LIBRARY UNIVERSITY OF CALIFORNIA. GIFT OF Class LIFE INSURANCE TAXATION Address of HON. GEO. CURTIS, JR., OF THE WISCONSIN TAX COMMISSION General Public Hearing on Report and Bill of Wisconsin Tax Commission Relating to the Taxation of Life Insurance Companies, in Assembly Chamber, Tuesday Evening, March 21, 1911. P790 Life Insurance Taxation. ADDRESS OF HON. GEO. CURTIS, JR., A MEMBER OF THE WISCONSIN TAX COMMISSION AT A GENERAL PUBLIC HEARING ON THE REPORT AND BILL OF THE WISCONSIN TAX COMMISSION RELATING TO THE TAXATION OF LIFE INSURANCE COMPANIES, DELIVERED IN THE ASSEMBLY CHAMBER, MADI- SON, WISCONSIN, TUESDAY EVENING, MARCH 21, 1911. Bill No. 836A 3388. Mr. Chairman iind Gentlemen of the Committee and Members of the Legislature: My appearance here tonight on behalf of the Tax Commission is pursuant to a request of the chairman of one of the committees having the bill in charge. This subject was considered by the Legislature of 1899, prior to the organization of the Tax Com- mission. At that session, after extended debate, radical changes were made in the law, and thereby the amount of revenue to be paid annually by insur- ance companies was greatly increased over the amount required under the law which had there- tofore been in force, without change, for some twen- ty years. 1 224660 The Act of 1899, known as the Orton law (Chap- ter 326), was amended by Chapter 21, Laws of 1901. The chief purpose of such amendment was to re- lieve domestic companies (those organized under Wisconsin laws) from the effect of retaliatory laws in other states without reducing the aggregate rev- enue to accrue from taxation of life companies. This legislation, unchanged since 1901, was tak- en to be a legislative declaration of a settled policy to the extent that the Commission deemed it a duty to defer extended study of the subject until some of the many other tax problems requiring considera- tion could be investigated. Progress in all investi- gation work has been materially retarded by the large amount of administrative duties laid upon the Commission. The life companies of the state have earnestly protested that the present law, though less onerous than the Act of 1899, is unjustly burdensome. Such protest and a growing doubt of the justice of the present law presumably induced the Legislature of 1909 to adopt a joint resolution by which the Com- mission is requested to make an investigation of the subject of life insurance taxation and report thereon. In view of the delay in the completion of the Commission's regular biennial report for 1911, it was deemed advisable to present an outline of the views of the Commission on the subject in a special report in advance of the compilation of the regular report. Such special report was presented to the Legis- lature February 10, 1911, and I will read that spe- 2 cial report, although I believe it has been printed. It is said that a good many legislators have not found time to peruse it, and perhaps its reading at this time will therefore be justified. The special report just mentioned is as follows : REPORT OF TAX COMMISSION. To the Honorable, the Governor and the Legislature of the State of Wisconsin : Pursuant to joint resolution No. 49 of the Legis- lature of 1909, the Tax Commission has had under consideration the subject of taxation of life insur- ance companies and has reached conclusions as to the amount of revenue which should be derived from that source and the method which should be employed for its ascertainment and collection. It is expected that a statement of the grounds upon which such conclusions rest will appear in the regular biennial report of the Commission; but it is impracticable to present in this communication more than an outline of the conclusions reached. Such outline follows: 1. Accumulated assets held by life insurance companies in trust for their policyholders may justly be made a source of revenue to the state. 2. The assets, other than real estate, from which contributions to such revenue may be re- quired should be limited to such as equitably belong to policyholders resident in the state. 3. So far as such assets are invested in real estate, the real estate should be taxed in the dis- trict where located under the general tax laws ap- plicable to other real estate. 4. The residue of such assets, consisting mainly of various forms of credits, and other interest or dividend bearing securities, in view of the purpose for which they are held and the low rate of income produced therefrom, should not be taxed at the rates usually imposed upon property or capital em- 3 ployed in productive enterprises carried on for the pecuniary profit which may be gained therein. 5. The amount of tax to be imposed upon or on account of such assets should not be greater than would be produced by a moderate income tax rate. Five per cent of the income from such assets is con- sidered a reasonable and moderate rate. 6. Such amount could not be imposed as a flat or uniform rate upon premium receipts without pro- ducing great inequality of tax burden as between different companies, premium receipts having no uniform relation to assets held in trust for policy- holders. 7. In order to reach and tax foreign and domes- tic companies alike the tax should be imposed as an excise or privilege tax. It would be impractic- able and inexpedient to impose the tax directly up- on policyholders resident in the state. Five Per Cent Income Tax. 8. A tax equal to 5 per cent of the income on assets held in trust for Wisconsin policyholders would be a higher tax than is imposed on life com- panies in some of the other states. The imposition of such tax on foreign companies would therefore subject Wisconsin companies doing business in other states to the payment of large amounts to such other states, under the so-called reciprocal or retal- iatory laws of such states, in excess of the amounts which Wisconsin companies would otherwise be obliged to pay in such states. 9. The amount of such excess which Wisconsin companies would pay in 1911 under retaliatory laws now in force would be about $174,000. 10. To avoid such effect upon Wisconsin com- panies it would be necessary to reduce the Wiscon- sin taxes upon foreign companies to amounts not greater than would be required of such companies according to the laws of their respective states. 11. A tax upon domestic and foreign life com- panies now doing business in Wisconsin equal to 5 per cent of their income from assets (other than real estate) equitably belonging to their Wisconsin policy holders would produce an aggregate revenue for 1910 of about f 87,000. Such aggregate would increase with the increase of such assets. 12. If the companies which have withdrawn from Wisconsin since 1907 should resume business in this state, then the aggregate revenue for 1910 from the tax described in the preceding paragraph would be materially larger. 13. A reduction of the proposed tax on foreign companies as suggested above would reduce the total revenue, estimated in paragraph 11 at $87,000, to about $75,000. Provisions in Proposed Bill. 14. Such reduction if made would be a mere expedient to save Wisconsin companies from puni- tive taxation in other states in amounts aggregating about $174,000, at a loss to the revenue of the state of about $12,000, as indicated above. Such loss to the state could be made up and a large net gain to Wisconsin companies could be secured by grant- ing the suggested reduction to foreign companies and increasing the license fees for Wisconsin com- panies sufficiently to make up the loss. 15. While it is illogical thus to place Wiscon- sin companies on a less favorable footing than for- eign companies, it seems unavoidable unless the state shall elect to collect less revenue from life companies than it ought to receive according to the foregoing conclusions. A legislative bill has been drawn, and is pre- sented herewith, providing for the taxation of life companies upon the plan and at the rate recom- mended above. It provides for the suggested re- ductions in the taxes upon foreign companies. If such reductions are deemed inadvisable the provi- sion therefor can be stricken out. If retained, there should also be provisions increasing the license fee for Wisconsin companies sufficiently to cover the loss in revenue resulting from reduction in the tax on foreign companies. As such loss would or might vary from year to year with changes in the condi- tions producing it, it is considered better to have the exact loss computed and made good by the Wis- consin companies, each year, than to provide there- for by an inflexible increased license fee rate on Wisconsin companies. The provisions just sug- gested are incorporated in the accompanying bill. They place the work of making the required compu- tations upon the Insurance Commissioner, whose office contains the requisite data. He is given au- thority to call for such further data as may be needful, if any. February 9, 1911. Respectfully submitted, NORMAN S. GILSON, GEORGE CURTIS, JR., NILS P. HAUGEN, Commissioners. HISTORY OF WISCONSIN LEGISLATION. As preliminary to a general discussion of the subject, a brief outline of the legislation in this state imposing taxes upon life companies and some- thing of the results under it will now be presented. The first act for the regulation and taxation of domestic life insurance companies in this state was Chapter 158, Laws of 1867, which by its pro- visions included "all companies transacting the business of life insurance in this state at the date of the passage of this act, whether such companies are organized under special charters granted for that purpose by the state or under the general laws thereof." By Section 5 of the act each insurance company so organized was required to pay into the state treasury 1 per cent of its cash receipts for the year preceding the making of its annual report. Section 6 provided that such payment should be in lieu of all taxes for any purpose authorized by the laws of the state. Chapter 179, Laws of 1867, was an act to regu- late and tax insurance companies not incorporated by the state of Wisconsin. By this act a sum equal to 3 per cent of the gross amount received in the state of Wisconsin for premiums and interest in each year was required to be paid by each company as an annual license fee for the privilege of trans- acting the business of insurance in this state. The act also provided that when application for a license was made by any company that had not previously transacted business within the state the license for the first year should be $500. The two acts above mentioned were approved on the same day although Chapter 179 was published four days earlier than Chapter 158. Thus, at prac- tically the same time, the Legislature provided for the regulation and taxation of domestic as well as foreign insurance companies but by two acts in- stead of one. The foregoing Laws of 1867 were repealed by Chapter 59, Laws of 1870, so far as they related to life insurance companies or the business of life in- surance. 7 The Act of 1870 provided for the regulation and taxation of both domestic and foreign life com- panies. Section 24 prescribed the following fees to be paid to the Secretary of State: For filing the an- nual statement required in the office of the Secre- tary of State, twenty-five dollars; for each agent's certificate of authority, one dollar ; for every copy of paper filed in the Secretary of State's office, twen- ty-five cents per folio; for affixing the seal of said office to such copy and certifying the same, one dol- lar ; for examining the affairs of any company when deemed necessary, the expense incurred therein. Section 27 of said Chapter 59 prohibited life insurance companies from transacting business in the state without first obtaining a license therefor, and further provided that no such license should be issued to any such company until it had filed in the office of the Secretary of State the reports and statements required in such act and made payment to the State Treasurer in addition to the fees above mentioned an annual license fee of |300, and fur- ther that each life insurance company organized in this state under special charter or under general laws should pay 1 per cent on the cash receipts for premiums received by such company in Wisconsin for the year preceding the making of its annual re- port. Such license fees were declared to be in lieu of all taxes except taxes upon real estate. It will be observed that the law of 1870 did not require foreign insurance companies to pay li- cense fees on premium receipts, but imposed only 8 an annual license fee of |300 in addition to the spe- cial charges for filing papers, examinations, etc., imposed upon all companies. The exemption of foreign companies from a tax on premiums was no doubt brought about by the retaliatory laws of New York and two or three other eastern states having insurance companies domiciled in their respective jurisdictions, transacting business in this state. While Chapter 158, Laws of 1867, prescribed a license tax of 1 per cent on premium receipts of domestic companies in the state, Chapter 179, Laws of 1867, imposed upon foreign companies trans- acting business here a sum equal to 3 per cent upon the gross amount received in the state of Wiscon- sin from premiums and interest in each year. The taxes thus imposed upon foreign companies was more than three times the amount required from the domestic companies. The first retaliatory law enacted in New York was Chapter 694, Laws of 1865, and being in force when Chapter 179, Laws of 1867, was enacted, re- quired Wisconsin companies doing business in New York to pay the same tax in that state that this state imposed upon New York companies. This presum- ably contributed to the repeal of Wisconsin's gross- ly discriminatory tax on foreign companies. Chapter 256, Laws of 1878, amended Section 27 of Chapter 59, Laws of 1870, by increasing the tax on premium receipts of domestic companies in the state from 1 to 2 per cent. This premium tax of 2 per cent remained in force until the passage of 9 Chapter 326, Laws of 1899, already mentioned as the Orton law. Under said Chapter 326 each domestic life in- surance company transacting business within the state was required to pay annually 1 per cent of its gross income from all sources except income from rents of real estate upon which it paid taxes in the same manner as other real estate, and ex- cepting also income from interest on United States bonds. Stated more explicitly, this license fee tax of 1 per cent was to be computed upon the entire premium receipts of the domestic company from all its policy holders wherever resident and upon the income from the entire ledger assets of the company, except rents from real estate and interest on United States bonds. By the same act a life insurance company organ- ized without the state of Wisconsin, transacting the business of life insurance within the state, was required to pay an annual license fee of 1 per cent upon all premiums collected and premium notes taken or received by it from residents of this state. In all cases the entire premium paid to the com- pany, whether in cash or in premium notes, was to be deemed income, without any deduction there- from on account of dividends paid or credited to the insured. Under this act The Northwestern Mutual Life Insurance Company, the principal domestic com- pany transacting the business of life insurance in the state, paid to the state in taxes the sum of f 186,- 396 in 1899 instead of f 33,357, the latter figure 10 being the amount of the license fee of 2 per cent on premium receipts imposed by the law of 1878. In 1900 the tax of 1 per cent on the gross income of this company in 1899 amounted to $241,636. This act of 1899 also brought into operation the retaliatory laws of at least four states and in 1900 the Northwestern Company paid retaliatory taxes on account of the income of 1899 as follows : To New York $25,220.20 To Illinois 17,694.63 To Connecticut 3,877.45 To New Jersey 3,560.51 Total $50,352.79 The license fees from life insurance companies of those states transacting business in Wisconsin, paid to this state, for the corresponding period are as follows: New York $19,684.51 Illinois 8.52 Connecticut 4,144.03 New Jersey 3,770.88 Total $27,607.94 Chapter 21, Laws of 1901, amended Chapter 326, Laws of 1899, so as to require domestic companies to pay an annual license fee of 3 per cent of their gross income from all sources, excepting income from rents of real estate and also excepting pre- miums collected outside the state of Wisconsin on policies held by non-residents of Wisconsin. In ascertaining the amount of premium receipts as the basis for computing such license fee, no deduction 11 is allowed on account of dividends paid or credited to the insured. By the same act foreign companies transacting the business of life insurance in the state are re- quired to pay an annual license fee of f 300, except that whenever the taxes and fees imposed upon a company of another state under the retaliatory laws of this state (Section 1221, Statutes of 1898) shall exceed $300, the amount of the annual license fee, such license fee shall be deducted. This pro- vision relieves domestic companies from the opera- tion of the retaliatory laws of other states. The amount of revenue accruing from the license fees imposed upon domestic companies by Chapter 21, Laws of 1901, was slightly, more than the amount secured under Chapter 326, Laws of 1899. The purpose of the act was to produce about the same amount of revenue to the state from life in- surance taxation and to relieve domestic companies from retaliatory taxes in other states. The license fees paid by The Northwestern Mu- tual Life Insurance Company, on premium receipts in the state, from 1868 to 1898, a period of thirty- one years, amounted in the aggregate to $342,637.65. The license fees paid by that company under the acts of 1899 and 1901 are as follows, by years : 1899 $ 186,386.54 1900 241,636.16 1901 243.185.27 1902 253,171.01 1903 261.517.12 1904 276,815.86 1905 308,566.62 12 1906 331,964.83 1907 358,980.48 1908 365,303.61 1909 403,238.68 1910 433,755.45 1911 450,704.78 Total, 13 years. .|4,115,226.41 SHALL ANY TAX BE IMPOSED? In dealing with the vital questions entering into the problem of life insurance taxation, the in- vestigator is confronted with the proposition often urged on behalf of life companies that, aside from the capital of stock companies, they should not be taxed at all except in respect to real estate owned and such exactions as may be necessary to defray the public expense of official inspection and regu- lation through a state insurance department or otherwise. It is represented in support of this contention that life insurance is a beneficent thing and should be encouraged and fostered by exemption instead of being burdened with a tax; that the assets of such companies held in trust for policy holders are accumulated savings the taxation of which would be a burden upon and a discouragement of provi- dence and thrift; that such assets, other than real estate, consist mainly of interest or dividend bearing securities which are merely representative of interests in tangible property usually fully taxed in the jurisdiction where located, and to tax both would be double taxation in economic effect. 13 These arguments are not without merit and are deemed a sufficient answer to the proposal to impose anything more than a very moderate tax. It must be borne in mind, however, that a very large part of the taxes collected in the various states, beyond that placed upon the "socially made value" of land, is imposed primarily upon savings of some sort or the product of industry and thrift, and must continue to be so placed until the entire scheme is radically changed. Frugality, thrift and industry are indispensable to economic progress, but it is mainly by the exer- cise of these virtues that people come to have ability to contribute to public revenues. Of necessity such revenues must come from those who possess such ability. All institutions for encouragement of thrift, for protection and safe investment of savings, are in some degree beneficent; but it is not perceived that the institution of life insurance is so far dif- ferent from others in this respect as to warrant its total exemption. On this point the late Dr. Zartman, of Yale, says : "All capital is a provision for the future, and in attempting to differentiate insurance savings from other savings the opponents of (insurance) taxation have failed to establish their point."* In a very recent address Prof. T. S. Adams says : "It is perfectly true that a tax on insurance paid by the policyholder tends to discourage thrift. But that is not in itself sufficient reason for abolish- *Investments of Life Ins. Companies, p. 220; H. Holt & Co., 1906. 14 ing such taxes. In the first place, our tax system similarly discourages thrift at many points ; savings banks are taxed in most states ; and the small home- steads in which wage-earners and salaried clerks invest their savings are more heavily taxed, in all probability, than any other class of property except the estates of widows and orphaned children in the process of administration and settlement. In fact, our whole system of state taxation, falling princi- pally on realized or accumulated wealth, is a huge engine for the taxation of savings and capital the two principal means by which thrifty people provide against future emergencies. Insurance is merely a method of co-operative saving with an ingenious provision that if any co-operator is prevented by death from continuing his savings, the more for- tunate survivors shall do a stipulated amount of saving for him. "Furthermore, this system of taxing savings and accumulated wealth has been deliberately adopted and will not be abandoned. The civilized nations of the world have committed themselves to the general policy of levying taxes, so far as possible, in propor- tion to ability, not disability ; according to strength, not weakness; and as the thrifty man is usually the able and the strong man, he will continue to pay most of the taxes. One of the incidental dis- advantages of this ability principle is the fact that it does to a degree tend to discourage thrift. But you cannot build a tax system on incidentals. The proposal to build a system of taxation on sumptuary principles penalizing waste and thriftlessness, re- warding thrift and industry has been repeatedly made in the past and deliberately rejected. It is impracticable, for one thing, because the more it succeeds, the less revenue it yields."* * Adams, Address at Fourth Annual Meeting of Life Ins. Presidents, 1910, p. 62; Zartman, Investments of Life Ins. Cos., pp. 221-224. 15 DOUBLE TAXATION. The double taxation argument is entitled to thoughtful consideration. It and the contra argu- ment are so nearly balanced that the two economists just cited reach apparently opposite conclusions, as to whether assets held in trust for policy holders should or should not be taxed. In Professor Adams' argument, mainly pre- sented, in form, as that of an impersonal doubter, he declares that "double taxation is not necessarily, but is actually as practiced in this country an abomination ;" that "the proposal to exempt credits is largely but not wholly sound, and its unsound point leaves room for some taxation of the policy- holders of insurance companies by the several states in which they reside." This conclusion seems to be reached mainly upon two considerations : ( 1 ) That in most of the states credits are still legally taxable and some amount of tax, though relatively small, is actually collected therefrom, and that credits held as life insurance assets are not entitled to exemption if other credits are to remain taxable. (2) That "there is a prac- tical and a theoretical flaw in the demand for credit exemption. People owe some obligation to pay taxes at the place where they reside." The latter consideration seems to have much greater weight with Professor Adams than the former. He says : "Here's John Smith, who lives in Indiana and has all his money invested in a street railway in Illinois. The defendants of credit exemption would give 16 Illinois all the tax and Indiana none. They say to Indiana: 'Remit all taxes on John Smith be- cause the only property he owns in Indiana is a paper evidence of ownership of property situated wholly in Illinois, where it is fully taxed.' This advice is at best a counsel of perfection. Indiana never will resign her claim, and really ought not resign all her claim." There is no disposition to belittle this argument ; indeed, it is proposed to adopt all there is in it of merit. But it must be conceded that it loses some of its force when due consideration is given to the fact that the case of the individual resident in one district having his tangible property in another is offset to some extent by the cases of tangible prop- erty in his district held by residents of others. The multiplicity of such offsetting cases goes far toward establishing an economic equilibrium between tax- ing jurisdictions and modifies to some extent the seeming injustice of the single case so strongly put by Professor Adams. But perfect equilibrium is not secured. The holders of credits and other "paper evidences" of rights in tangible property located elsewhere reside in greater numbers in urban than in rural com- munities ; in the former there is less value of tangi- ble property in proportion to revenue necessities than in the latter, and herein is found seeming justification for some tax upon the holder of credits in the community in which he resides, notwith- standing the full taxation of the tangible property represented by such credits. 17 Of perhaps greater importance is the fact that, in the growing complexity of society, its higher standards of living, and of service through public agencies, with its corresponding increase in public expenditures, the increasing burden of taxation becomes less and less equitably distributed by the crude plan of the general property tax, whereby, in theory, tax burdens are apportioned by uniform rates according to the capital value of every kind of property, including that which, according to some views, is property merely by legal fiction. Neither in theory nor in practical administra- tion does it accomplish the highest degree of equality. In theory it fails to accomplish that equality of sacrifice which differentiates between the individual of small means and the one of large, and in practical administration it usually fails to secure in the assessment of the larger and more com- plex properties a valuation relatively equal to that placed on the smaller, simpler ones. It assumes, too, an economic untruth, that all kinds of prop- erty will bear the same degree of tax burden, measured by capital value. The constantly increasing burden of taxation tends to accentuate such inequalities and to in- tensify the demand for some measure of relief some plan whereby a portion of the burden will be placed on those better able to bear it than those who suffer greatest from the regressive workings of the general property tax. It is upon these imperfectly outlined considera- tions that justification is found for taxation of 18 inheritances and also taxes upon incomes beyond a reasonable minimum of subsistence. To the extent that such taxes may be reasonably imposed they may be justly placed upon credits or the in- come therefrom notwithstanding the taxation also of the actual property represented by such credits.* SHALL REAL ESTATE BE TAXED? There is general agreement that real estate owned by life insurance companies should be taxed in the district where located in the same manner and for the same purposes that other real estate in the same district is taxed. Ownership of real estate is not essential to the business of such com- panies. When they become such owners, the use to which the real estate is devoted does not differ in character from the use of other real estate in the same district so as to warrant any different treat- ment for purposes of taxation. *In a former report of the Tax Commission the taxation of credits was discussed at some length and the position then taken, rather broadly, was that such taxation was not only inexpedient but unsound in theory and tended to inequality of burden as between debtors and their creditors treated as one class and non-indebted property owners as another class one member of the Commission dissenting. It should be borne in mind that that discussion was directed primarily to the question of retaining or discarding that feature of Wisconsin's general property tax which required credits to be taxed upon a valuation basis at the rates imposed upon property generally. To that question the same answer would now be returned that was then given by those who declared the view just stated. The proposal of a low tax on credits as compared with general property was not then considered, or not as fully as it should have been, and some of the grounds now offered in justification of such low tax were not then suggested. At that time an income tax seemed far away, if not an impossibility, and the constitution for- bade the taxation of credits as property at any lower rate than that imposed on other property. 19 In its use it is in practical competition with all other real estate and presumably is equally remunerative to its owners. The great bulk of local tax burdens now rests upon real estate and must continue to do so for years to come. These burdens are heavy in most jurisdictions and no part should be exempted, wholly or partially, un- less clear and strong reasons demand it. Such reasons do not appear in respect to the real estate acquired by life companies. In prescribing special methods for taxation of various financial institutions and some other special interests, legislatures generally require the real estate owned by them to be taxed as other real estate. There seems to be no good reason why an exception should be made in respect to realty held by life companies. AS TO TAXATION OF OTHER ASSETS. While the state is not restricted in any legal sense to the assets of life insurance companies as the basis or justification for their taxation, it has been the purpose of some of the foregoing discus- sion to indicate that the existence of such assets constitutes the chief ground upon which the right to secure general revenue from such companies can be maintained. The ability of each company to contribute to the public revenue rests upon such assets or the income it receives therefrom, and the amount to be required from each should be measured accord- 20 ing to such ability rather than by a more arbitrary standard. This suggests at once the question whether the state shall impose taxes upon or with reference to all such assets as are held by its home companies and also subject foreign companies doing business here to such taxation as may be found expedient, or shall it measure its exaction of both domestic and foreign companies, as near as may be, by the amount of such assets equitably belonging to resi- dents of this state? The power of the state to pursue the former course is undoubted, for in legal contemplation the company is the owner of such assets, and such as consist of credits or other intangible securities have a legal situs for purposes of taxation in the jurisdiction in which the corporation has its loca- tion or legal domicile. But such assets, aside from the portion repre- senting the capital of stock companies, are virtually held in trust for the policyholders and equitably belong to them, and these policyholders, especially those of the larger companies, reside in all parts of the country. It is true that under the general property tax laws of the state, similar in this respect to the laws of other states, property belonging to trust estates is usually taxed to the trustee, be he guar- dian, executor or what not, precisely as if he were the absolute owner, and such of it as has its legal situs at the domicile of the owner is taxed to such trustee in the jurisdiction in which he resides with- 21 out regard to the place of residence of the persons for whose benefit the trustee holds it. This does not produce important inequalities between different taxing jurisdictions as applied to cases of relatively small estates, for they are sufficiently numerous in the course of years to offset one another so as to produce an approximate equilibrium. But the large accumulations of life insurance assets, consisting mainly of forms of property, which can hardly have a situs except at the domicile of the company, present a case which is exceptional, one calling for different treatment. As the tax on or on account of such assets falls ultimately upon the policy holders, simple justice seems to demand that each taxing jurisdiction, at least each state jurisdiction, should have such pro- portion of the total tax revenue as is borne, theoret- ically at least, by policyholders resident therein, and no more. Each state can secure, and in most instances does secure, that much from every foreign company doing business within its borders, and no satisfactory reason exists, it is believed, why any state should exact more from its home companies. Few, if any, of the several American states will relinquish the right to tax foreign companies, and such taxes when imposed will be somewhat in pro- portion to the assets of such companies equitably belonging to policyholders resident in the state which makes the exaction. If each state also taxes to the full all the assets of its home companies there will clearly be double taxation in one of its abominable forms. 99 On this point, in an addess delivered in 1908 before the annual meeting of life insurance presi- dents, Professor Zartman said in part : "The state in which a company is located does not have the moral right to levy a general property tax upon all the assets of such companies as happen to have their home offices in that state. No success- ful insurance company has gathered its assets, even for the most part, from the savings of citizens within the state where it is located. Its assets are the result of premiums that it has collected from very part of the country. These assets belong in large part to citizens of other states. Whatever rights the state may have in regard to the share of the assets belonging to its own citizens, it does not have the same right over assets belonging to citizens of other states." WHAT SHOULD BE THE TAX RATE? This is at once the most important and the most difficult feature of the problem. Upon the rate mainly depends the justice of the tax and the amount of revenue which the state may properly exact from life companies. By what test or standard shall the rate be ascertained? On this question very little help is obtainable from the legislation of the past. On no subject in the whole domain of taxation does there appear a wider variation in method of treatment or weight of burden than in the life insurance tax laws of civilized states the tax ranging from a nominal tax or none at all to one "as great as the traffic will bear," or greater; and in published discussion 23 of the subject there seems to be, so far as noted, very little to serve as a guide. At the fourth annual conference of the Inter- national Tax Association there was submitted the report of a committee previously appointed "to in- vestigate the question of life insurance taxation." The report was signed by Lawson Purdy, one of the ablest tax administrators and tax students in the country, president of the department of taxes and assessments, New York City ; George H. Noyes, general counsel of The Northwestern Mutual Life Insurance Company, and W. H. Daniels, professor of political economy, Princeton University. In reading the following excerpts from that report it should be borne in mind that the reso- lution under which the committee was appointed in effect required consideration to be given to the matter of uniformity in insurance tax laws as well as the general subject of taxation of life companies. In its effort to find a basis for uniformity the com- mittee was presumably influenced by the prevailing practice in this country of basing the tax upon premium receipts. Extracts From Report of Committee of Interna- tional Tax Conference. It is not the purpose of this committee to dis- cuss fundamental principles, but to confine con- sideration to the relationship between taxation and life insurance. Your committee is of the opinion that life insurance companies should contribute the expenses incident to their supervision by the state. Your committee has carefully considered many good reasons why life insurance should be exempt from taxation entirely except on the real estate owned by the insurance companies, especially be- cause life insurance enjoys no special privilege and is primarily a means of co-operating to distribute the cost of providing for dependent widows and children, and secondarily of saving a fund for old age. Nevertheless, the committee believes that the states will for the present demand considerable revenue from life insurance companies. Owing to the varied character of their business, there can be no one theoretically correct method of taxing them, but a common ground should be found upon which both the state and insurance companies can harmoniously stand. ***** Life insurance companies occupy a unique posi- tion in the business world. While properly classi- fied as private corporations, they are not among the productive or industrial corporations, nor, with a few exceptions, those organized for profit. They act merely as receivers, investors and distributors of funds placed in their hands for administration. Their assets, which consist mainly of credits, are held solely to pay policyholders, and their con- tracts of insurance are not instrumentalities of commerce. In their connection with the state they are subject to more supervision than individuals and less than public service corporations. They may naturally be placed in a separate and distinct class, and are entitled to a method of taxation adapted to the character and extent of their operations. * * * * * Your committee has considered many theories in connection with the subject, including plans for the taxation of income, reserve, assets, surplus, and so-called "investment features," but finds them all more or less subject to grave objections. It thinks the most convenient and practicable 25 tax for the present is in the nature of a license fee for the privilege of doing business. A reasonable tax would be one just sufficient to cover the necessary cost of supervision, but your committee reluctantly yields to the practical de- mands of the state that life insurance companies should contribute a larger amount to its revenue. Life insurance companies operate in the several states of the Union by courtesy, since they are not engaged in interstate commerce. They contribute to the revenue according to legislative enactments, the amount of their contribution being measured by the amount of business done with the policy- holders in each state. This amount is represented by annual domestic premium receipts. That this plan has met with favor is shown by the fact that of all states of the Union taxing domestic life insurance companies (twelve practi- cally do not tax them at all), twenty-seven base their license fee or "tax" on a percentage of do- mestic premium receipts, while forty-one adopt the domestic premium receipt basis in "taxing-' for- eign life insurance companies operating within their borders. Your committee approves of this prevailing method as the most convenient means now prac- ticable for the adjustment of existing tax inequali- ties and discriminations. ***** It must be admitted that there is no one sci- entific system of taxing life insurance companies; whatever is adopted must be simple and easy and certain of calculation. The legislative mind must not be confused by technical side issues. A license fee or tax measured by premium re- ceipts received in the state meets this desired re- quirement and bases the contributions of life insurance companies to governmental support on the amount of business transacted with policy- holders in the several taxing jurisdictions. 26 Concerning the rate your committee is of the opinion that the imposition of a tax of 1 per centum of domestic premium receipts upon all com- panies engaged in the business of life insurance would result in substantial and sufficient revenue to the several states and be an ample requirement from the companies. The fee should be uniform, and apply alike to domestic and foreign companies. Under existing laws the basis of domestic pre- mium receipts is generally recognized, but the rates vary materially, resulting in manifest discrimina- tion and injustice, and provoking retaliation. The revenue thus paid by way of license fee should be in lieu of all charges for supervision and all taxes except those locally levied on real estate. Resolutions Adopted by Conference. After receiving the foregoing report the Confer- ence adopted the following preamble and resolu- tions : Whereas, A tax measured by domestic premium receipts of companies engaged in the business of insuring lives in the several states is easily and accurately calculated, and accords with the amount of business transacted with the policyholders in the several states; therefore, be it Resolved, That it is the sense of the Conference that a uniform method of taxing the domestic pre- mium receipts of all companies, foreign and do- mestic, engaged in the business of insuring lives should be adopted in the several states of the Union. Resolved, That the Conference make no recom- mendation as to the amount of the rate. Thus, in the latest deliberations on the subject, the rate, the vital thing, is left "in the air," while in connection with the committee's suggestion of the rate of 1 per cent on domestic premium receipts 27 little is found to serve as a reason why that rate is selected rather than one higher or lower. From general knowledge of prevailing rates it may be seen that the adoption of the proposed 1 per cent rate would render the retaliatory laws of some other states inoperative, but this could not be accomplished in all states without removing all taxes upon foreign companies. It will be noted that the members of the com- mittee just mentioned are inclined to the view that life companies should be taxed, except in respect to real estate, only enough to defray the state's ex- pense for supervision and regulation, and that the tax itself should be by way of compensation for the privilege of conducting life insurance business, though the committee "reluctantly yields to the practical demands of the state" for a larger revenue. But as already indicated, the Commission vir- tually rejects this view in reaching its conclusion that life companies may legitimately be required to make reasonable contributions to general public revenues. It does not adopt the commonly entertained idea that tax contributions are merely payments by the citizen for privileges, protection and other benefits conferred by government, but takes the broader ground that revenue is an absolute necessity of government, and must be obtained, not in pro- portion to benefits received, but in proportion to the ability of citizens to pay. Consequently the Com- mission is not aided in its effort to discover the proper tax rate to be imposed, or the amount of 28 revenue the state may justly demand, by any study of the value of the privilege of conducting the busi- ness of life insurance, or of the expense incurred by the public for supervision and regulation of such companies. Nor is the Commission able to get much working knowledge of taxpaying ability from the premium receipts of the various companies. If such receipts were a serviceable index of ability, the assessment companies and fraternals would be found to possess ability hitherto unsuspected, and the companies writing "industrial" policies and those whose poli- cies are largely recent contracts would be classed as possessing ability of equal degree with those whose policies are largely paid up or well advanced toward maturity and have great reserve accumu- lations behind them. Hence the conclusion that ability must be de- termined by the accumulated assets of the com- panies and that the rate must be determined largely with reference to what such assets can reasonably and justly bear, having reference so far as prac- ticable to experience with similar assets otherwise employed in other enterprises. As already observed, the assets of life com- panies, other than real estate, consist mainly of credits and other interest or dividend bearing securities. The necessity for safety and reliability of life insurance contracts compels the companies to invest in securities of the highest grade, and these, of course, yield only low interest rates. The tax which 29 life companies should pay on account of such assets may be determined by the rate which can be justly and reasonably imposed generally upon securities of that character, assuming, as before indicated, that no sufficient reason exists for giving life com- panies preferential consideration. TAX KATE MUST BE LOW. Keasons have already been presented for the conclusion that such rate must be low. Taxation of such assets at the rates ordinarily imposed upon general property presents not only the case of full double taxation, but a rate which is in large degree confiscatory. The average rate of taxation on general prop- erty in cities is estimated to be not far from 1% per cent on true value of property assessed. The highest grade of securities do not average to yield much, if any, in excess of 4% per cent. A tax rate of 1% per cent upon face value of such securities would take one-third of the income. Such burden amounts to partial confiscation, when it is considered that the security is but rep- resentative of an interest in property already taxed at or near the rates imposed upon general property. The situation as affecting life companies may be illustrated by taking a concrete instance : The assets of The Northwestern Mutual Life Insurance Company, of Wisconsin, excluding real estate, amounted on January 1, 1911, to $271,595,- 259.87. 30 The proportion of such assets equitably belong- ing to Wisconsin policyholders is about 7 1/3 per cent, or |19,918,796.35* The company's annual income on this amount at the average rate of its income on all its assets for 1910 (4.557 per cent) is $907,699.55. An ad valorem tax on the Wisconsin portion of such assets at the average tax rate in Wisconsin for the year 1910 as computed on estimated true value of taxable general property such rate being .01117968554 (nearly 11.18 mills) would amount to $222,685.88. This would equal 24.53 + per cent of the annual income from such assets. It will per- haps be serviceable to note in this connection that the amount of taxes required of the same company for the year 1910 (paid February 28, 1911) under existing Wisconsin law was $450,704.78, which is 49.65 + per cent of such income. The unjustifiable excessiveness of such rate of taxation on assets of this character seems manifest. The practically universal failure of the attempt to impose ordinary general property tax rates upon credits is due largely, it is believed, to the excessive weight of the burden. The average individual feels the injustice and will evade if possible ; the average assessor realizes it and makes little effort to prevent the evasion. This is shown in the results of efforts in this country to secure revenue from credits and kindred *Ascertained by proportion of insurance in force on lives of Wisconsin residents ($79,227,755) to the company's total insurance in force January 1, 1911 ($1,080,139,708). 31 intangible assets evidences of interests in tangible property otherwise taxed by reducing the rate to so low a figure as to take away any substantial justification for evasion. Such results are highly instructive. In the city of Baltimore, about 1896, the local rate on credits was reduced to three mills on the dollar. To this was added a varying state rate sometimes as great as 1.7 mills, making a total rate of between four and five mills a fairly stiff rate for that sort of assets. The result was that the amount of such assets listed for taxation in- creased from about $6,000,000 under the old regime of attempted full rate taxation to above $150,- 000,000 some twelve years later. In Connecticut the rate is reduced to four mills and in Pennsylvania it is also four mills on the dollar. In both instances substantial revenue is produced, although it is not doubted that some evasion is still practiced, accurate information on that point being, of course, impossible. PEOPER TAX KATE. The low rates just referred to afford very strong light on the question of what is the proper rate to be imposed upon such assets, whether in the hands of life insurance companies or others. Additional light is gained from the practice pre- vailing in those states which undertake to tax savings banks and the deposits therein by a different rate than that imposed under the general property tax. 32 It has been impracticable to ascertain such rates so as to state them precisely by averages or other- wise owing, in part, to the great number and variety of exemptions and exceptions; but enough has been learned to render it fairly safe to say that such rates average not higher, probably lower, than the rates imposed upon general credits in Baltimore, Connecticut and Pennsylvania. In Connecticut the rate on savings deposits is 2% mills, and this is probably not far from the prevailing rate elsewhere. More instructive, perhaps, are the rates imposed where substantial income taxes prevail. Income taxes are not generally relied upon as the sole or chief source of state and local municipal revenues, but are ordinarily supplemental to other forms of taxation. Speaking broadly, they are imposed in part upon incomes derived from property otherwise taxed, much as a tax upon credits is a super tax with reference to the tax upon the tangible property which the credits represent. Indeed, income taxes are precisely that in so far as income from credits is subjected to the tax. Being in effect a super tax so far as relates to credits, and also in respect to some other forms of property, and being also sup- plemental to other methods of taxation, the rates in general are low as compared with ordinary rates on general property. The British income tax rate is perhaps as typical as any except when income taxes are the main reliance for general revenue. That rate in recent years has been usually one shilling in the pound, or 5 per cent of the income above a moderate exemp- 33 tion for the "minimum of subsistence." Prior to the Boer war it was materially less than that, but during that war it was somewhat more. While precise calculations are impracticable, it is believed that a 5 per cent income rate is not far from the average prevailing in most income tax countries except, as before indicated, where the income tax is a chief source of revenue. KATE AS PROPOSED IN GENERAL INCOME TAX BILL. The Commission has also given consideration to the pending bill for an income tax in Wisconsin reported by a special committee of the Legislature of 1909. The tax proposed in that bill will be mainly supplementary to other taxes and in the nature of a surtax as to some forms of property, but is intended, however, to afford an apportion- ment of tax burdens more nearly in proportion to ability than seems possible under present laws. But in respect to credits the tax proposed in this bill- that is, the income tax bill will be in lieu of all other taxes, as indeed it should be. Now, the rates proposed in that bill, graduated from 1 per cent up to 6 per cent, would not average above 5 per cent except in the case of very large incomes, and then only in respect to the excess above the exemptions allowed. In the case of the average moderate in- come the average rate would be materially less than 5 per cent. In this connection it seems proper to note that the assets of life companies, being held in trust 34 for a multitude of policy holders, may justly be considered as representing a great number of indi- vidual estates, mostly small or only moderate, rather than a single great accumulation belonging to one person or corporation. In the recent address of Professor Adams, al- ready mentioned, it is suggested, indirectly and tentatively rather than otherwise, that a rate sub- stantially equal to the average rate which may be roughly estimated from the amount of revenue now secured from credits under the general property tax laws may be taken as approximately the rate to be imposed on the credit assets of life companies ; and in that connection he roughly estimates, on data partly assumed, that assets of this character in the hands of private individuals "on the average are taxed at the rate of from six to seven hundreths of 1 per cent, about one-fourth or one-fifth as much as the similar property of insurance companies is pay- ing," the country over. The Commission has not felt warranted, how- ever, in taking as a guide or standard the results, or want of results, of the attempt to tax credits under the general property laws in order to deter- mine what life companies should pay on that sort of assets. If the attempted taxation of credits under the general property law is a farce, as is generally admitted, with' occasional tragedy to emphasize the farce, would it not be equally farcical to employ the average results of such taxation in an effort to establish a real and a logically defensible tax for life insurance companies? 35 FIVE PER CENT A PROPER RATE. As stated in its special report, the Commission concludes that 5 per cent of the income from assets, other than real estate of life companies, is the proper standard or measure for determining the amount such companies should contribute to the public revenues, in addition to taxes upon real estate, applying such rate to the income from assets equitably belonging to policyholders resident in the state. There is, perhaps, room for contention that, in respect to stock companies, such rate should not be computed upon the assets which represent cap- ital stock, assuming that the stock itself is taxed or some tax is imposed upon stock companies on account of capital. But the capital invested in such companies is employed for profit much the same as capital employed in other financial insti- tutions. If business enterprises in general are to be sub- jected to a supplementary burden in the form of a moderate income tax, it would appear equally justi- fiable to subject the income from assets representing the capital of stock life companies to the corre- sponding burden of the low tax now proposed. The legislative bill submitted with the Com- mission's special report does not allow any deduc- tions of assets representing capital stock in com- puting the tax. If such tax should be made in lieu of taxes upon the capital of stock companies it would afford 36 such companies some degree of immunity and advantage over mutual companies and a much lighter burden of taxation than is borne by banks, trust companies and like financial institutions in this state, so far as relates to the moneyed capital invested therein.* Of course, the 5 per cent income rate suggested is not ascertained by definite statistical or other precise calculation. It is not perceived that any rate may be calculated arithmetically from any data known to be available. If it were sought to secure an assumed total of revenue from life companies, the ascertainment of a rate or rates to produce it would be a simple and definite matter of computation, but the problem, as understood by the Commission, is to ascertain not what such companies shall or can be forced to pay, but what amount of tax can be reasonably and justly imposed. This involves a study of ability, of the character and functions of the assets out of which ability grows and the rates by which ability may be measured in practical administration. The nature of the inquiry is such that the answer to be returned must be quite largely a matter of human judgment. It is not claimed that the judgment exercised in this instance is infallible, but there has been *Where, by charter provisions or otherwise, there are limitations upon the amount of profits which the share holders of stock companies may receive on account of the capital employed, the case would be different from that of other financial institutions where no limitation is im- posed, and such difference might be sufficient to warrant some difference in treatment in tax legislation. 37 earnest effort to acquire as much of the knowledge requisite to intelligent judgment as possible within the time thus far available. AS TO PREMIUM RECEIPT BASIS OF TAXATION. As is well known, the prevailing practice in the American states is to use premium receipts as the basis for determining the amount of tax which life companies shall be required to pay, though there is great variation in respect to the rate imposed on such receipts. This prevailing practice is largely due to the fact that such method is simple, certain and inex- pensive in administration. This fact, and the prevalence of the method, doubtless had much weight with the committee of the International Tax Association in making its recommendation of that method to the Conference of the Association in 1910, already mentioned. In deference to that practice and to such recom- mendation the Commission was at first disposed to approve such method after first ascertaining the amount of revenue which should accrue from a tax worked out by the test and standard of a mod- erate rate upon income. It was soon observed, however, that premium receipts of the various companies doing business in Wisconsin bear no uniform relation to the assets of those companies respectively. The companies carrying large amounts of so-called industrial insur- ance collect much larger amounts in premiums in 38 proportion to reserve assets required to meet the obligations of those contracts than the premium receipts needful for the ordinary type of policy; and the companies which have a large proportion of paid up or well matured policies in force collect, of course, a smaller amount of premium receipts in proportion to reserve assets than those having a less proportion of such policies. This want of uniform relation between premium receipts and assets will be shown more fully in statistical tables to accompany the general report of the Tax Commission; and a well settled convic- tion that income producing assets constitute a far more just and accurate test or measure of ability to pay than premium receipts has led the Commis- sion to abandon the idea of premium receipts as the basis for the tax on life companies, and to recom- mend, as indicated in the report and accompanying bill, that the tax be determined by direct application of the proposed 5 per cent rate to income from assets. This would be an income tax in effect, but in order to reach and tax foreign companies the tax should be in form an excise or charge for the privi- lege of conducting life insurance in the state, and it is so made in the bill mentioned. RECIPKOCAL OR RETALIATORY LAWS. The proposition stated in paragraphs 8 to 15, inclusive, of the Commission's special report deal primarily with the situation resulting from the re- taliatory laws of other states. It is not believed 39 that these require very much elucidation or ampli- fication. The general purpose and tenor of such laws may be briefly stated. New York, for example, enacts that companies of that state and of other states shall pay a tax of 1 per cent on premium receipts in that state. This is the regular tax. It enacts further that if any other state shall impose a higher tax on New York companies than the regular tax in New York, the companies of such other state shall pay the same higher tax in New York. This is the retaliatory feature. Its purpose is to prevent as much as pos- sible the excessive taxation in other states of the companies of the state enacting such law. In some states no "regular" tax is imposed, but by a "recip- rocal" law each company of another state is re- quired to pay a tax proportionately equal to that required in its home state. Ketaliatory and reciprocal laws of the char- acter just mentioned are often deprecated and their abolition advocated. They have legitimately served their purpose in some instances, however, as in the case of excessive taxation of foreign com- panies in Wisconsin under the act of 1867, men- tioned in an earlier part of this discussion. The possibility of the repetition of such legislation is probably sufficient to keep such retaliatory laws in force, and there is little reason to expect their repeal so long as there is such wide variance be- tween the laws of the several states in respect to the amount of taxes to be paid by life companies. When, if ever, such laws become substantially 40 uniform, the retaliatory laws will become corre- spondingly inoperative. If their existence and enforcement will tend to secure such uniformity that fact would furnish an additional reason for their retention. A PLAIN QUESTION OP EIGHT AND WRONG. While fiscal legislation is a dry subject, it often involves questions of right and wrong, calling upon the legislator for the exercise of statesmanship and courage of the highest order. In the opinion of many citizens of the state, and of many people of other states, Wisconsin has achieved enviable distinction in the enactment of laws designed to correct abuses and secure equality of right and obligation among her citizens. The credit for such achievement is due largely to the moral fibre and manly courage of the rep- resentatives of the people who have sat in her leg- islative halls. Within recent years they have dealt with the taxation of various forms of accumulated capital with a view to establishing equality and justice, and in the laws enacted great advancement was made, it is believed, toward the object sought. While these enactments called for courage and fidelity to duty, they made no call upon legislators to relinquish accustomed revenues. A greater test is now before you. If the conclusions reached by the Commission on the subject now under consideration are approx- imately correct, it becomes a plain question of 41 right and wrong whether Wisconsin shall continue to exact from life companies and the holders of life insurance policies the amounts demanded under present laws. Can Wisconsin afford to lower her standard of righteousness in legislation? Will her legislators fail to uphold that standard merely because it will cost the loss of a substantial amount of revenue from a source from which too much has heretofore been exacted? UNIVERSITY OF CALIFORNIA LIBRARY BERKELEY Return to desk from which borrowed. This book is DUE on the last date stamped below. ; JUL241957 AUG 20 LD 21-100m-ll,'49(B7146sl6)476