ 7,053,242.72 Treatment, Refining, and Freight 3,586,419.08 Selling Commission _ 214,312.92 Mine Development Extinguishment 445,440.50 $11,299,415.22 Net Income from Operation plus Depletion $ 9,978,655.28 Miscellaneous Income: From Investments $ 572,481.46 Sundry Income 65,165.68 $ 437,647.14 $10,416,302.82 Other Charges: For Plant Alterations, Replacements and Abandonments $ 521,081.68 For Adjustment of Charges to Development Account.... 194,051.20 $ 715,133.08 Balance to Surplus Account $ 9,701,169.74 Surplus from Operations. Balance December 31, 1916 $13,813,177.68 Net Income and Proceeds of Depletion 9,701,169.74 $23,514,347.42 1 Hatfield, op. cit., p. 73. WHAT IS "NET PROCEEDS" 53 Dividends $ 5,835,562.30 Capital Distribution 788,589.50 $ 6,624,151.80 Balance December 31, 1917 $16,890,195.62 NEVADA CONSOLIDATED COPPER COMPANY. Statement of Operations for the year ended December 31, 1917. Operating Revenue: Copper produced $18,484,271.24 Silver produced 767,750.41 Net Proceeds from Sale of Carbonate Ore 27,691,06 $20,279,722.71 Operating Expenses: Mining including Proportion of Shipping Expense $ 3,374,254.87 Freight on Ore 1,101,810.20 Milling 3,039,442.35 Smelting 2,161,279.67 Depreciation on Steptoe Plant 650,255.20 Freight and Refining 1,112,222.49 Selling Commission 196,110.55 $11,635,375.33 Net Income from Operations plus Depletion $ 8,644,347.38 Miscellaneous Income: Dividends on Investments $ 825,000.00 Interest on Bonds 33,874.99 Interest 140,249.77 Cash Discounts on Purchases 11,978.58 Rents, Miscellaneous Income, etc 281,147.95 $ 1,293,251.29 Total from all sources to surplus account $ 9,937,598.67 Surplus from Operations. Balance December 31, 1916 $12,353,643.04 Net Income and Proceeds of Depletion 9,937,598.67 $22,291,241.71 Ore Extinguishment 12 Months ended December 31, 1917.. $12,353,643.04 Depreciation of Mine Equipment 39,597,34 Plant Alterations, Replacements, and Abandonments 528,705.95 Dividends 7,298,018.05 Capital Distribution 999,728.10 $ 9,110,715.00 Balance December 31, 1917.... ....$13,180,525.00 54 MINE TAXATION IN MONTANA BUTTE AND SUPERIOR MINING COMPANY Comparative Income Account for 1917. Income: Spelter, Zinc and Lead Concentrates and Residues $ 7,817,674.25 Less Freight 1,100,237.11 $ 6,716,437.14 Operating Costs and Expenses: Mining $ 2,537,575.70 Milling 1,265,312.27 Other Charges, Shut Down Expenses, etc 566.053.29 Total Operating Costs and Expenses $ 4,368,941.26 Gross Profits on Operations $ 2,347,495.88 Reserves for Depreciation and Depletion $ 1,941,129.65 Net Profits on Operation $ 406,366.22 Other Income ... 103.191.03 Total Income $ 509.557.25 Reserve for Excess Profits and Income Taxes, Contin- gencies, etc 236.646.72 Net Income $ 272,910.53 The above statements agree in essentials. None of them con- tain the term "net proceeds'. " It is not merely a matter of terminology. There is in fact no single item in any of the above income accounts which exactly corresponds to what is termed "net proceeds" in the Montana law. This can be made clearer by presenting in outline form the statement of net proceeds which the owner of a Montana mine is required to make. It is as follows : Statement of Net Proceeds: State gross yield or value (number of tons at per ton of ore). Deduct: 1. Total cost of extracting and milling; 2. Total cost of transportation to place of reduction or sale ; 3. Total cost of reduction ; 4. Cost of selling; 5. Total cost of improvements on buildings and in the workings of the mine. 6. Total cost of construction of mills for mines and of reduction works used and operated in connection with mines (which were built during the year). Add: Salaries of persons or officers not actually engaged in the working of the mine; The result is Net Proceeds. WHAT IS "NET PROCEEDS" 55 It is clear that the "net proceeds'" in the above statement are computed in a manner which is not followed by any mining company in its ordinary accounting. The Montana law allows a full deduction of all improvements and extensions made in any one year, but it does not include in operating expenses salaries of officers not engaged in the workings of the mine. Net proceeds cannot, therefore, correspond to net operating profits'. For the same reason, net proceeds cannot agree in any one year with ' * net income. ' ' The Montana law provides for the extinguishment of all capital expenses made in any one year. The general method of accounting consists in deducting depre- ciation and depletion charges gradually during a number of years. In the long run, however, it would seem that the effect of the Montana law is to make net proceeds correspond more or less to net income. An examination of the income statements of the various mining companies presented above shows, that if one should sum up the "net income from operations" for the entire life-period of a mine and then deduct from that sum the total of all depreciation and development charges, the result would be approximately the total "net proceeds" of the mine during its entire life. The difference would be the amount paid out in salaries to officers not actually engaged in the working of the mine and the total amount of depletion charges which the Mon- tana law does' not provide for. Even in the long run, however, "net proceeds" would not necessarily equal total income. If a mining company should invest part of its surplus for one or more years in some other business, in railroad securities for instance, the income from such investments, though originally derived from mining operations, would swell the dividends, but would have no effect on net pro- ceeds. The latter would, therefore, tend to fall below the total income. On the other hand, for reasons indicated above, net proceeds would tend to be above the net operating income. If properly and accurately accounted for, net proceeds would, therefore, fall between operating and total income without quite being equal to either. 56 MINE TAXATION IN MONTANA The peculiar method used for the computation of net proceeds is responsible for the divergent views on the subject quoted at the beginning of this chapter. Strictly speaking, net proceeds are not net income. As a matter of fact, in the long run they approach net income from operation so closely as to justify their identification with such net income. CHAPTER VI. THE ANACONDA COPPER MINING COMPANY. No discussion of mine taxation in Montana would be complete without special consideration of the case of the Anaconda Copper Mining Co. In the popular mind the mining industry in Montana and the Anaconda Copper Mining Company are identical, and the facts' fully justify the dominating position which the Ana- conda Copper Mining Company occupies in the discussion of mine taxation. According to the reports published annually by the United States Geological Survey, the mines of the Anaconda Copper Mining Company produce nine-tenths of all the copper, about two-thirds of the silver, and a considerable part of all the gold of the state. The figures for the four years 1913-1916 are presented in Table XII, and indicate sufficiently the extent of the mining operations of the Company. TABLE XII. Year Copper in pounds Silver in fine ounces Gold in fine ounces Total in state Produced * by A. C. M. Co. Total in state By A. C. M. Co. Total in state By A. C. M. Co. 1916 1915 1914 1913 352.928,373 267,231.014 233,229,640 287,828,699 307,395,092 235,076,289 205,298,531 241,983,323 16,494,366 14,378,437 12,016,460 13,819,201 10,790,705 8,064,986 7,221,815 8,719,132 220,130 242,077 199,203 168,994 92,099 106,702 99,650 64,898 * Produced from the mines of the Company. See reports on Mineral Resources by the United States Geological Survey, 1913-1917. The dominant position of the A. C. M. Co. in the mining in- dustry of Montana is also revealed by a comparison of the net proceeds a&sessed in the state. The figures for the fifteen years from 1903 to 1917 are as follows: 57 58 MINE TAXATION IN MONTANA TABLE XIII. Year Total net proceeds of mines assessed in Montana Net proceeds of A. C. M. Co. assessed Per cent of total 1917 $45,519,461 $36,010,543 79.1 J916 28,605,355 14,628,787 51.1 1915 10,855,342 6,828,160 62.9 1914 11,517,166 8,613,565 74.8 1913 14,509,695 11,446,902 78.8 1912 12,116,283 10,525,730 86.8 1911 6,203,590 5,097,433 82.1 1910 8,117,602 6,413,501 79.0 1909 6,983,713 4,880,355 69.9 1908 4,731,884 3,374,211 71.3 1907 20,358,119 16,174,755 79.4 1906 19,264,423 14,247,111 73.9 1905 10,532,425 8,692,244 82.8 1904 7,861,624 6,240,024 79.3 1903 8,056,355 6,486,532 80.5 1 To compare the burden of taxes borne by the A. C. M. Co. with that of other property in the state, it is convenient at first to compare the assessment of the Company with that of other prop- erty. Table XIV contains the figures which bear upon the sub- ject for the fifteen years from 1903 to 1917. TABLE XIV. Tear Total assessment of state Assessment of A. C. M. Co. Per cent of total 1917 $582,286,529 $55,606,347 9.5 1916 487,898,353 31,310.903 6.5 1915 439,785,918 22,356.370 5.1 1914 412,361,919 24,057,993 5.8 1913 382,807,277 26,550,066 6.9 1912 ! 346,550,585 25,300,178 7.3 1911 331,670,418 19,724,101 5.9 1910 309,673,699 19,775,916 6.3 1909 280,401,064 18,449,940 6.6 1908 248,774,792 17,483,367 7.0 1907 251,882,437 28,238,022 11.2 1906 | 233,953.571 26,911,857 11.5 1905 209,912,340 20,332,451 9.7 1904 201,748,063 16,426.007 8.1 1903 201.333.310 16.583,667 8.2 This table shows that the properties owned by the A. C. M. Co. formed a greater proportion of the total assessment of the state in 1906 and 1907 than in any other year of the period under consideration. A more uniform tendency may be discerned by considering the average annual assessments for five-year periods as shown in Table XV. THE ANACONDA COPPER MINING COMPANY 59 TABLE XV. Five-year period Average annual as- sessment of state Average annual as- sessment of A. C. M. Co. Per cent of total 1913-1917 1908-1912 1903-1907 $461,027,999 303,414.111 219,765,944 $31.976,353 20.146.700 21,698,401 6.9 6.6 9.9 The above table shows that relatively to the total assessment of the state the A. C. M. Co. was assessed higher during 1903-07 than since and that the relative decrease in the assessment has amounted to three per cent. This is in accordance with the conclusion reached in Chapter IV that mining property has tended to form a decreasing proportion of the total assessment of the state. The fluctuations in the annual assessments' of the A. C. M. Co. are the result of variation in the net proceeds of the Company. For instance, in 1913 the net proceeds formed 43 per cent of the total assessment of the Company, but in 1915 they dropped to 30 per cent, while in 1916 they rose to 64 per cent. The same tendency was indicated for the assessments of the mining in- dustry as a whole in Chapter IV. The assessments presented above are the basis on which the A. C. M. Co. has paid taxes during the period considered. The taxes paid on net proceeds, timber lands 1 , and other property during 1913-1917 are shown in Table XVI. TABLE XVI. Total taxes Taxes paid Per Taxes paid Taxes paid Year paid by A. C. on net cent of on timber on other M. Co. proceeds total lands property 1917 $2,086,005* $1.066,519 51.1 $152,991 $438,117 1916 979.622 483,756 49.4 141,556 354,309 1915 687,236 229,520 33.4 124,659 3&3,056 1914 675,738 250,156 37.0 127,513 298,069 1913 752,633 332,338 44.1 126,678 293,617 * Includes $428,376 of one per cent corporation license tax paid to the State of Montana, according to the law passed in 1917. 60 MINE TAXATION IN MONTANA The taxes indicated in the above table were paid for state, county, municipal, school, and all other purposes. By com- paring these figures with the taxes paid in the state on all other property, the proportion of the tax burden borne by the A. C. M. Co. will become evident. There is no one report published by any of the departments of our state government which contains 1 an exact statement of the total taxes paid for all purposes in Montana in any one year. The figures given in the following tables are calculated on the basis of the reports published by the State Examiner, State Superintendent of Public Instruction, and other state officers. Some of these figures were obtained from the office of the State Treasurer. There is no doubt that the figures fall somewhat below the total taxes paid in the state and therefore make the position of the A. C. M. Co. more favor- able than it would be if the exact figures were known. The figures given for the A. C. M. Co. are exact and are taken from the pamphlets published annually by the Company. These fig- ures are arranged in the following statistical tables. Table XVII presents the relative amounts of taxes paid during 1913-1917 for state purposes only. TABLE XVII. Year* Total taxes paid to the state exclusive of corporation license tax Corporation license tax Total paid in statet Amount paid by A. C. M. Co. Per cent of total Total paid by all cor- porations in state Amount paid by A. A. C. M. Co. Per cent of total 1917 1916 1915 1914 1913 $1,944,806 1,739,952 1,735,661 1,683,437 1,405,804 $155,698 87,671 62,598 68,565 79,650 8.0 5.0 3.6 4.1 5.7 $786,446 $428,376 54.5 Annual Average for 1913-1917 1,701,932 90,838 5.3 * Fiscal year ending November 30. t These figures were obtained from the records in the office of the State Treasurer. They include receipts from general fund, inheritance tax, and some license taxes. The latter are not uniformly entered and are therefore omitted in part. THE ANACONDA COPPER MINING COMPANY 61 The above table shows that the amount of taxes contributed by the A. C. M. Co. for purposes of state government decreased both absolutely and relatively from 1913 to 1915, and increased during 1916-17. The passage of the corporation license tax law, imposing a tax of one per cent on the net income of corporations raised the amount of taxes paid by the A. C. M. Co. considerably. In fact, under this law the A. C. M. Co. paid to the state about three times as much in license taxes as in property taxes. This was due to the prosperity of the Company during the year end- ing December 31, 1916. Combining the taxes paid under the general levy and on inheritance with the corporation license tax and with $17,358 paid by private car and express companies, one obtains a total of taxes paid for state purposes, equal to $2,748,630 out of which the A. C. M. Co. paid $584,074 or 21.2 per cent. The corporation license tax has thus helped to raise the proportion of taxes paid by the A. C. M. Co. for state pur- poses from an average of about five per cent to twenty-one per cent ; that is, it has increased it about four times. However, the property and license taxes collected by the state government form but a small part of the total amount of taxes collected in the state. By far the largest part is collected by the counties, towns and cities for purposes of county and mu- nicipal government, for the maintenance of schools, for the building and repair of roads, for charitable needs, and for all other purposes which come within the scope of county and municipal government in the State of Montana. The total col- lected for all these purposes and the amount contributed by the A. C. M. Co. are presented in Table XVIII. TABLE XVIII. Year Total taxes paid for county, municipal, school and other purposes, except for state government Total paid in Montana * Total paid by A. C. M. Co. Per cent of total 1917 1916 1915 1914 $18,054,405 15,220,609 13,515,048 11,705,037 $1,501,931 891.951 624,638 607.173 8.32 5.86 4.62 5.19 Annual average for 1914-1917 14,623,775 906,423 6.19 * These figures were obtained by adding the following items : (1) receipts from taxes, licenses and permits, and trust and agency payments to cities 62 MINE TAXATION IN MONTANA and towns as reported by county clerks to the State Examiner; (2) re- ceipts from taxes as reported by the State Superintendent of Public In- struction; (3) general property taxes for Butte, Missoula, and Helena, as obtained from respective city officials; (4) license taxes for Missoula for all years and license taxes for Butte for 1917 and 1915 as reported by the Bureau of the Census. I made several unsuccessful attempts to ob- tain the figures for Great Falls. It was also impossible to make a proper estimate for 1913. These figures do not include improvement or other special assessments or any other government receipts. It is possible on the basis of the available data to analyze more fully the taxes paid specifically for school purposes, as is shown in Table XIX. TABLE XIX. Total school taxes General school taxes Special and high paid * paid school taxes paid Per Per Per Year In Mon- 1 ana By A. C. M. Co. cent of to- In Mon- tana By A. C. M. Co. cent of to- In Mon- tana By A. C. M. Co. cent of to- tal tal tal 1917 $5,993,218 $680,543 11.4 $2,212,961 $223,569 10.1 $3,272,234 $456,974 13.9 1916 5,167,565 408,540 7 9 1,834,955 125,243 6 8 2,895,261 283,296 9 8 1915 4,423,608 276,030 6. B 1,786,319 89,176 49 2,298,147 186,854 8.1 1914 3,998,175 265,123 6.6 1,588,353 94,831 5.9 2,099,604 170,291 8.1 An- nual aver- 1914- 1917 j 4,895,641 407,559 8.3 1,855,647 133,205 7.2 2,641,311 274,356 10.4 * Includes "Apportionment from County Tax," "Special Tax for General Fund," and "Special Tax for Interest and Sinking Fund" as reported by the State Superintendent of Public Instruction. The above two tables show that the A. C. M. Co. paid from 4.6 to 8.3 per cent of all taxes 1 other than state taxes and from 6.2 to 11.4 per cent of all school taxes. During the four years 1914-1917 the A. C. M. Co. paid an average of 8.3 per cent of all school taxes. It should be borne in mind that by far the greater part of the taxes paid by the A. C. M. Co. for county and school purposes are paid in the two counties of Silver Bow and Deer Lodge. For instance, in 1917 the A. C. M. Co. paid in those two counties $567,704 in school taxes out of the total of $680,543 ; in other words, over 83 per cent of all school taxes' paid by the A. C. M. Co. in the state in 1917 went to support the schools in just those two counties. At least 75 per cent of all other taxes (except THE ANACONDA COPPER MINING COMPANY 63 those paid for the support of the state government) are paid in the same two counties. In the above tables all taxes paid in the State of Montana were segregated according to the purpose for which they were paid. A general comparison of the total taxes paid for all purposes in Montana is shown in Table XX. TABLE XX. Year Total taxes paid for state, county, school and other purposes In Montana By A. C. M. Co. Per cent of total 1917 1916 1915 1914 $20,803,000 16,960.500 15,250,700 13.388,475 $2,086.005 979,622 687,622 675.738 10.0 5.8 4.5 5.0 Annual average! for 1914-1917 16,600.669 1,107,247 6.7 Table XX shows that during the four years 1914-1917 the A. C. M. Co. paid from 5 to 10 per cent of the total taxes col- lected in the state, and that the average for the four years' was 6.7 per cent. This then is the measure of the tax burden borne by the A. C. M. Co. in the State of Montana. As explained above, these figures are conservatively estimated. They are much lower than the estimate of the Temporary Tax and License Commission, whose report just published estimates the total amount of taxes collected in Montana in 1917 as equal to $22,950,503. On the basis of this estimate of the Tax Commission, the A. C. M. Co. would have paid in 1917 only 9 per cent of the total taxes col- lected in the state. The facts established by the statistical tables given above make it possible to examine more closely the burden of taxation borne by the Anaconda Copper Mining Company. As explained in Chapter III, the "rule of proportion," implied in the spirit and demanded by the letter of the law consists in apportioning taxes according to the market value of property and in accordance with ability as measured by actual or potential earning capacity. It 64 MINE TAXATION IN MONTANA is' legitimate, therefore, to compare the taxes paid by the A. C. M. Co. with its assets and net income. It must be remembered, however, that the A. C. M. Co. is a composite organization embracing many different kinds of prop- erty in a number of states and in different countries. The sub- sidiary corporations of the A. C. M. Co. include the International Smelting Company, the International Lead Refining Company, the Rantan Copper Works, etc. Among its properties are coal mines in Wyoming, copper mines in Arizona, mines and railroads' in South America, timber lands in Montana, brick plants, foundries, etc. The annual reports published by the Company cover all these properties in one balance sheet and in one profit and loss account. Nevertheless, it is possible to obtain an idea of the extent of the property and of the operations of the Company in Montana. As indicated above, the A. C. M. Co. in 1917 paid $428,376 in corporation license taxes' to the State of Montana. This amount was one per cent of the net income of the Company from opera- tions in Montana during the year ending December 31, 1916. This means that the total net income of the Company from opera- tions in Montana in 1916 was at least $42,837,600. The annual re- port of the Company for the year ending December 31, 1916, gives the total profit of the Company for 1916 as $50,828,372. It is clear from these figures that the A. C. M. Co. obtained in 1916 84.3 per cent of its total profits from operations in Mon- tana. It is also possible on the basis of the available data to estimate the value of the Company's property in Montana. The balance sheet of the Company, as of December 31, 1916, shows assets equal to $224,013,841, itemized as follows : Fixed Assets: Mines and Mining Claims, Coal Mines, Water Rights, and Lands for Reduction Works and Refineries, etc. $ 74,687,053 Buildings and Machinery at Mines, Reduction Works, Refineries, Sawmills, Foundries, Waterworks, etc 47,303,134 Timber Lands 1 5,499,957 Investments in Sundry Companies not entirely owned 18,936,375 $146,426,520 THE ANACONDA COPPER MINING COMPANY 65 Current Assets: Supplies on hand and Expenses paid in advance $ 7,317,431 Merchandise held for sale 978,230 Metals in process and on hand in process, at cost; on hand, sold at contract prices 37,225,804 Accounts Receivable and Cash 32.065,854 $ 77,587,320 $224,013,841 In a careful and most penetrating analysis of the financial statement of the A. C. M. Co. for 1916, Mr. W. R. Ingals has placed approximate values on the various properties' of the Com- pany. 1 According to Mr. Ingals, the mines and the metallurgical plants of the Company in Montana are worth at least $47 per share which would mean a total value of $109,568,750. The foundries, brick yards, lumber mills and public utilities are estimated at $3,650,000. The timber lands of the Company are reported at $5,499,957. Deducting the investments outside Mon- tana from the total reported value of investments', one obtains a value of about $5,000,000 for investments in Montana, such as the shares of Butte and Superior, etc. The total of all the fig- ures quoted above is equal to $123,718,707. The mining plants (surface works) are estimated at $9,400,000. Thus, even remain- ing within the limits of the most conservative estimates, one must place the value of the properties held by the A. C. M. Co. in Montana at from $124,000,000 to $130,000,000. This means that the Company owns at least 85 per cent of its fixed assets in Montana. Applying the same proportion to total assets would result in a valuation of about $190,000,000 for the total assets of the Company owned in Montana. As the properties held by the A. C. M. Co. outside Montana have been acquired gradually during the past five or six years, the proportion of the Montana assets of the Company to its total assets must have been larger in the years preceding 1916. But assuming that the proportion has 1 been the same and taking the minimum (i. e., 85 per cent) and keeping in mind also that the assessments for 1917 correspond most nearly to assets 1 W. R. Ingalls, "Anaconda's Finances," Engineering and Mining Jour- nal June 16, 1918. 66 MINE TAXATION IN MONTANA reported as of December 31, 1916, one may compare the assess- ments of the Company with its assets in the following table. TABLE XXI. Year Total assets of A.C.M. Co. Total as- sessment of A.C.M. Co. Per cent of assessment of total assets Estimated assets owned in Montana Per cent of assessment of assets owned in Montana 1916-17 1915-16 1914-15 1913-14 $224,013,8-11 174,785,526 141,400,798 124,559,174 $55.606,347 31,310.993 22,356.370 24,057.993 24.9 17.9 15.8 19.3 $190,411,764 148,567,697 120,190,678 105,875,297 29.2 21.1 18.6 22.7 Average 1914-17 166,189,835 33,332,926 20.1 141,261,359 23.6 Table XXI shows that during the four years 1914-1917 the A. C. M. Co. was assessed at from 18.6 to 29.2 per cent of its total estimated assets owned in Montana, and that the average annual assessment of the Company for this period was 23.6 per cent. It is generally agreed that the financial policies of the A. C. M. Co. are very conservative and that its reported assets are undervalued rather than overstated. In view of this, the reported assets 1 may be taken as the approximate value of the properties owned by the Company, and its assessments appear thus to have averaged 23.6 per cent of estimated true value during 1914-1917. It should also be noted that while the net income of the A. C. M. Co. in 1916 from operations in Montana was $42,837,600, its total assessment in 1917 was $55,606,347; that is, the total assessment was only $12,768,747 more than its income for the year. In other words, the net income of the Com- pany was about 77 per cent of its total assessment. More significant than the comparison of assessments and as- sets are the parallels drawn in the following table between taxes paid and the items of importance in the income account of the Company. The items selected are dividends paid and total net income. The term net income in this table and throughout this chapter means net profits obtained after deducting from total income all fixed charges. TEE ANACONDA COPPER MINING COMPANY 67 TABLE XXII. Total for the Items Compared 1916-1917 1915-1916 1914-1915 1913-1914 four years from 1913-14 to 1916-17 Taxes paid by A. C. M. Co $ 2,086,005 $ 979,622 $ 687,236 $ 675,738 $ 4,428,601 Total net in- come of A. C. M Co. 50,878,372 16,695,807 8,789,588 11,323,498 87,687,265 Dividends paid by A. C. M. Co. 17,484,375 9,325,000 9,077,500 12.997,500" 48,884,375 Taxes paid per $100 of income 4.10 5.87 7.80 5.97 5.05 Taxes paid per $100 of divid'ds 11.93 10.50 7.51 5.19 9.06 The figures in the above table show the taxes paid for the fiscal year ending November 30, while the income and dividends are computed for the year ending December 31. For instance, the A. C. M. Co. paid $2,086,005 in taxes for the year ending No- vember 30, 1917, while the profits of $50,878,372 and the divi- dends of $17,484,375 were for the year ending December 31, 1916. As the A. C. M. Co. charges 1 all taxes paid to general operating expenses, it might be thought more proper to compare taxes paid to November 30, 1917, with profits made during the year ending December 31, 1917, and make similar comparisons for the preceding years. On the other hand, the assessment of the A. C. M. Co. on which it is taxed is made between March 1 and June 1 of each year, and presumably its assessment then corresponds more closely with the items in its financial report as of December 31 of the preceding year. The corporation li- cense tax is collected on the income declared by the Company for its fiscal year preceding. In view of this condition, it was con- sidered advisable to adopt the procedure followed in Table XXII. However, if comparisons' were made between taxes and income for the same calendar year, the results would be less favorable to the A. C. M. Co., as may be seen from the following table. 68 MINE TAXATION IN MONTANA TABLE XXIII. Items compared 1917 1916 1915 1914 1913 Total for five years 1913-1917 Taxes paid by A. C. M. Co. for year ending Nov. 30.... Net income of A. C. M. Co. for year ending Dec. 31.... Dividends paid by A. C. M. for year ending Dec. 31.... Taxes paid per $100 of income $2,086,005 34,333,751 19,815,625 6.07 10.52 $ 979,622 50,878,372 17,484,375 1.93 5.61 $ 687,236 16,695,809 9,325,000 4.12 7.37 $ 675,738 8,789,588 9,077,500 7.60 7.44 $ 752,633 11,323,498 12,997,500 6.65 5.79 5,181,234 121,971,017 68,700,000 4.25 7.55 Taxes paid per $100 of dividends According to Table XXII, the A. C. M. Co. paid in taxes an average of 5 per cent of its income and 9 per cent of its dividends during the four years 1914-1917. Table XXIII, computed as explained above, reduces the average to 4.25 per cent of income and 7.5 per cent of dividends. One may reconcile both tables by saying that the A. C. M. Co. paid in taxes during the period under consideration an average of 4 to 5 per cent of its net income and of 7 to 9 per cent of its dividends. The two tables also show that, no matter how the computation is made, the taxes paid by the A. C. M. Co. since 1915 have been less in proportion to the profits of the Company than the taxes paid during 1913-14. If the corporation license tax law had not been passed, the Com- pany would have paid in 1917, $1,657,629 in taxes 1 , which would have amounted to 3.25 per cent on its profits of 1916 or 4.82 per cent of the profits of 1917. The corporation license tax, which amounted to $428,376, increased the total taxes of the Company sufficiently to more than equal 6 per cent of the net income and 10.5 per cent of the dividends in 1917, and also raised in a cor- responding degree the averages for the five years 1913-1917. The figures in Tables XXII and XXIII compare the taxes paid by the A. C. M. Co. with its total net income or profits'. But a portion of this income is derived by the Company from operations outside Montana. As pointed out above, the income of the A. C. M. Co. from operations in Montana during the year ending December 31, 1916, was 84.3 per cent of its total income. It was also indicated above why it is s'afe to assume the same proportion of income from operations in Montana to total in- come for the five years' 1913-1917. Applying this assumption to the figures of Tables XXII and XXIII, one finds that during THE ANACONDA COPPER MINING COMPANY 69 1913-1917 the A. C. M. Co. paid in taxes an average of 5 to 6 per cent of its income derived from operations in Montana. In 1917 the A. C. M. Co. reported to the state treasury that its income from operations in Montana (during the year ending December 31, 1916) was $42,837,600 on which the corporation license tax was paid. As the Company in 1917 paid $2,086,005 in total taxes, this would mean that the Company in that year paid in taxes 4.87 per cent of its net income from operations' in Montana. The taxes paid by the A. C. M. Co. may be analyzed in yet another way which throws additional light on the Montana meth- od of mine taxation. The comparison is presented in the follow- ing table: TABLE XXIV. A. C. M. Co. 1917 1916 1915 1914 1913 1913-1917 Net proceeds assessed.. All other property as- sessed, exclusive of net proceeds $36,010,543 19,595,804 $14,628,787 16,682,206 $6,828,160 15,528,210 $8,613,565 15,444,428 $11,446,902 15,103,164 $77,527,957 82,353,812 Taxes paid on net pro- seeds 1,066,519 483,756 229,520 250,156 332,338 2,362,289 Taxes paid on all other property, exclusive of net proceeds 1 019 485* 495,866 457,716 425,582 420,295 2,818,944 Taxes per $100 of net proceeds 2.95 3.30 3.36 2.90 2.90 3.04 Taxes per $1,000 of all other property assessed 50.2 29.7 29.4 27.5 27.8 32.9 * Includes $428,376 of corporation license tax. The significance of the above table lies in the fact that it shows that the A. C. M. Co. paid about the same number of mills on net proceeds as on all other property. If the interpretation of net proceeds given in Chapter V is correct and net proceeds 1 approach net income, it is evident that the A. C. M. Co. is assessed at practically the same rate on its general property and on its annual income from the mines. This, then, is the burden of taxation borne by the Anaconda Copper Mining Company in Montana. How does this record compare with that of other property in the state? Comprehen- sive comparisons are impossible because no figures are available showing the market value and net income of other classes of property. The Tax and License Commission, however, has col- 70 MINE TAXATION IN MONTANA lected some data which permit a few specific comparisons. They are presented in Table XXV for the year 1917. TABLE XXV. Properties compared Net income in Montana Taxes paid in Montana Per cent of income A. C. M. Co $42,837,600* $2,086,005 4.87 Northern Pacific R. R. Co. f 942,409$ Chicago, M. & St. Paul R. R. t 555 256$ Great Northern R R Co j- 1 024 617$ Electric Utilities 6,649,610 414,116 623 Water Companies 528,506 69697 1319 Gas Plants 102,512 13,851 13.51 Street Railways ... . . 184,773 46,523 25.18 * Earned during year ending December 31, 1916. t Not available. $ Based on property taxes paid in 1916 and corporation license tax paid in 1917. The above table compares the taxes paid by the A. C. M. Co. in 1917 with the income received for the year ending December 31, 1916. This is based on the fact that the assessment of prop- erty in Montana is made as of March first, and net proceeds are reported for the year ending May 31. Besides, the corporation license tax for 1917 is based on the net income of the preceding fiscal or calendar year. But in order to avoid any possible dif- ficulties in the above table, the taxes paid by the A. C. M. Co. for the fiscal year ending November 30, 1917, may be compared with the income of the Company for the year ending December 31, 1917. According to the report of the Company, its' income for 1917 was $34,333,751. Assuming that the proportion of the income derived from operations in Montana was the same as in 1916, the income for 1917 in Montana was $28,840,350. As the Company paid $2,086,005 in taxes for the year ending November 30, 1917, the proportion of taxes to income calculated on the basis of operations for the year ending December 31, 1917, would equal 7.23 per cent. In either case, the figures would seem to indicate that the A. C. M. Co. paid in 1917 less taxes in propor- tion to its income than some of the public utilities. No such data as were presented above for the public utilities THE ANACONDA COPPER MINING COMPANY 71 are available for city real estate, farming property, livestock, etc. Nevertheless, an approximate comparison between the A. C. M. Co. and such property is possible. It was indicated above that the total assessment of all property in Montana was $582,- 286,529 in 1917 ; $487,898,355 in 1916 ; $439,785,918 in 1915 ; and $412,361,919 in 1914. During these four years, the total amount of taxes paid in the state for all purposes was $20,803,000 in 1917; $16,960,500 in 1916; $15,250,700 in 1915; and $13,388,475 in 1914. Deducting the taxes paid by the A. C. M. Co. during these years, one finds that all other property in the state (exclu- sive of that owned by the A. C. M. Co.) paid in taxes $18,716,995 in 1917; $15,980,878 in 1916; $14,563,464 in 1915; and $12,712,- 737 in 1914. Deducting also from the total assessed valuation of the state the assessment of the A. C. M. Co., one obtains the fig- ures showing that all property in the state, exclusive of that held by the A. C. M. Co., was assessed at $526,680,182 in 1917; $456,- 587,362 in 1916 ; $417,429,548 in 1915 ; and at $388,309,926 in 1914. Dividing the amount of taxes paid by the assessments gives the average rate for all property in the state, exclusive of the A. C. M. Co. The figures are 3.55 per cent in 1917 ; 3.50 per cent in 1916 ; 3.45 in 1915 ; and 3.27 in 1914 ; in other words, all property in the state, exclusive of the property owned by the A. C. M. Co., paid 35.5 mills' in 1917 ; 35 mills in 1916 ; 34.9 mills in 1915 ; and 32.7 mills in 1914 ; an average of 34.5 mills annually during the four years. The Tax Commission in its report to the Legislature estimates the average tax levy in the state as equal to 37.3 mills. This again indicates that all estimates in this chapter have been made as conservatively as possible. It is, of course, a matter of common knowledge that property throughout the state is assessed not at its full cash value, as required by law, but at a greater or less percentage of such value. Various classes of property are affected in different de- grees by the arbitrary administrative procedure. It is claimed that agricultural land is assessed at 35 per cent of its value; cattle at 45 per cent; horses and mules at 52 per cent; bank stock at 65 per cent of its value. In 1912 the Bureau of the Census estimated that real property and improve- ments in Montana were assessed at 43.5 per cent of their true value. Intangible property largely escapes assessment altogether. 72 MINE TAXATION IN MONTANA No average for all property in the state would be of much value because of the wide variations in the assessments of the different classes of property. Confining the comparison to land and livestock, it is clear that the average number of mills paid in taxes in Montana, as calcu- lated above, must be divided by about three or two and a half, in order to obtain the number of mills paid on the actual cash value of such property. Such a calculation shows that land and livestock in Montana paid from 12 to 14 mills on true value in 1917, 1916, and 1915 ; and from 11 to 13 mills in 1914 ; an average of 12 mills' for the four years, for both agricultural land and livestock. To compare fully the results 1 obtained as to the assessment and taxation of property in general and of the A. C. M. Co. in par- ticular, the property taxes calculated above must be reduced to an income basis. It is hardly necessary to say that such a task cannot be carried out in an exact way in the present state of statistical data. All that can be done is to attempt an estimate based on the generally known facts. Assuming that different classes of property in Montana produce incomes varying from 6 to 20 per cent on the investment, it would follow that an average of 12 mills on the true value of property would result in the payment of a tax equalling from 7 to 30 per cent of the income from the property. The percentage would vary with the nature of the property. Intangible property, for instance, probably pays a low proportion in taxes by evading the assessor. In the case of farming property, especially that owned by the farmer of moderate means, the proportion of income paid in taxes is undoubtedly much higher. If the average income from property in the state is 10 or 12 per cent, then property in Mon- tana pays from 10 to 12 per cent of its income in taxes. These estimates are in agreement with the general facts established for the country as a whole. It is generally thought that the people of the United States pay from 15 to 20 per cent of their income for governmental expenditures, and that the major part of such taxes is paid for state and local purposes. 1 It is also recognized 1 H. R. Seager, Principles of Economics, p. 476. THE ANACONDA COPPER MINING COMPANY 73 that the general property tax falls most heavily upon farming property. All the calculations' made in this chapter can be summarized in a few lines. During the five years, 1913-1917, the average as- sessment of the A. C. M. Co. was 6.6 per cent of the total assess- ment of the state, and the Company paid 6.7 per cent of all taxes collected in the state. The Company was assessed at about 25 per cent of the true value of all its properties in Montana, while agricultural land is reported to have been assessed at 35 per cent, livestock at 45, bank stock at 60. During the same period the A. C. M. Co. paid about the same number of mills on its 1 assess- ment as all other property in the state ; but the A. C. M. Co. paid only about 8 mills on the estimated true value of its Montana properties, while all other property paid on an average of 12 to 14 mills. And finally, the A. C. M. Co. paid in taxes to the state about 6 per cent of its income derived from operations in Montana, \vhile other property, especially farming property, paid an average of 10 to 12 per cent. This then is the comparative tax burden in Montana in so far as' it can be measured on the basis of available data. CHAPTER VII. THE DEFECTS IN THE MONTANA MINE TAX LAW. The analysis of the Montana method of mine taxation pre- sented in the preceding chapters was an attempt to make clear the effects of the law in its concrete application in the state. It seems desirable, however, to summarize in general terms the more important features of the Montana mine tax law and to point out what may be considered their inadequacy from a fiscal point of view. The primary difficulty is the constitutional provision prescrib- ing a special method for taxing the mines (Section 3 of Article XII of the Montana Constitution). This section was the subject of heated discussion in the Constitutional Convention of 1889, and was 1 adopted in the face of violent opposition on the part of some members of the convention. As pointed out above, this constitutional provision is a legal device which spikes the wheels of economic law in the domain of mining. It fixes an arbitrary value on the surface which is one of the elements in the valua- tion of a mine. But the greatest significance of this provision is that it limits the powers of the legislative bodies of the state to tax the mines in any way which may be deemed necessary. No other class of property in Montana is protected by such spe- cial constitutional enactments. The general limitations on the taxing power of the state, such as the requirements of uniformity and equality are considered sufficient for all property in the state. The mines alone are accorded special constitutional pro- tection. There are only five states in the country in which the method of taxing mines is 1 prescribed in the constitution. These states are Montana, Nevada, Utah, Wyoming, and South Carolina. 1 Such states as Pennsylvania, California, Michigan, Minnesota, Arizona, and others, whose mines are among their most important resources, have no special constitutional limitations upon the taxation of mineral property. In all these states, the legislature 1 L. E. Young, Mine Taxation in the United States, P. 78. 74 DEFECTS IN MONTANA MINE TAX LAWS 75 or the tax commission has the necessary authority to deal with the mines. Such procedure has not resulted in any harm to the mining industry. The five states which still retain constitutional provisions on mine taxation are admittedly among those in which the more modern principles of taxation have found the least ap- plication. The second defect in the Montana law is the contradictory method of assessing mines which is a result of both constitutional and statutory provisions. As* shown above, the value of a mine for purposes of taxation is assumed to equal the price paid to the government for the surface plus the independent value of the improvements plus the net proceeds of the year. On such an assessment the general property tax rate is imposed. This procedure means that the Montana mines are really taxed under the system of the general property tax, but that a large part of their assessed value is 1 more nearly income than property. This is a confusion of principles and methods which is not even justi- fied by the Constitution. Section 3 of Article XII of the Constitution provides merely that the net proceeds shall be taxed ' ' as provided by law. " It is within the province of the legisla- ture to determine how this should be done. The legislature could, if it s'o desired, tax the net proceeds as income or in any other manner. The method of taxing net proceeds as personal property is the cause of the contradiction pointed out above. The method of mine taxation adopted in Montana results in a third difficulty which has been referred to several times in the preceding chapters, namely, the uncertain and fluctuating character of the assessment of the mining industry. The net proceeds have often dropped over 50 per cent in one year. This 1 is well illustrated by the assessment of this year (1918) w r hich shows a return of only $17,355,196 in net proceeds as against $45,519,461 in 1917. The decrease for the year is about 62 per cent. This means a proportionate decrease in taxes. The situation especially affects the state government whose tax levy is 1 limited by the Constitution to two and a half mills. Such a decrease means a considerable loss in revenue and consequent financial difficulties. In view of the continued growth of our state government which is natural in a comparatively new state such as Montana, the uncertainty and irregularity result- 76 MINE TAXATION IN MONTANA ing from the method of assessing mines is a particular disadvan- tage. This "net proceeds" feature of the law also has the effect of adjusting the taxes paid by the mines to their earnings. When the mines are prosperous and show larger net proceeds, they pay higher taxes. When business is less thriving, net proceeds and the taxes paid by the mines decrease accordingly. On the other hand, all other property in the state has to pay taxes on its value regardless of its earnings for the year. A farmer may have a crop failure or a business may show a deficit for the year, yet the assessment of the farmer 's or business man 's property would show little, if any, effect of such conditions. Under the general property tax, the farmer or business man is assessed not on what he earns but on what he has. A fourth defect in the law is the peculiar method of computing net proceeds prescribed by the law. As was 1 pointed out in Chap- ter V, this method is of such a nature as to make comparisons between assessments and the financial reports for business* pur- poses entirely impossible. This is a serious matter. A scientific method of accounting is an essential prerequisite for the proper discharge of the obligations of business to the state. The Inter- state Commerce Commission has for years prescribed the system of accounting to be used by the railroads. The public service commissions in many states prepare the forms of books which must be kept by the public utilities. The adoption of the cor- poration income tax and excess profits tax forced the federal government to suggest methods of accounting to be used for the preparation of income returns'. The idea of greater uniformity and of greater supervision of accounting methods by the gov- ernment is an inevitable development of all recent tendencies in government regulation and public finance. It would seem to offer the best solution for the many difficulties that have caused friction between tax officials and mining companies in many states. Associations of mine operators' in several of the important coal mining states have realized this and have recommended such uniform accounting methods. The idea has also been urged by the Federal Trade Commission. 1 !L. E. Young, Mine Taxation in the United States, p. 207. DEFECTS IN MONTANA MINE TAX LAW 11 A corollary of the above is the fifth defect in the Montana law which leaves the assessment of mines entirely to the local assessor. No matter how conscientious and capable a county assessor may be, he cannot be expected to perform this part of his duty ade- quately. The magnitude and complexity of the mining business in the state make it necessary to devote much time and to apply special training and experience to the process of assessment. As a rule, the county assessors in the state are content to receive the statements of valuation sent in by the officials of the mining companies. This practically leaves the assessment of mines in the hands of the owners of the mines and reduces the super- vision of the taxing authorities of the state over mine assess- ment to almost nothing. These are the principal defects in the mine tax law of Montana. The manner in which these defects influence the general tax situation in the state was s'hown concretely in Chapters IV and VI. The larger problem of what method of mine taxation is most adequate in general and would fit conditions in Montana most fully will be considered in subsequent chapters. The provisions of the Montana law, briefly summarized in this chapter as inadequate, have been justified time and again by the peculiar nature of mining, which is a highly speculative busi- ness. The argument is 1 based on two main propositions : the ex- haustibility of mineral resources and the assumption of excep- tional risk in mining. These propositions must be carefully an- alyzed in order to elucidate the general principles which are at the basis of mine taxation and which should furnish the neces- sary guidance in changing the Montana law. They are consid- ered in the chapters which follow. CHAPTER VIII. THE EXHAUSTIBILITY OF MINERAL RESOURCES. It is, of course, a commonplace that at some time or other all mines become either physically exhausted or economically un- profitable under prevailing methods of metallurgical treatment. The latter condition is relative and is counteracted by the prog- ress 1 of mining and metallurgy. One of the most remarkable developments in the mining industry of Montana in the past ten years has been the introduction of new and improved methods which have made possible the recovery of a larger percentage of metal from the ore and the treatment of ore which was con- sidered unprofitable before, thus extending the life of the mines. This race between science and nature is a feature, not only of mining, but of many other human activities in which similar factors are involved. However, in so far as particular mines are concerned, the race cannot be kept up indefinitely, and sooner or later the stage of physical exhaustion or the limit of economic exploitation must be reached. This is unavoidable because the mineral taken from a mine cannot be replaced and the very process of making a mine productive and profitable implies the destruction of the basis upon which its usefulness rests. The representatives of the mining interests place especial emphasis upon this characteristic of the mining industry. In their opinion, it differentiates mining from every other form of property and business 1 enterprise. Mr. C. F. Kelly in the pamph- let referred to above contrasts the "practically perpetual yield from the farm" with "the yield from the mine which is one of rapid exhaustion/' He finds the same difference between the railway and other industries and mining. To quote Mr. Kelly : "The railways that traverse the state we believe will last for all time. They will serve as medium of transportation for people and the commerce of this region as long as time endures. The successful manufacturer establishes his busi- 78 79 EZHAUSTIBILITY OF MINERAL RESOURCES ness, and it runs on without diminution, perseverance in- creases the return, and energy adds to and amplifies the extent of business done. But the greater the perserverance, the greater the energy, the more skillful the operation of a mine, the sooner it is completely exhausted, and all that remains is a cavern in a hillside " This condition is beyond human control. ' ' That which has resulted from the mysterious forces of Nature working through countless ages of world making, when the universe was young and long ere man's intellect had stimulated activity on the globe, cannot now be reproduced " Mr. Kelly continues : "Be the total amount large or small there is only so much commercial ore existing in any deposit or in any locality. it is impossible to either replenish or replace the ore when once taken from the ground." Mr. Kelly illustrates his argument by comparing a mine to "a piece of cheese, from which a slice is taken in each day's operation." 1 For the sake of greater clearness, Mr. Kelly's argumentation may be reduced to three simple propositions. First, mines differ from land and other resources: mines are exhaustible and have a brief life ; other resources are inexhaustible and have perpetual existence. Secondly, because of this difference, the economics of mining is totally different from that of all other industries. Thirdly, this difference is so fundamental as to necessitate an absolutely distinct method for the taxation of mines. These three propositions demand careful examination. it is undoubtedly true that there are natural resources which for all practical purposes are indestructible. But agricultural land cannot be classed among such resources without some qual- ifications. The properties of the soil which produce growth and make farming possible are among the things which can be and are continuously destroyed. Every crop raised on a farm con- sumes a certain amount of the phosphorus, potassium, calcium, and other elements in the soil which are the foundation of fer- 1 C. F. Kelly, Mining Taxation in Montana, P. 15. 80 MINE TAXATION IN MONTANA tility. The total destruction of the fertility of a given portion of the earth is not entirely impossible. . Recent historical re- search has tended to place emphasis on soil exhaustion as a cause of the downfall of great nations. The exhaustion of Roman soil has been suggested as one of the important factors which con- tributed to the downfall of the Roman Empire. 1 The evidence is not confined to any one country. "Go to the ruins of ancient and rich civilizations in Asia Minor, Northern Africa or elsewhere. Look at the un- peopled valleys, at the dead and buried cities, and you can decipher there the promise and the prophecy that the law of soil exhaustion held in store for all of us. It is but the story of an abandoned farm on a gigantic scale. Depleted of humus by constant cropping, land could no longer re- ward labor and support life; so the people abandoned it. Deserted, it became a desert; the light soil was washed by the rain and blown around by shifting winds." - One does not have to go to Africa or Asia to convince himself of this fact. There is sufficient evidence of the operation of this law in the United States. Long before the Civil War, the system of agriculture in the South was' depleting the cotton lands of their fertility and was causing the abandonment of estates in South Carolina and Georgia. 3 The deserted farms of New Hampshire, Vermont, northern New York, and the deteriorated value- shrunken farm properties in western Massachusetts, Ohio, and Indiana tell the same story. It is asserted that the soil of the West is also being reduced in agricultural potency by exactly the same processes. 4 The decrease in yield per acre has affected even such new regions as the wheat district of Minnesota and North Dakota. 5 Wrong methods of agriculture are the chief cause of the destruction of the productive power of the earth. But the process of erosion is also responsible for the loss of large tracts of fertile land which are swept away into streams and to the sea. !V. G. Simkhovitch, Rome's Fall Reconsidered," Political Science Quarterly, June, 1916. 2 Simkhovitch, "Hay and History," Political Science Quarterly, Septem- ber, 1913. 3 Thomas N. Carver, Selected Readings in Rural Economics, p. 277. 4 Edwin G. Nourse, Agricultural Economics (1916), p. 192. 5 J. R. Smith, Commerce and Industry (1916), p. 29. EXHAUSTIBILITY OF MINERAL RESOURCES 81 It is estimated that at least 4,000,000 acres of farm land in the United States have been totally ruined by erosion, and that about twice as many acres' have been seriously damaged. The loss of fertility due to erosion amounts to millions of dollars annually, though the process is so slow and uniform that it may not be perceptible for some time. 1 Agricultural land is thus not an indestructible resource. Never- theless there is a difference between farming land and mineral deposits which must not be ignored. Though land and minerals are both exhaustible in use, agricultural land may be restored to its productivity by proper fertilization and scientific methods of agriculture, while mineral deposits are totally exhausted and destroyed in the process of use. This 1 means that agricultural land and similar resources may be maintained in a state of production indefinitely. In the old, settled countries of the world, agriculture has been carried on on the same land for many centuries. The soil of such countries has been worked over many times', and is as much the work of man as the gift of nature. The important fact, however, is that land can be so maintained and even improved and offers a basis for indefinite use. A mine, on the other hand, can be used for purposes of production only as long as the ore lasts, which is necessarily a more or less' limited period of time. The same distinction may be made between mineral and other resources, such as timber lands, or such productive enterprises as railroads. It must be remembered, however, that -the dis- tinction is not absolute. There are conditions under which the restoration of agricultural land may be entirely unprofitable. The large number of abandoned farms in the country illustrates this very clearly. Urban land may lose all or part of its value as a result of changes in population or other conditions of urban life. A manufacturing plant may be affected in the same way by changes in fashion and social tastes or by general industrial transformations'. In an economic sense, such changes which re- sult in the total or partial destruction of the value of property are analogous to exhaustion. On the whole, however, the contrast between a mine and other forms of wealth, as' outlined above, may be accepted as correct. 1 Yearbook of the Department of Agriculture, 1916, PP- 107-118. 82 MINE TAXATION IN MONTANA The important question, however, is, what is the meaning of this difference between mineral and other resources. Has' it the economic significance ascribed to it by mining men and others? The answer to this question depends upon a proper analysis of the generally recognized principles of business enterprise. The fundamental consideration in all business is to preserve the capital invested in addition to obtaining an adequate return on it. The individual investor buys bonds or stocks in the ex- pectation, not only that he will receive a certain annual income, but that he will recover at least the amount invested when his security matures or when he decides to sell it. Every business enterprise as 1 a going concern is considered successful only if it earns a proper return while maintaining its capital unimpaired. In every business the capital is invested in concrete capital goods : land, machinery, tools, buildings, etc. The preservation of the capital implies the maintenance of these capital goods in proper condition. It also involves renewals and replacements 1 made necessary by the changing standards of the business and by the progress of industry in general. The demand for maintaining capital intact is counteracted by the fact that all things are subject to deterioration and dis- integration. Buildings; machinery, dams, ditches, tools, etc., all wear out sooner or later. Besides the wear and tear, the changes in economic life, such as new inventions, new processes, new fashions, result in the obsolescence of machines and plants for productive purposes. In a word, the law of nature is de- struction ; the law of business is the preservation and accumula- tion of capital. This is one of the many instances of the diver- gence between the processes of nature and the demands of social existence. If man is to achieve his 1 business ends he must protect himself against the destruction wrought by nature and also against the destructive results of his own inventive genius. The problem has been s'olved by regarding the maintenance of capital goods as part of the expenses of production and by making special allowance from current earnings for the depre- ciation of property which cannot be made good by current re- pairs. This is the procedure of modern accounting. Every well conducted business not only includes repairs, renewals, and some of its 1 betterments in operating cost, but also, provides special EXHAUSTIBILITY OF MINERAL RESOURCES 83 funds to offset the decreased serviceability and value of its tangible and intangible assets. The financial reports of the various corporations in Chapter V illustrate this very well. Maintenance and depreciation are among the charges against gross proceeds' by which net income is reduced, while the re- placement fund appears as a special account on the balance sheet of the firm or company. Whether depreciation and reserve funds are merely nominal accounts and represent investments in the business, or are actually accumulated in the form of cash, se- curities', independent property, etc., they serve the same purpose, namely, to assure the continued and unimpaired existence of the capital invested. The provision of depreciation and similar funds is based on the recognition that capital must be constantly renewed from current earnings. Production is the only source from which all business enterprises can and must draw the strength for con- tinued existence. Every business is expected to conduct its op- erations so as to reproduce periodically the capital it represents in addition to the desirable returns in the form of interest and profits'. Whether the business lasts a year or a century, the process involved remains the same. The manner in which these general principles affect partic- ular kinds of business can be easily traced. A railroad, for in- stance, can no more last forever, without being constantly re- newed, than a human being can live without food. The elements which compose the railroad, its road-bed, rails', ties, cars, engines are continuously giving out under the pressure of the forces of nature. The life of the various parts of the road differs in length, but there is a definite period beyond which they all wear out. If a railroad should carry on its business without con- stantly repairing, renewing, and improving its road-bed and rolling stock, it would find itself incapacitated in a very short time. The heavy expenditures for maintenance of way and equipment, which may be found in the income account of every railroad, are sufficient evidence of this fact. Though the out- lays for repairs and renewals are made continuously, it may be said that the accumulation of these outlays for a number of years represents a total renewal of the road or in other words, a replacement of the original capital invested in the road. 84 MINE TAXATION IN MONTANA The same is 1 true, not only of manufacturing and mercantile establishments, but also of farming. The annual depreciation of farm machinery, farm buildings, livestock, etc., is considerable. Investigations in a number of states have shown that the rate of depreciation on farm machinery varies from 5 to 20 per cent, depending on the implement and the way it is us'ed; that the loss from decrease in the value of sheep sold as well as from deaths results in a depreciation of nearly 10 per cent ; and that the average depreciation on a large number of horses is over 8 per cent; while on pure bred and highly graded cattle it varies from 4 to 13 per cent. 1 Whether the farmer keeps proper ac- counts 1 or not, he is constantly replacing the value of his improve- ments, buildings, machinery and livestock out of the earnings of his farm. But a successful farmer must do more than that. "A farm cannot properly be called successful unless it pays a fair rate of interest on the investment, returns fair wages for the farmer's labor, and maintains at the same time the fertility of the soil." 2 This 1 is essential because the fertility of the soil is the funda- mental element in the value of a farm and it is subject to deteri- oration and destruction. The fertility is maintained by proper manuring, rotation of crops, commercial fertilizers 1 and other improvements which involve considerable expenditures. These are properly charged to the cost of operating the farm. The efficient farmer must follow the procedure of all good business men. He must include repairs arid the maintenance of soil fertility in his operating expenses and must provide for the eventual replacement of his buildings, machinery, and other im- provements. In other words, that part of his capital which is represented by his improvements and by the exhaustible prop- erties of the soil is constantly reborn in the process of produc- tion. These general principles of business enterprise are also applic- able to mining. A successful producing mine is expected to return at the end of its life-period the capital invested in it and a fair interest on such capital. Both the capital and the return 1 Nourse, Agricultural Economics, pp. 300-04. 2 Farmer's Bulletin No. 661, published by the Department of Agricul- ture. Italics mine. EXHAUSTIB1LITY OF MINERAL RESOURCES 85 on it must come from the earnings of the mine. The main- tenance of the improvements in and about a mine is a part of the operating expenses which also include the cost of development work. New construction which is a replacement of deteriorated and obsolete improvements as well as all losses 1 in the value of the plant which cannot be repaired are taken care of by means of depreciation funds, as is done in other industrial enterprises. The only difference which arises in the case of mines 1 is the de- preciation of property which is caused by the depletion of the ore. Such depreciation cannot be guarded against by renewals, betterments, or extensions in the particular mine which is being consumed. But it can be taken care of in other ways. A mining company whose mines are being exhausted may devote part of its 1 annual earnings to acquire new mining properties which will prolong the life of the enterprise. Such has been the policy of English companies for many years, and it is being adopted in the United States. 1 Another way to redeem the capital invested in a mine is to set aside from earnings annually a sum which at a given rate of interest will at the end of the life-period of the mine return the original capital. 2 This involves the difficulty of determining the life of a mine which will be dis'cussed in another chapter. Such provision for the redemption of capital invested in mines is known as amortization. It is the same principle which is involved in sinking funds used by corporations in general for the extinction of interest bearing debts. The financial statements of the mining companies referred to in Chapter V show that these large and well organized com- panies not only make definite annual charges for the deprecia- tion of equipment, but also carry special allowances for ' ' ore ex- tinguishment " or " capital distribution. ' ' They thus clearly and definitely provide for the return of the capital invested in their business. The confusion of ideas concerning the real significance of wasting assets, such as mines, has been the result chiefly of the practice followed by so many mining companies of distributing all their earnings in dividends without making proper provisions 1 Robert S. Lewis, "Amortization and Depreciation," The Mining and Scientific Press, September 23, 1916. 2 E. B. Skinner, The Mathematical Theory of Investment, p. 161. 86 MINE TAXATION IN MONTANA for depreciation and amortization. Such companies' have left it to their stockholders to make the necessary division of dividends into profits and capital returned. 1 This procedure has been justified on various theoretical grounds. 2 But in practice the majority of investors in mining stocks have revealed but a very vague idea of the true nature of the earnings' derived from their holdings and have not provided for the amortization of their in- vestment, thus suffering frequently a total or partial loss of cap- ital. The necessity of allowing for depreciation and amortization and of distinguishing clearly dividends which are profit from dividends which are capital returned, has recently been impressed upon the mining business 1 by the new developments in federal taxation. The Federal Income Tax Law, that is, the Act of September 8, 1916, as amended October 3, 1917, forced the mining men of the country, as well as other business men, to re- consider carefully their systems of accounting in order to adjust themselves to the requirements of the government. The federal law, which places' a tax on net income, allows certain deductions which in the case of mines are as f ollow r s : "All losses actually sustained and charged off within the year and not compensated by insurance or otherwise, includ- ing a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business or trade In the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made, such reasonable allow- ance to be made .... under rules and regulations to be prescribed by the Secretary of the Treasury. Provided, that when the allowance authorized shall equal the capital originally invested, or in case of purchase made prior to