SEPARATION OF STATE AND LOCAL REVENUES IN THE UNITED STATES BY MABEL NEWCOMER, A. M. Instructor in Economics in Vassar College Sometime Garth Fellow in Economics in Columbia University SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN THE FACULTY OF POLITICAL SCIENCE COLUMBIA UNIVERSITY NEW YORK ** 1917 EXCHANGE SEPARATION OF STATE AND LOCAL REVENUES IN THE UNITED STATES BY MABEL NEWCOMER, A. M. Instructor in Economics in Vassar College Sometime Garth Fellow in Economics Columbia University SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN THE FACULTY OF POLITICAL SCIENCE COLUMBIA UNIVERSITY NEW YORK 1917 \1 PREFACE The problem of the separation of state and local rev- enues is one which has received much attention recently from students of finance and state officials, and while it has not yet been widely adopted it is almost invariably discussed when financial reforms are under consideration. In this monograph, the writer has endeavored to make a comparative study of separation in those states where this aspect of the relation of state and local revenues is most prominent attempting to ascertain the causes of its growth, its relation to increases in revenue and ex- penditures, and its effect on the distribution of the tax burden. The writer wishes to take this opportunity to acknowl- edge her indebtedness to Professor Stephen I. Miller of Leland Stanford Junior University for suggesting the subject of the monograph, and to Professor Edwin R. A. Seligman, under whose direction the study has been made. Thanks are also due to Professor Robert M. Haig for much helpful criticism, to Professor Carl C. Plehn of the University of California and Mr. A. C. Pleydell of the New York Tax Reform Association for reading portions of the manuscript and for making many valuable sug- gestions, and to those state officials who have courte- ously supplied the writer with information not available in their published reports. MABEL NEWCOMER. COLUMBIA UNIVERSITY, APRIL 23, 1917. 299] 5 o 8 CONTENTS [ 302 Section Page CHAPTER VI PARTIAL SEPARATION IN NEW JERSEY 1. State and Local Tax System 92 2. Effects of Separation 96 CHAPTER VII PARTIAL SEPARATION IN VERMONT 1. History of Taxation in Vermont 104 2. Effects of Separation in CHAPTER VIII PARTIAL SEPARATION IN WEST VIRGINIA 1. History of Taxation in West Virginia 119 2. Effects of Separation 1 23 CHAPTER IX SEPARATION IN CALIFORNIA 1. Introduction 127 2. History of Taxation in California 128 3. Achievement of Separation in 1910 137 4. Administration of the New Law 145 5. Litigation 149 6. Shifting of the Tax Burden 149 7. Revenues and Assessments Under the New System 157 8. Growth of Expenditure 158 9. Administrative Changes 170 10. Outlook 171 CHAPTER X MOVEMENT TOWARD SEPARATION IN THE UNITED STATES AS A W T HOLE . . 176 CHAPTER XI CONCLUSIONS 182 BIBLIOGRAPHY 192 CHAPTER I INTRODUCTION I. FAILURE OF THE GENERAL PROPERTY TAX IN the United States at the present time there exists a growing dissatisfaction with the state and local revenue systems. Such dissatisfaction is not new nor is it peculiar to this country, but a number of causes have contributed in making the problem unusually serious here in recent years. Revenue systems are rarely kept abreast of needs. By the time a need has become sufficiently acute to be felt, analyzed, and met with proper legislation, conditions have often so changed that such legislation is inadequate, if not positively injurious. Hence the satisfaction lags behind the manifesta- tion of the need, and discontent arises in approximate pro- portion to the lag. If, as seems to be the case, the need is not met as quickly in the United States as in other pro- gressive countries, the fact may be attributed in part to more rapid development, and in part to less effective governmental machinery, although greater unwillingness to submit to unsatisfactory conditions may be held accountable for much complaint. And if, as is undoubtedly the case, dissatisfac- tion has increased in the past few decades, this may be at- tributed on the one hand to the rapid growth of expenditures resulting from increasing governmental activities, and on the other to the development of such varied forms of wealth and such complex industrial conditions that the locally admin-' istered general property tax, which is so widely employed in 303] 9 I0 SEPARATION OF STATE AND LOCAL REVENUES [304 this country, is no longer adequate to meet the situation. 1 As long as land was plentiful and other forms of wealth comparatively scarce as long, that is, as agriculture com- pletely overshadowed manufacturing in importance the general property tax was not grossly unjust or very op- pressive. But with the increase of intangible property and the extension of business beyond local and beyond state boundaries an increasing amount of taxable property evades its share of the tax, and our rapidly increasing expenditures must be met by a tax on a narrowing base. The general property tax, employed by practically all countries during some phase of their development, has been abandoned as the main source of revenue by all well de- veloped countries, with the exception of Switzerland, Aus- tralia and the United States ; and it is no longer adaptable to the conditions existing in these countries. 2 Arising as a simple way of producing the necessary revenues in small agricultural communities, it has been allowed to remain, al- though never very satisfactory, and long since outgrown. Under present conditions it not only fails to reach much intangible property but it permits of gross inequalities in the assessment of tangible property. Further, the right of the locality to derive taxes from corporate property within its jurisdiction is often questionable. It is in order to abolish unequal local assessments (or at least to avoid the evil consequences of such inequalities), to reach corporate property, which comprises a large share of intangible property, and to do away with the unequal distribution among local divisions of the proceeds from the tax on public utilities, that separation has been proposed. 1 Cf. Edwin R. A. Seligman, Essays in Taxation (Revised Ed., 1913), p. 347 et seq. 2 Ibid., p. 140. Switzerland may constitute in the minds of some an exception to this statement. 305] INTRODUCTION ll This last reason Professor Plehn holds to be the controlling one. Equal assessment, he believes, may be obtained in other ways, and also satisfactory taxation of corporations, but only through separation can the satisfactory distribution of taxes from public utilities be realized. 1 However, it is generally considered to be primarily an administrative re- form, designed so to improve the machinery of the revenue system that taxes may be levied and collected with an ap- proach to justice and efficiency. " The separation of state and local revenues is not a cure," says Professor Seligman, " but it will help to make a cure possible." 2 2. MEANING OF " SEPARATION OF STATE AND LOCAL REVENUES " The term " separation of state and local revenues " is ap- plied to various methods of taxation. When first proposed as a definite fiscal measure it was used to denote a system in which state and local revenues are derived from wholly independent sources. This practically means that there shall be no state tax levied pn general property, the state revenue being obtained from taxes on special classes of property which are exempted from local taxation. This method, separation of the sources of state and local revenues, is the one ordinarily designated by the term, and the one most widely adopted in the United States, although in no case has such separation of sources been strictly observed. As defects in this system have been revealed, various modifications and substitutions have suggested themselves. These have been advanced under the name of separation as possible improvements over the first system. One important 1 Proceedings of the Ninth National Conference on State and Local Taxation, 1915, p. 51. Hereafter these Proceedings will be referred to as Conference. 2 Seligman, op. cit., p. 351. 12 SEPARATION OF STATE AND LOCAL REVENUES [306 modification, first suggested (1899) by Mr. Allen Ripley Foote * in order to obviate the inelasticity of revenues and the danger of extravagant state expenditure, is the intro- duction of apportionment by expenditure, viz., that the state revenue required in addition to the yield of special taxes shall be derived from a direct tax on property, ap- portioned among the local divisions according to local re- venue or expenditure instead of according to assessed valu- ations. This is as effective as separation of source in equalizing assessments, and if used only as a supplementary tax does not seriously interfere with the other benefits of separation. More recently Professor Plehn has advanced another method which he designates as " pure separation," as dis- tinguished from " segregation/' The latter term he ap- plies to separation of source, i. e. to systems where property is classified for taxation and divided between the state and the localities, it being a matter of indifference whether the various classes of property are taxed in the same way or in different ways. " Pure separation " occurs where different taxes are used by the state and the localities, although these taxes may be derived from the same source. The California method of reserving corporate property for the state and assigning the property of natural persons to the local divis- ions is segregation ; whereas a system employing the general property tax for local purposes and an income tax for state purposes would be pure separation. Separation of source, with certain modifications, is the method which has been most widely advocated and most generally applied in the United States, and consequently it is the method most frequently discussed and most vigorously opposed. This is the form of separation which will be considered in this monograph. 1 Seligman, op. cit., p. 359 n. 2 Conference, 1915, p. 58. 307] INTRODUCTION I $ 3. THEORY OF SEPARATION In examining either the efficiency or the equity of a revenue system two relations must be considered : first, the relation of the individual to the state; and second, the relation of the central to the local governments. In other words there are two fundamental problems to be solved, the problem of the distribution of the burden of revenues among the inhabitants of a state on the one hand, and on the other the problem of the division of administration and of yield among the various jurisdictions. One solution has been offered for both of these problems. 1 It is to charge in proportion to benefit for those services the individual benefit of which is measurable and to make the administration of such services and the administration and use of the revenues derived from them local functions. Services, on the other hand, the benefit from which is general and cannot be assigned to particular persons or properties, are to be made state functions, and the revenues necessary to perform such services are to be derived from taxes im- posed according to ability or faculty. The advocates of this system do not go so far as to say that all functions should be divided between the localities and the state according as the individual benefit is or is not as- certainable. They would not radically change present sys- tems. Rather they assume that the present division of state and local functions corresponds roughly to such a scheme. They are merely attempting to* analyze present conditions. Unfortunately in practice the dividing line between matters of general and matters of local concern is very vague. The fact is that the variations in different countries and com- 1 See discussions in C. F. Bastable's Public Finance (3d ed., London, 1903), pp. up et seq., 393 et seq.; Seiigman, op. cit., p. 478; G. Schanz, " Zur Frage des Steuer Prinzips bei den Gemeinde-Steuern," Finanz- Archiz', 32 Jhrg., erster bd., pp. 54-55- I4 SEPARATION OF STATE AND LOCAL REVENUES [308 munities at the same time, and at different periods of time, are so great that it is scarcely safe to call any function dis- tinctly local or central. The division suggested does not exist, and even if it could be satisfactorily made the locali- ties would still be confronted with the difficulty of assigning the overhead expenses of the general government, the special benefit of which is not determinable. The final objection to such a scheme is that, both in theory and in practice, the criterion of ability, in so far as ability can be measured, is being accepted and applied in many cases where the individual benefit is determinable. The use of special assessments is growing rapidly, and such assessments are determined by benefit; moreover, benefit is the primary consideration in charging incorporation fees or gas rates, and it is still customary to cover at least the cost of service in supplying water or transportation facilities. But in these latter instances, at least, it is an open question whether the gain in well-being which might be obtained by charging only a nominal sum would not make it advisable to operate such utilities at a loss. And in the matter of education, where special benefit is largely measurable, the criterion of benefit has long since been abandoned. In truth the standard of ability promises to supplant that of benefit in a large number of cases where the individual benefit is obvious ; so that even if it might be conceded that local affairs were always those conferring special benefit it would not always follow that the localities might defray the cost of their activities from fees collected in carrying them on. This standard that state revenues should be in accordance with ability, and local rev- enues in proportion to benefit was advanced, and to some extent applied, in Prussia as the standard for assigning rev- enues to the state and local governments when revenues were separated by the reforms of I895. 1 No attempt has been 1 Seligman, op. cit., p. 478 ; Schanz, op. cit., pp. 54-55- 309] INTRODUCTION ^ made, however, to apply this standard where separation has been introduced in the United States. Other principles have been observed, both in assigning the sources to each division of government and in justifying such assignment. Ability, as measured by progressive rather than propor- tional taxes, is now the generally accepted principle for divid- ing the burden among individuals. Although progressive taxes are at best a crude measure, they are more nearly exact than proportional taxes; they at least approach our present conception of justice ; and they have the additional advantage of producing large revenues. Consequently they are widely favored. But no such well-recognized guiding principle has been offered to solve the other problem, that of administration and division of revenues; and it is with the solution of this problem that separation in the United States is concerned. In practice, administration and use of revenues have usually gone together, especially in the United States, though even here there are some notable exceptions. But this would not seem to be necessary. The choice of the administrative agent may be determined primarily by administrative effi- ciency, i. e., the collections of the various revenues may be put into the hands of that authority best able to collect them, whether or not they are to be used by that authority. 1 Ad- ministrative efficiency is not always dependent on use, nor can it of itself be accepted as justification for use. Use, or division of yield, must be determined by some less tangible principle of right or need. Consequently this problem, which is the fundamental problem of separation, resolves itself into two distinct parts. These must be solved separately, for the most satisfactory results cannot be obtained by always com- bining administration and use as under separation of sources. 2 1 Bastable, op. cit., p. 393 ct seq. 2 Ibid., p. 404 et seq. I4 SEPARATION OF STATE AND LOCAL REVENUES [308 munities at the same time, and at different periods of time, are so great that it is scarcely safe to call any function dis- tinctly local or central. The division suggested does not exist, and even if it could be satisfactorily made the locali- ties would still be confronted with the difficulty of assigning the overhead expenses of the general government, the special benefit of which is not determinable. The final objection to such a scheme is that, both in theory and in practice, the criterion of ability, in so far as ability can be measured, is being accepted and applied in many cases where the individual benefit is determinable. The use of special assessments is growing rapidly, and such assessments are determined by benefit; moreover, benefit is the primary consideration in charging incorporation fees or gas rates, and it is still customary to cover at least the cost of service in supplying water or transportation facilities. But in these latter instances, at least, it is an open question whether the gain in well-being which might be obtained by charging only a nominal sum would not make it advisable to operate such utilities at a loss. And in the matter of education, where special benefit is largely measurable, the criterion of benefit has long since been abandoned. In truth the standard of ability promises to supplant that of benefit in a large number of cases where the individual benefit is obvious ; so that even if it might be conceded that local affairs were always those conferring special benefit it would not always follow that the localities might defray the cost of their activities from fees collected in carrying them on. This standard that state revenues should be in accordance with ability, and local rev- enues in proportion to benefit was advanced, and to some extent applied, in Prussia as the standard for assigning rev- enues to the state and local governments when revenues were separated by the reforms of 1895. 1 No attempt has been 1 Seligman, op. clt., p. 478 ; Schanz, op. cit., pp. 54~S5- 309] INTRODUCTION jcj made, however, to apply this standard where separation has been introduced in the United States. Other principles have been observed, both in assigning the sources to each division of government and in justifying such assignment. Ability, as measured by progressive rather than propor- tional taxes, is now the generally accepted principle for divid- ing the burden among individuals. Although progressive taxes are at best a crude measure, they are more nearly exact than proportional taxes; they at least approach our present conception of justice ; and they have the additional advantage of producing large revenues. Consequently they are widely favored. But no such well-recognized guiding principle has been offered to solve the other problem, that of administration and division of revenues; and it is with the solution of this problem that separation in the United States is concerned. In practice, administration and use of revenues have usually gone together, especially in the United States, though even here there are some notable exceptions. But this would not seem to be necessary. The choice of the administrative agent may be determined primarily by administrative effi- ciency, i. e., the collections of the various revenues may be put into the hands of that authority best able to collect them, whether or not they are to be used by that authority. 1 Ad- ministrative efficiency is not always dependent on use, nor can it of itself be accepted as justification for use. Use, or division of yield, must be determined by some less tangible principle of right or need. Consequently this problem, which is the fundamental problem of separation, resolves itself into two distinct parts. These must be solved separately, for the most satisfactory results cannot be obtained by always com- bining administration and use as under separation of sources. 2 1 Bastable, op. cit., p. 393 ct seq. 2 Ibid., p. 404 et seq. !6 SEPARATION OF STATE AND LOCAL REVENUES [310 If it be conceded that the authority administering revenues need not be the same as the authority using them, effi- ciency would seem to be the most reasonable standard for determining the best administrative agent. And efficiency is in fact the criterion which is being widely accepted, so widely indeed that separation of sources has been largely determined on this basis, 1 while the problem of deciding which authority can best use the proceeds has been made a secondary consideration. As a result of this and of hesita- tion to separate administration and use there is a tendency to assign to the state the proceeds of those sources which it has been found can be better administered by the state. Then in order to provide the localities with revenues they have been assigned the general property tax, as the least ob- jectionable tax for local administration. Whether local administration of this tax is more efficient than state admin- istration is questionable ; 2 but as long as administration and use are combined it would seem to be the only feasible division. This is the foundation on which separation has been based. But it has been further fortified by a justification quite un- related to efficiency of the use of revenues by those juris- dictions to which they have been assigned from motives of expediency. This justification is simply that values should be taxed only by that government whose people have created them, that, to give a specific instance, a few power plants supplying electricity to an entire state should be taxed by that state, and not by the counties where the most of their 1 As shown by the later detailed discussion it has been the failure to enforce the general property tax which has led to the introduction of state-administered special taxes and to the consequent growth of separa- tion. Cf. also Report of the Commission on Revenue and Taxation (Sacramento, 1906), p. 81 ct seq. 2 Conference, 1907, p. 523. 3 n] INTRODUCTION ! 7 property happens to exist, and whose people contribute little or nothing to the value of the plants. In spite of the fact that the presence of corporate property in a municipality often occasions considerable local ex- penditure, this theory of allocation of revenues has been generally accepted by the advocates of separation ; x not only does it seem reasonable that those who create values have the best right to share in them, but such a division also cor- responds, at least roughly, to needs, since increases in values and in governmental expenditures follow the growth of population. This division has not been, and cannot be, ap- plied with great precision. Much of the wealth taxed by the state is created by local conditions; much is of national or international origin. But although the value of certain cor- porations may be of distinctly local origin while that of certain real estate, especially in commercial centers, may be of state, national or even international derivation, still the assignment of corporate property to the state, and of other property to the localities, probably accords in the main with the division advocated ; and whether or not such a division is realized it does improve the effectiveness of administration, and satisfies in large measure the needs and claims of the different jurisdictions. This is the justification of separa- tion as it has been realized, and the basis on which further separation is advocated. 4. ARGUMENTS FOR AND AGAINST SEPARATION Accepting these as the underlying principles upon which separation has been built, attention can now be given to the specific advantages and disadvantages advanced in support of, or in opposition to. the measure. When it was first ad- 1 Seligman, op. cit., pp. 352-353; >C. C. Plehn, "Tax Reform in Cali- fornia," Conference, 1911, pp. 116-117; H. C. Adams, Science of Finance (New York, 1899), pp. 501-502. jg SEPARATION OF STATE AND LOCAL REVENUES vocated as a definite financial reform, one of the chief ad- vantages attributed to it was that it would lead to home rule, or local option, in taxation. 1 In fact it was called a home- rule measure. It was supposed that, since the removal of the state tax would do away with the necessity of uniform systems, the local divisions would then be given some free- dom to adapt their systems better to their varying needs. The liberty specifically desired was the liberty to exempt personalty, and in some cases improvements on real estate. However, this is no longer so widely advanced as an argu- ment in favor of separation. Whatever the advantages of home rule, and its value is at least debatable, it is a distinct issue. 2 Separation opens the way, but home rule need not follow, and has not followed. Nowhere has it been adopted, nor does the demand for it seem to 1 be growing. 3 A second argument advanced by the advocates of separa- tion combines the principles that taxes should be adminis- tered by that agency which can administer them most effi- ciently, and that the yield of taxes should be assigned to 1 Commission on Revenue and Taxation, 1906, p. n; Conference, 1907, P- 495- 2 Seligman, op. cit., pp. 367-368. 3 An increasing number of local-option amendments are brought up for consideration annually in various western states, but their regular defeat does not suggest that they are growing in popularity. Attempts to obtain local option in California since separation has been introduced have been uniformly unsuccessful. (Cf. infra, p. 173). Limited local option exists with separation in Vermont. Here localities have permis- sion to exempt the property of mining and manufacturing corporations for ten years. ( Cf. infra, p. 109) . Rhode Island, without separation, gives the localities the privilege of exempting certain property. (Report of the Board of Tax' Commissioners, Rhode Island, 1913, p. 41.) In Colorado, also without separation, Pueblo exempted improvements on real estate from local taxation by a charter amendment under the general home- rule powers granted to Colorado cities, but the amendment was re- pealed in 1915, (Y. Scheftel, Taxation of Land Value [Boston, 1916], pp. 456-457). This is the extent of local option in the United States. 313] INTRODUCTION ! 9 that authority, the patronage of whose people occasions the value taxed. This argument is that separation is in accord with the natural division of governmental activities and fol- lows the principle already laid down in the separation of national and state revenues. Some tax subjects, such as real estate, are purely local in character and are more easily as- sessed by local officials, while other subjects, such as in- surance companies, do a state business, and can be more easily reached by the state. Great injustice often arises from leaving corporate property to local taxation, for it fre- quently occurs that valuable property lies in comparatively undeveloped regions, which do not contribute appreciably to its support, and do not need the large revenues it yields. 1 The remaining arguments are all in support of the as- sertion that separation brings improved administration. In the first place it is maintained that it removes the diversity of interests, and consequent conflicts, between city and county, which interfere with the enacting of good laws. The counties are constantly complaining that they are pay- ing an undue share of the state tax, since a greater pro- portion of their property than of city property is in tangible form. 2 The argument most often brought forward is that separ- ation will tend to equalize assessments, or at least to elimin- ate the disadvantages of inequalities. Low and unequal as- sessments are prevalent throughout the United States. It is not unusual for assessed valuation of real estate to vary from 20 to 80 per cent in a single state and when personalty is included even greater variations occur. 3 While many 1 Cf. arguments advanced in Seligman, op. cit., p. 352 et seq., and in Conference, 1915, p. 51. 2 Seligman, op. cit., p. 356. 3 Reports of Minnesota Tax Commission, 1908-1912, passim; Report of the Illinois Tax Commission on the Tax System, 1910, p. 21 et seq. 20 SEPARATION OF STATE AND LOCAL REVENUES [314 causes, among them political considerations and ignorance on the part of assessors, are responsible for these inequali- ties, it is held that one of the principal factors is the state tax on general property apportioned according to assessed valuation. So long as the taxpayers of a county where property is assessed at fifty per cent of real value have to pay in state taxes only half as much, relatively, as the tax- payers of a county where property is assessed at full value, there will always be a tendency among the counties to com- pete in undervaluing their property. The removal of the state tax will eliminate this incentive to undervaluation, and the local assessors, it is claimed, will then raise their ratio to approximately full value, particularly as a high assessment will permit of a low tax rate, a consideration in. local advertising. And even if this should not occur, with no state tax the principal objection to inequalities is removed. This abolishes the need of state equalization, which has never been very successful. 1 It is further claimed by proponents of the measure that the redistribution of the tax will equalize the burden as be- tween different kinds of property. 2 A partial shifting of the tax from real estate to intangible property will result the state corporation tax reaching intangibles more success- fully 3 and greater equality will thus be attained, since real estate is paying more under the general property tax than other property. Objections to all of these arguments are advanced by 1 Seligman, op. cit., p. 22. Professor T. S. Adams, however, believes that equalization has not yet been given a fair trial, and that under in- telligent and centralized control it would prove entirely successful. (Cf. discussions in Conference, 1907, p. 527, and Annals of the American Academy of Political and Social Science, vol. Iviii, pp. 138-139). 2 Commission on Revenue and Taxation, 1906, pp. 79-80. 3 State corporation taxation is an essential feature of all schemes of separation thus far adopted. 315] INTRODUCTION 21 opponents of separation. 1 Considering home rule first, they agree that it is encouraged by separation, but they consider it to be undesirable. However, home rule, as indicated above, 2 is a distinct problem, and whatever its advantages or disadvantages it need not be considered here. Concerning the conformity of this system to the natural divisions of governmental activities the opponents object, with reason, that there is no necessary relation between the two; that control should be determined by convenience and efficiency of administration, taxation by fiscal needs, and owing to the united 'political and social organization of the state and local divisions these needs can be better satisfied by a unified revenue system. 3 With regard, further, to the relation of revenues to needs under separation, it is claimed by opponents that it takes away from the cities their great source of revenue; conse- quently the burden probably falls most heavily on them, and they are already overburdened with municipal taxes, for city expenditures are rising more rapidly than any other. Quoting Professor T. S. Adams: What separation actually does is to substitute for a conscious distribution of state burdens in accordance with the value of property, an unconscious, unseen, and more or less haphazard distribution, which shifts the burden we know not where, avoids the evils of faulty equalization according to property by flying to other ills we know not of. 4 Professor Adams further says 1 See discussions by Professor T. S. Adams (Conference, 1907, p. 515 et seq.}, by Professor C. J. Bullock (Quarterly Journal of Economics, vol. xxiv, p. 437 et seq.,} and Professor J. E. Brindley, (" Problem of Tax Reform in Iowa," Conference, 1910, p. 155). 2 Cf. supra, p. 18. 8 Conference, 1910, p. 156. 4 Conference, 1907, p. 523. 22 SEPARATION OF STATE AND LOCAL REVENUES Unless the presence of property at a place has no connection with public expenditure of that place, unless the right to exploit the commercial opportunities of a place creates no obligation to pay taxes at that place, . . . then street car com- panies, heating and lighting plants, most banks, and some tel- ephone companies owe most of their fiscal allegiance to fairly well defined local districts, and when these local districts are deprived by the state of the power of taxing such corporations they are saddled with burdens of state taxation which belong elsewhere. 1 Diversity of interest, it is maintained, will not be removed. The burden must fall somewhere, and it will result in oppos- ing the interests of city and rural, of manufacturing and residence districts. 2 Concerning the equalization of assessments the opponents argue that the desire to avoid state taxes is a minor cause of undervaluation, the state tax being always a small propor- tion of the total. 3 To obtain fair valuations requires ex- pert treatment which only the central government can give. 1 Conference, 1907, p. 525. 2 Quarterly Journal of Economics, vol. xxiv, p. 449. 3 Though the state tax amounted only to n.6 per cent of the total property tax in the United States in 1902 it is not on that account a negligible factor. As Professor Seligman points out (op. cit., pp. 355-356) the proportion of state to county expenditure is larger than the proportion of county to town expenditure. The ratio for the general property tax, with which alone assessments are concerned, was, 1913, 49.1 per cent (state to county) as compared with 42.6 per cent (county to town). In the less developed states this ratio is reversed, (46 per cent as compared with 283 per cent in Arizona, 1913), and even in California before separation the proportion of county to town revenues from general property greatly exceeded the proportion of state to county. However, in the more developed states, comprising most of those considering separation, the proportion of state to county taxes is by far larger, even where separation exists in a measurable degree. (Computed from data in Census Report, Wealth, Debt and Taxation, 1913, vol. ii.) 317] INTRODUCTION 23 Unequal assessments are due rather to the inherent difficul- ties of the task, political pressure, personal considerations, insufficient time and pay given to the assessors, and the de- sire to evade the county tax. The need of equalization remains. In addition to these objections it is argued that separation leads to wastefulness. Lack of a direct tax prevents the people from feeling the burden. 1 Counties and municipali- ties will urge state expenditure because the burden falls on corporations, and corporations will urge county and muni- cipal expenditure to retaliate, and because of benefits ac- cruing. 2 The result is extravagance. People in general lose interest, and corporations are forced into politics. Finally the opponents of separation contend that it will give no elastic state tax, and will lead either to insufficient state revenue or insufficient local revenues. 3 The propon- ents of the measure, however, argue that state revenue may be supplemented, if necessary, by a tax apportioned accord- ing to local expenditure, although the possibilities of special taxes are by no means exhausted, the desired elasticity may be obtained by making variable one tax, e. g. the inheritance tax, by the accumulation of a surplus, or by the use of apportionment by expenditure; and local revenue may be increased by the division of the state surplus. 4 Separation, as has been said, 5 is not in itself a reform, but opens the way to reform. It makes possible more efficient administration, and reaches sources which escape under the general property tax. The end sought is improved adminis- tration and increased revenues through the abolition of the 1 Quarterly Journal of Economics, vol. xxiv, p. 454. 2 Report of the State Tax Commission of Arizona, 1912, p. 25, 3 Quarterly Journal of Economics, vol. xxiv, p. 453. 4 Seligman, op. cit., p. 358 et seq. 5 Supra, p. u. 24 SEPARATION OF STATE AND LOCAL REVENUES state general property tax and the substitution of more just and effective special taxes. All alike agree that improved administration is desirable, but the opponents of separation believe that this is not the way to obtain it. They offer in- stead apportionment by expenditure, 1 or centralized admin- istration without reference to separation. 2 5. SEPARATION IN FOREIGN COUNTRIES Although separation has arisen in the United States only in dealing with the problem of the general property tax it has been introduced into other countries for other reasons. France and Belgium, to be sure, cling to a unified system in which local taxes are derived from the same sources as cen- tral taxes, 3 and subventions are largely resorted to, the whole system being highly centralized. 4 In England, how- ever, although administration is closely controlled by the central authorities, the national and local governments have no taxes in common except the probate duty which is administered by the central government and returned in part to the localities. The national government levies taxes on incomes, on some forms of personalty, and, since 1910, on land. The localities are supported by local rates on real estate (quite distinct from the national land taxes), certain licenses and subventions. Although the na- tional and local authorities share none of their taxes (with the one exception named), this system involves very little separation of source. 5 In Switzerland, where the general property tax is still widely used, the local tax systems are 1 Conference, 1911, p. 253 et seq. 2 Conference, 1907, p. 526. 8 The changes made in the land tax in France, 1914, have not inter- fered with its use as both a central and local tax. The new income tax (1914), however, is, as yet, used only for central purposes. (Jour- nal des Economistes, 6 ser., tome 49, 1916, p. 277 et seq.) 4 Grice, J. W., National and Local Finance (1910), ch. vii-xiv. 5 Ibid., chs. ii-vi ; see also Seligman, op. cit., p. 482 et seq. 319] INTRODUCTION 2 $ for the most part combined with those of the cantons, the local taxes being in the form of additions to the canton taxes. In the French cantons the tendency is toward highly centralized administration like that of France, but in the German cantons a considerable degree of local autonomy in administration is granted. There is, however, no appreci- able degree of separation. 1 In Prussia, and to a considerable extent throughout Ger- many, fairly complete separation exists. The fiscal system of Prussia was revolutionized by several laws passed in 1893 and put into effect in 1895. The principle underlying the reform was that, owing to the difference in the relations of the citizens to the state and to the town, state taxes should be levied according to ability, and local taxes according to benefit. Consequently it was provided that the state income tax, already in use, should be supplemented by a property tax, and the land, building and business taxes should be abolished as state taxes. Local revenue was to be derived mainly from fees and special assessments, and direct taxes on real estate and business. Limited use of indirect taxes and of a local income tax was also permitted. While these laws have developed a number of defects 2 they seem, as a 1 F. Ott, Die Vermogens- und Einkommens-Steuer in der Schweiz (Zurich, 1914), passim. 2 This system (which exists in a number of states) is severely criti- cized by Dr. Schanz. Separation has resulted in higher taxes on real estate than on other wealth in some cases the ratio is five to three which, he argues, is indefensible, since the owners of real estate are no more benefited by local expenditure than the owners of other wealth. He believes that local taxes, like state taxes, should be in accordance with ability, since state and local functions are much the same, and in so far as the different jurisdictions perform the same sort of services they should obtain their revenues in the safne way. (Finanz-Archiv, 32 Jhrg., p. 54 et seq.) This criticism does not apply to separation in the United States. No general attempt has been made to levy local taxes in accordance with benefit and one of the chief aims of separation has been to reduce the burden on real estate. 26 SEPARATION OF STATE AND LOCAL REVENUES [320 whole, to have proved satisfactory, and the resulting separa- tion of the state and local revenues is generally considered to be a great advance over the former system. 1 Canada has developed a satisfactory system of taxation wherein complete separation of provincial and local revenues exists in all of the nine provinces. By the British North American Act of 1867 the federal government retained all of the customs duties and excises, and the provinces were restricted to licenses and direct taxes. The former were small and the latter were entirely in the hands of the muni- cipalities. Consequently, in order that the provinces might not be embarrassed by insufficient revenues the act pro- vided further that the federal government should assume the provincial debt, and grant to the provinces specific sub- sidies, and in addition the revenue from the crown lands or an indemnity in place of it. The revenues collected by the provinces themselves arise, for the most part, from corpora- tion taxes, licenses and fees. The municipalities obtain their revenue mainly from direct taxes on property and business. 2 6. SEPARATION IN THE UNITED STATES During the colonial period and in the early history of our states, the general property tax, outside of New Eng- land, was not widely used, except as a local tax. Many of the colonists were unaccustomed to such a tax, and the slight need of revenues and the existence of other large sources which later disappeared made its use unnecessary. Before the Revolution the import duties formed an important source of revenue, and later, when these were taken from the 1 Seligman, op. cit., p. 437 et seq. 2 S. Vineberg, " Provincial and Local Taxation in Canada," Columbia University Studies in History, Economics and Public Law, 1912, vol. Hi, PP. 153-156. 321] INTRODUCTION 27 states, large revenues were obtained from licenses, lotteries, state investments, and the sale of public lands. 1 Direct taxes were early used to a limited extent, but these took the form of taxes on specific subjects rather than all property, and assessments were made on arbitrary values in- stead of on selling values. 2 These taxes were first com- bined into a general property tax in the New England States during the early nineteenth century. The Middle Western States followed, making the general property tax the cen- tral tax of their fiscal systems as they entered the Union. During the era of internal improvements the second quar- ter of the century the Middle Atlantic States were forced to resort to this tax, and the Southern States followed shortly afterward. 3 In the North and West the tax was readily accepted, but the Southern States endeavored, with some success, to check its growth by developing business license taxes, and the Middle Atlantic States only turned to it when their reckless, and for the most part unsuccessful, policy of state aid to internal improvements forced them to obtain larger revenues. However, the general property tax was so generally accepted, when it was finally introduced, that only in Delaware and Pennsylvania has it never become an important state tax; yet owing to the earlier absence of such a tax in many states, and the large dependence on in- direct sources in others, separation, partial or complete, existed in most of the states until nearly 1850.* The separation thus existing was not, however, adopted 1 R. T. Ely, Taxation in American States and Cities (New York, 1888), bk. ii, chs. i-ii; J. H. Hollander, ed., "Studies in Taxation," Johns Hopkins University Studies, iios. 1-4, 1900; for systems of states discussed in this monograph, cf. infra, passim. 2 Ely, op. tit., p. 132. 3 Seligman, op. cit., pp. 16-17. * Ely, op. cit., passim ; Hollander, op. cit., passim. 28 SEPARATION OF STATE AND LOCAL REVENUES [332 consciously as a desirable fiscal principle. The property tax, which was a burden to all, was unpopular in many of the states, and for the most part there was no difficulty in obtaining sufficient revenues without it. When greater revenues were needed the direct tax was resorted to for state and local purposes, as the simplest means of supplying the growing needs. The new system abolished separation, and no attempt was made to retain it. It was believed by some 1 that the direct tax would check extravagance, but the con- tinued large expenditures in New York after the introduc- tion of the direct tax, and the reckless investments of Massa- chusetts, and later Michigan, where the general property tax was well established, 2 do not suggest that the absence of a direct tax was the main cause of extravagance. Separation was abandoned unconsciously, as it had been employed un- consciously, with no intelligent consideration of its desir- ability or undesirability. It was not even thought of, ap- parently, as a definite fiscal principle. In the attempt to meet growing expenditures the state tax on property was rapidly developed, and during the third quarter of the nine- teenth century it became practically universal. With the paying off of the state debts incurred during the Civil War taxation again became very burdensome ; and the agitation arising in the attempt to lighten this burden brought with it the realization that the general property tax, introduced to meet the earlier need, was inadequate for this new and greater demand. With changing conditions the tax was proving defective. Corporations were rapidly in- creasing, and with them intangibles, which the general prop- erty tax failed in large part to reach. During the last quarter of the nineteenth century the emphasis was shifting 1 E. g., Report of the Comptroller, New York, 1844, p. 76. 2 Cf. reports of financial officials of these states. 323] INTRODUCTION 29 from property to the income from property, the growth of corporations being probably largely responsible for this also ; for investments in stocks and bonds were increasing, and property consisted more and more of rights to the income from wealth rather than the concrete items of wealth them- selves. Further, the government was restricting the rights of private property. 1 This change soon manifested itself in the field of taxation. On the one hand, to tax property, valuable because of the expected future yield of income, though yielding little or nothing at the time of taxation, was obviously a hardship. On the other hand, the failure to reach large incomes arising from intangible wealth (such as is now designated as corporate excess, good will or fran- chise value) caused gross inequalities, which were felt to be even more flagrant as the principle of progressive taxa- tion, the logical development of the faculty theory, grew. Inequalities of assessment of all forms of property only added to the difficulties. Persistent but unsuccessful efforts were made to enforce the general property tax as it stood. Almost equally in- effective attempts were made to devise new taxes to reach personalty. Then the plan of classifying property was tried, different methods of taxation being applied to the different classes. Under this system it was found that cer- tain taxes could be satisfactorily administered only under central control, and it naturally followed, in many cases, that the state appropriated for its own use the revenue from such taxes as it administered, and relinquished to the local- ities as compensation other taxes, which they were more cap- able of handling. This process, distinguishable nearly half a century ago, is still going on today. In this way the separation of state and local revenues has again arisen un- 1 Principally through the regulation of corporations. 3 SEPARATION OF STATE AND LOCAL REVENUES [324 consciously, and it has been and still is in many places growing in this way, an incidental result of other changes. Consequently all states obtain a part of their revenue under the principle of separation. Along with its incidental growth, however, separation has been advanced as a definite reform, and this advocacy of separation, as in itself a step forward, has unquestionably been an important factor in the attainment of separation in such states as New York, where the movement was initiated through classification; and in one state, California, separa- tion was adopted as a conscious reform without any pre- liminary development of special taxes. CHAPTER II SEPARATION IN DELAWARE COMPLETE separation of revenues exists in Delaware, not as the outcome of slow, planless development in the struggle to increase revenues, or as the result of a con- scious effort to equalize burdens, but as a survival of the widespread system existing in this country in the early nine- teenth century, before the general property tax had grown to its present supremacy. License taxes and revenues from investments have sup- plied the state with considerable income, although decreas- ing in importance, and for a time before 1800 the general income tax was used, and later a poll tax. 1 The general property tax was employed only occasionally, and for brief periods, first from 1798 to 1804, again from 1814 to 1819, then in 1833, and finally from 1869 to i877. 2 The failure to establish the general property tax is due to the control of the legislature by agricultural interests and to the relatively small need of revenues. While per capita wealth is com- paratively small ($1,493 m I 9 I 3 as compared to $1,965, the average for the United States) so also is per capita state expenditure ($3.15 in 1913 as compared with $3.95, the average for the United States). 3 Moreover the state has profited by revenues from the corporations which it has encouraged to incorporate there. A large debt has never 1 Ely, op. cit., p. 122. 2 Report of the State Revenue and Taxation Commission (Delaware, 1909), P. 45- 3 Wealth, Debt and Taxation, 1913, vol. i, p. 26 ; vol. ii, p. 40. 325] 31 32 SEPARATION OF STATE AND LOCAL REVENUES [326 accumulated and the problem of taxation has never become acute. The question of revenues has been further simplified by the fact that the constitution permits classification. This has made it possible to introduce special corporation taxes. In 1820 a tax was imposed on the capital stock of banks. 1 This tax was extended to national banks in 1866, and the rate was reduced in 1869. At present certain banks pay one-fourth of one per cent on paid-up capital. Others pay one-fifth of one per cent on capital stock, surplus and un- divided profits, and are exempt from all other taxes. 2 A passenger tax was placed on steamboats in 1821, and on stage coaches in i829. 3 Railroads, however, were not taxed until 1864. The Delaware Railroad, chartered in 1836, had been granted a fifty-year exemption, but in 1864 a passenger tax was placed on all transportation companies. Five years later railroads were subjected, in addition, to a number of special taxes, on net earnings, capital stock, locomotives, pas- senger cars and freight cars. This complex system was suspended in 1873, the various taxes being commuted for lump sums determined by the legislature. 4 This, except for changes in the amount of the lump sums due, is the method of taxation used today. Insurance companies were first taxed in 1869. At present life-insurance companies pay two per cent on general prop- erty less return premiums and reinsurance. Other com- panies pay one and one-half per cent on gross premiums, except domestic fire insurance companies which pay $100 annually. Life insurance companies pay in addition a franchise tax of three-tenths of one per cent on gross 1 Revenue and Taxation Commission, 1909, p. 65 et seq. 2 Wealth, Debt and Taxation, vol. i, p. 491. 3 Revenue and Taxation Commission, 1909, p. 21 et seq. 4 Ibid., p. 22. 327] SEPARATION IN DELAWARE 33 premiums and three- fourths of one per cent on surplus. Other insurance companies pay a franchise tax of three- fourths of one per cent on gross premiums. 1 Telegraph and telephone companies pay 20 cents to 60 cents per mile of wire, and telephone companies pay in addi- tion 25 cents per transmitter. Both also pay a franchise tax of one per cent on gross receipts within the state. Express companies pay six per cent on gross earnings of interstate business plus $250 license fees. They also pay a franchise tax of one per cent on gross earnings. Steam, gas and electric companies pay one mill on gross receipts ; also a franchise tax on gross receipts of two-fifths of one per cent, which, in the case of companies with dividends in excess of four per cent, is in addition to a tax of four per cent on such excess dividends. Pipe lines pay a franchise tax of three-fifths of one per cent and parlor car companies pay one of one and one-half per cent on gross earnings. All mercantile, manufacturing and miscellaneous corpor- ations doing less than fifty per cent of their business in the state are subject to a tax which runs from $5 on capital of $25,000 or under to $25 per $500,000 on capital of $1,000,000 and over. These companies are subject also to various license taxes, some of which were so reduced in 1907, at the instance of the manufacturers paying them, that the state has suffered a serious loss of revenues. Finally all corporations are subject, upon incorporation, to the charter mill tax of ten cents per $1,000 capital, with a minimum of $10. This is the largest single source of revenue in the state. Such is the system of corporation taxation in Delaware. Expediency, apparently, has been the sole guide. Almost every conceivable base has been experimented with, and in 1 For a complete account of the present revenue system see Wealth,. Debt and Taxation, 1913, vol. i, p. 491. 34 SEPARATION OF STATE AND LOCAL REVENUES [328 consequence there are rather serious inequalities. But the taxes have not been heavy and the system has produced revenues ample for the state's needs. An inheritance tax, first imposed in 1869, yielded in 1915 approximately 1.5 per cent of all revenue. 1 It is a col- lateral tax of one to five per cent graded according to rela- tionship, on all estates over $500. The return from state investments yields about the same amount. There are no other important sources of state revenue, aside from the cor- poration taxes already mentioned, and licenses. There has been a steady, but not large, increase in rev- enues. Revenues of the general fund increased 61 per cent in the twenty years from 1873 to 1893, and 123 per cent in the twenty years from 1893 to 191 3. 2 Revenues are rising more rapidly than this in over half of the states. 3 The rev- enues of the general fund in 1915 were $810,300. They were distributed as follows : TABLE I REVENUES OF THE GENERAL FUND, 1915* Source Amount Percentage Railroads $112,000 13.8 Telegraph and telephone 14,400 1.7 Express 2,500 0.3 Franchise tax 96,700 11.9 Incorporation fees 1 1 7,400 14.5 Bank and insurance 73>4 9-O Licenses 156,900 19.3 Inheritance tax 11,100 1.4 Dividends 11,900 1.5 Other 214,000 26.6 Total 810,300 100.0 1 Computed from data in Annual Report of the State Treasurer of Delaware, 1915. 2 Computed from data in Auditor's Report for 1873 and Treasurer's Report for 1893 and 1913. 8 Wealth, Debt and Taxation, 1913, vol. ii, pp. 36-39. 4 Compiled from data in Report of State Treasurer, 1915. 329] SEPARATION IN DELAWARE 35 The local divisions depend almost entirely on the general property tax. In 1913, 72 per cent of local revenue receipts came from this source. 1 This tax has a wide base since the only property reserved for state taxation is the railway right of way. In consequence it is not especially burden- some and the localities have no difficulty in obtaining ample revenue. The average tax rate in 1912 was $1.91 per $100 assessed value. This makes the rate on actual value of real estate $1.02, if the rate of assessed to true value in the census report 2 may be accepted. This is not a high rate. There has been but little centralization of the adminis- tration of local taxes. 3 One assessor is elected for each " hundred " 4 and it is his duty to assess the property of corporations as well as of natural persons. The only equali- zation obtained is through the board of revision of assess- ment of each district, which is composed of the assessor and two citizens appointed by the levy court. The functions of this board are to supervise and equalize assessments. There is no equalization between counties. 5 All state revenues are collected by the treasurer, except certain licenses which are collected by the clerks of the peace. A collector appointed by the governor investigates state- ments of taxable property filed with clerks of the peace. This system is fairly satisfactory, largely owing to the fact that the demands on it are light. It has never been called upon to meet the test of heavy expenditures. Conse- quently it is of little significance in the study of separation 1 Compiled from data in Wealth, Debt and Taxation, 1913, vol. ii. 2 Ibid., vol. i, p. 16. 3 Ibid., vol. i, pp. 489-493. 4 The local unit of assessment. 5 Wealth, Debt and Taxation, vol. i, p. 492. 36 SEPARATION OF STATE AND LOCAL REVENUES [330 of sources of revenues. It is in the more highly developed states, where the enormous growth of expenditures has made development of revenues an exceedingly difficult and serious problem, that the advantages and limitations of separation can best be judged. And it is in these states, where the greatest strain has been put upon financial systems, that separation has been most often introduced. CHAPTER III SEPARATION IN PENNSYLVANIA I. HISTORY OF TAXATION IN PENNSYLVANIA PENNSYLVANIA'S experiments with special taxes led her early to fairly successful taxation of intangibles. 1 As a re- sult this state, like Delaware, has never depended long on the general property tax for state revenues, although for a few years it became the principal source of revenue. A state direct tax was first levied in 1785, but being found to be both unsuccessful and unnecessary it was dis- continued in 1 789. The receipts from the sale of public lands and the interest on state investments supplied the larger part of state revenues for many years. These sources yielded 26.4 per cent and 36.2 per cent, respectively, of all state revenues in 1810 as compared with 23.6 per cent from taxes which were mostly license taxes. 2 Specified classes of personal property were first taxed by the state in 1831, at the rate of one mill. In addition a one-mill state tax was added to all real and personal prop- erty taxed locally. These realty and personalty taxes were levied for only five years, it being confidently expected that the income from canals, railroads and other public works, whose cost of construction was the occasion of the levy, would soon be sufficient to support the state. 8 They were 1 Infra, p. 38 et seq. 2 Ely, op. cit., p. 45. 3 T. K. Worthington, "Historical Sketch of the Finances of Penn- sylvania." American Economic Association Publications, vol. ii, no. 2, p. 38 (1887). 33i] 37 38 SEPARATION OF STATE AND LOCAL REVENUES [332 consequently given up in 1836. Money received from the federal government through the distribution of the surplus in 1837, and through the United States Bank rechartered by the Pennsylvania legislature, sufficed the state until I84O. 1 But the canals and railroads, failed to yield the returns an- ticipated, and the debt became so large that it was found necessary to take definite action in this year. A law was enacted imposing taxes on bank stock, certain classes of per- sonalty and the salaries of state officials. But this was en- tirely inadequate. In 1839, expenditures had exceeded revenues, exclusive of loans, by over five million dollars ($6,971,000 as compared with $1,900,000), yet the new sources were expected to yield scarcely more than half a million, and actually did yield somewhat less. Loans neces- sarily continued, but the credit of the state was so poor that it was found necessary first, in 1841, to obtain money through state " bills of credit " which was unconstitutional, and then, in 1842, to pay interest to creditors by means of interest-bearing certificates. 2 This serious financial condition of the state finally aroused the people so that the legislature was forced to pass more decisive measures for relief. In 1843 tne sa l e f state secur- ities and public works was considered. Two-thirds of the stock was sold in this year and the sale of public works was attempted the year following, but was not actually accom- plished until i858. 3 The most important measure was the enactment in 1844 of a law subjecting to taxation for state and county purposes all real estate not specifically exempt, all personal estate, corporate stock, bank capital and indi- vidual incomes. The proceeds of these taxes were devoted to the payment of the interest on the debt. Revenues from 1 Worthington, op. cit., p. 42. 2 Ibid., p. 55 et seq. 3 B. M. Nead, Financial History of Pennsylvania, 1682-1881 (Harris- burg, 1881), p. 23 et scq. 333] SEPARATION IN PENNSYLVANIA 39 taxes and licenses rose, following this law, from $396,000 in 1843 to $1,113,000 in 1844, and to over $2,000,000 in I846. 1 In 1845 tne tax on rea l an d personal estate alone supplied $1,318,332. This was the largest single source of revenue. Canal and railroad tolls, which were the next largest source, yielded $i,i54,592. 2 In addition to increas- ing revenue, the state practiced real economy in expendi- ture, and the credit of the state was at once restored. The debt was not reduced appreciably the years immediately fol- lowing, but in 1849 a sinking fund was established, being supplied by the proceeds from the inheritance tax and the taxes on charters and various licenses. This system supplied ample revenues until the outbreak of the Civil War, when new special taxes were created. For the next twenty years the state continuously enacted and repealed laws in the effort to adjust revenues to needs, but with all the changes there was a rapid growth in corporation taxes and a steady decline in taxes on other property. The state tax on real estate was repealed in 1866 and has never since been imposed. In 1873 and 1874 taxes on horses and cattle, and on corporate loans, were repealed. 3 Many other changes were made in the years following, and in 1885 the personalty tax was completely revised in a notable effort to reach that part (estimated to be 85 per cent of the whole) which was escaping. The state tax was reduced from 4 to 3 mills ; mortgages and other evidence of indebtedness were exempted from all local taxation; and provision was made for the better recording of such mortgages to make the state tax more effective. 4 1 Worthington, op. cit,, p. 63 et seq. * Report of the Auditor General of Pennsylvania, 1843, p. 5. 3 F. M. Eastman, Taxation for State Purposes in Pennsylvania (1898), pp. xii-xiii. 4 Ibid., p. 152. 4 o SEPARATION OF STATE AND LOCAL REVENUES [334 This act completed the separation which had been started with the exemption of realty from the state tax in 1867. There was a sharp division of sources. The localities de- pended on realty, and certain forms of tangible personalty exempt from state taxation; the state depended on person- alty, principally intangible, reserved exclusively for the state and reached through a variety of taxes. In 1889 one-third of the tax on personalty was returned to the local districts in lieu of all claims for collection. This proportion was raised to three- fourths in 1891 and the rate on personalty was raised again to four mills. In 1913 the tax was abolished as a state tax, such personalty as was subject to it being turned over to the counties to be taxed by them at the same rate. 1 The state still retains its tax on the loans of private and municipal corporations. This is the extent of Pennsyl- vania's experience with general taxes. Only at intervals be- tween 1831 and 1866 was any real general property tax levied. The first important special tax was one on bank dividends imposed in 1814. This was made a graduated tax in i835. 2 In 1840 banks were subjected, in addition to this, to the capital stock tax imposed in that year. Both the scope and the rate of these taxes were slightly increased by later changes, making banks, as compared with other corpora- tions, heavily taxed. In 1866 certain reductions were made, and changes, sometimes unimportant, sometimes vital, but mostly in the form of reductions and exemptions, were made frequently thereafter. The most sweeping changes took place in 1881 when an optional tax on the par value of stock was offered in lieu of all other taxes except real estate; in 1889 when the rate of this tax was raised and the tax was 1 Wealth, Debt and Taxation, 1913, vol. i, p. 642. 2 Eastman, op. cit., p. 89. 335] SEPARATION IN PENNSYLVANIA 4I made compulsory; and in 1897 when the system was unified and equalized by abolishing the distinction between stock taxable to the bank and shares taxable to the individual and placing on all banks a 4 mill tax on actual value, with the option of a 10 mill tax on the par value of all shares. 1 No attempt was made to reach other corporations until 1840, except for the one mill state personal property tax of 1831, which included corporate stocks. But in 1840 a tax was imposed on the dividends of all domestic corporations, and later extended to joint stock companies. This was changed to a capital stock tax in 1844, and this tax, with some changes, still exists. Manufactures were exempted by the laws of 1879 and i885. 2 In 1849 premiums and deposits of foreign insurance com- panies received within the state were specially taxed. Ex- cept for a reduction of the rate in 1889, this tax remains today. One-half of the yield is returned to the localities. Domestic insurance companies were not selected for special taxation until 1877, when an 8 mill tax was imposed on gross premiums and assessments received within the state. 3 All corporations, except transportation companies, not paying the state tax on dividends were subjected in 1864 to a tax on net earnings such as already existed (1861) for private bankers and brokers. This was later extended to unincorporated banks and savings institutions. In 1875 cor ~ porations subject to the capital stock tax and gross pre- miums tax were withdrawn from this act. 4 A specific tax was imposed on the loans of private cor- porations in 1864, to be collected from the corporations. Such loans had been under the personal property tax before this. The tax was repealed in 1874, but reenacted in 1879, 1 Eastman, op. cit., p. 89 et seq. * Ibid., p. 60. 3 Ibid., p. 107. *Ibid., p. no. 42 SEPARATION OF STATE AND LOCAL REVENUES [336 and revised several times thereafter. The present rate of 4 mills has been employed since iSQi. 1 In 1866 transportation companies were taxed on gross receipts within the state. This tax was repealed in 1873 but reenacted in 1877, the rate at this time being made 8 mills. 2 By the acts of 1868 and 1897 organization taxes were imposed on corporations at the rates of one- fourth and one- third of one per cent of authorized capital stock according to the character of the corporation. 3 In 1901 these were extended to the stock of foreign corporations employed within the state, and the base of the tax was made actual instead of authorized capital stock. In 1897 building and loan associations were brought under a tax similar to that on banks. This same year an annual excise tax was placed on express companies. The rates were average gross receipts per mile. 4 To sum up, at the present time a capital stock tax of 5 mills is imposed on all corporations, domestic and foreign, except banks, trust and foreign insurance companies, and manufacturing companies on stock engaged in manufac- turing within the state. A four mill tax on loans is placed on all private corporations (which act as the state's agents in collecting the tax from the individual owner) except such loans as are owned by domestic corporations paying the state taxes on capital stock, by national banks, or by non-residents. An 8 mill tax is placed on gross receipts of all transportation and transmis- sion companies, except gas companies, in addition to other taxes. Other corporation taxes are a 2 per cent tax on the premiums of foreign insurance companies (which is re- 1 Eastman, op. cit., p. 66 et seq. z lbid., p. 81. 4 Ibid., p. 121. *Ibid., p. 31 et seq. 337] SEPARATION IN PENNSYLVANIA 43 turned to the localities), an eight mill tax on domestic in- surance companies, five and four mill taxes on the capital stock, surplus and undivided profits of trust and banking companies respectively; ten mills on distilling companies; and fees of one-fourth to one-third of one per cent for in- corporation. 1 In addition to the receipts from corporation taxes the state has two other large sources of revenue licenses and the inheritance tax. Until 1913 the personal property tax was also an important source, although, with the exception of the tax on mortgages, it was never successfully enforced. Licenses, particularly mercantile and liquor licenses, have been depended upon from early times for large revenues. They are shared in part with the localities. The inheritance tax was introduced in 1826, when it was imposed on estates of over $250 going to collateral heirs, at the rate of 5 per cent. A direct inheritance tax was introduced in 1897, but was repealed in 1905. The tax on collateral inheritances remains as to rate and exemption as originally enacted. Except for the addition of a tax on anthracite coal imposed in 1913, 2 and a stock-transfer tax imposed in 191 5, 3 this system stands without material change today. 2. LOCAL TAXATION The localities obtain their revenues from taxes on occu- pations, which are virtually poll taxes, subventions from the state, taxes on real estate, horses and cattle, and, since 1913, vehicles for hire and certain intangible personalty including mortgages and other evidence of indebtedness, stock of cor- porations not taxed by the state, and all other moneyed capital in the hands of individuals. None of these sources is touched by the state. 1 Wealth, Debt and Taxation, 1913, vol. i, p. 637 et seq. 2 Ibid., p. 642. 3 Conference, 1915, p. 407. 44 SEPARATION OF STATE AND LOCAL REVENUES [338 The occupation tax yielded in 1913 only two per cent of all local receipts ; subventions amounted to five per cent ; and licenses, five per cent. 1 Taxes on realty and personalty sup- plied nearly half of all receipts. Other important sources were the earnings of public-service enterprises and of gen- eral departments, interest and rents. 3. SEPARATION IN PENNSYLVANIA The history of Pennsylvania's system of taxation, in so far as separation is concerned, may be divided into four periods: (i) the time previous to 1840, when, except for occasional brief intervals, no state direct tax was laid; (2) the period between 1840 and 1866, when the general prop- erty tax was the main source of revenues for both the state and localities; (3) the transition period from 1866 to 1885, during which the state relinquished first the real estate tax, and then the tax on horses and cattle, and the localities were deprived of the privilege of taxing such personalty as was directly taxed by the state; and (4) the period since 1885 during which complete separation of revenues has existed. " Separation of sources " is not, in the strictest interpre- tation of the term, complete. The inheritance tax paid to the state must be derived in part from the same source as the local tax on real estate; and certain corporations pay a local tax on real estate the value of which is included in the value of the capital stock taxed by the state. But these ex- ceptions are not significant. Most of the corporations pay- ing the capital stock tax are exempt from local taxes on the real estate included in the value of their capital stock. None of the loans taxed by the state is locally taxed and none of 1 Computed from data in Wealth, Debt and Taxation, 1913, vol. ii, pp. 122-123, 466-467. 339] SEPARATION IN PENNSYLVANIA 45 the personalty taxed by the localities is reached by the state. Separation of source is for all practical purposes complete. TABLE II 1 STATE TAXES ON REAL AND PERSONAL PROPERTY, 1841-1915 Date 1841. 1845- 1850. 1855- 1860. 1865. 1870. 1875. 1880. 1885. 1890. 1895. 1900. 1905. 1910. Total Receipts $5,380,800 3,010,100 4,438,100 5,390,500 3,479,500 6,220,000 6,336,600 6,480,100 6,720,300 8,179,700 8,625,900 12,030,000 17,494,200 24,269,100 28,895,400 30,157,000 Receipts from Realty and Percentage of Realty and Personalty Personalty Tax Revenues Taxes to Total $33,3 0.6 1,318,300 43-8 1,317,800 29.7 1,721,100 31.9 1,444,700 41-5 1,959,200 31.5 702,200 11.8 55^300 8.5 423,700 6-3 621,000 7.6 615,900 7.0 577,000 4-8 789,800 4-5 861,700 3-7 1,117,500 3-9 4. EFFECT OF SEPARATION ON LOCAL TAX SYSTEMS Under this system the real estate tax supplies the localities with their principal, as well as their only elastic source of revenue; and real estate in consequence, as compared with the personalty taxed locally and all of the property taxed by the state, bears a heavy burden. In 1907 real estate paid ap- proximately seventeen mills on assessed value, as compared with the four mill tax on personalty. In 1913 the ratio was eighteen to four. This difference would be even greater if true instead of assessed value were considered, since the greater undervaluation and evasion of personalty result in a lower average ratio of assessed to real value. A conserva- tive estimate would place the value of personalty on a par 1 Complied from Reports of the Auditor General. 46 SEPARATION OF STATE AND LOCAL REVENUES [340 with the value of realty, yet the assessed valuation of per- sonalty was only 24.7 per cent of that of realty in I9O4. 1 This, even allowing for the fact that much personalty, tan- gible and intangible, is not taxable in Pennsylvania, is un- duly low. One estimate 2 gives the value of taxable per- sonalty returned as 77 per cent of the actual taxable value in 1895; yet, though the increase in the assessed value of personalty has easily kept pace with the increase in the assessed value of realty, 3 less optimistic, and apparently equally reliable estimates 4 give the average ratio of assessed to real value as being well under fifty per cent and possibly only twenty-five per cent. It was estimated to average only twenty-three per cent of actual taxable value in 19 12. 5 Realty, on the other hand, was estimated in 1906 to be assessed at from seventeen per cent to one hundred per cent of actual value, with an average a little below sixty per cent. In 1912 the ratio of assessed to true value was esti- mated to average 58.6 per cent. At this ratio real estate in 1912 was paying a little over eleven mills on actual value, whereas personalty was paying only one mill. The ratio of four to eighteen, taking into account the undesirability of a heavy tax mortgage and the difficulty of reaching personalty under a high rate, may be justified. At least this is the ratio intended by the legislators. But whereas the system 1 Computed from Annual Report of the Secretary of Internal Affairs of Pennsylvania, 1904 (1905), pp. 4-56. 2 McCrea, iR. C, " Taxation of Personal Property in Pennsylvania," Quarterly Journal of Economics, vol. xxi, p. 81 et seq. 3 Taxable realty increased 149 per cent and taxable personalty 209 per cent in the period 1888-1912. Reports of the Secretary of Internal Affairs (1880-1915). 4 E. g., Secretary of Internal Affairs, Report, 1904, p. loB. 5 Cf. the statement of Mr. Weeks, President of the Pennsylvania Tax Conference, that personalty was assessed at only one-fourth of its actual value, 1892. (Weeks, J. D., Address before the Manufacturers' Association of Cincinnati and Hamilton Co., Ohio, March 6, 1894, p. 8). 34 i] SEPARATION IN PENNSYLVANIA 47 countenances the taxation of real estate at four or five times the rate of personalty, it was not intended that the rate should be ten or eleven times as great. And to this degree the system fails. Both state and local expenditure, and in consequence state and local revenue, have been increasing rapidly of late. In fifteen years (1899-1914) state expenditures increased 103 per cent. 1 No data for local expenditures are available, but there was a 96 per cent increase in local taxes for this period. 2 The state, even without an elastic tax, has easily met the increase, and in 1913, to relieve real estate taxed locally, it turned over the personal property tax to the coun- ties. The yield of this was approximately five million dol- lars in 1914. This should reduce the tax on real estate be- tween one and two mills. But it is not so much the weight of the tax as the in- equality which makes the real estate tax burdensome. In 1913, according to the federal census, real estate was as- sessed at 58.6 per cent of true value. 3 This same average ratio of valuation was given in 1892, in which year varia- tions within counties were estimated at from 20 to 93 per cent. In 1895 estimates were made as follows: range between cities, 16 to 87 per cent; range between bor- roughs, 22 to 104 per cent; range between counties, 20 to 93 per cent; range between townships, 21 to 95 per cent; range between town lots of one county, 9 to 117 per cent; range between farmlands of one county, 1 6 to no per cent. 4 Many other examples are given, and 1 Computed from data in Treasurer's Report for the years cited. 2 Computed from data in Report of the Secretary of Internal Affairs, for the years cited. 3 Wealth, Debt and Taxation, 1913, vol. i, p. 16. 4 Pennsylvania Tax Conference, 189$ Selling Price, Assessed Valua- tion and Taxation of Real Estate in Pennsylvania, passim. 48 SEPARATION OF STATE AND LOCAL REVENUES [342 even though they are extreme cases they are sufficiently frequent to be of serious concern. There is no reason to suppose that inequalities are appreciably less now. The localities have been assisted somewhat by the state, for, quite contrary to the experience of most states under separation, the state has had ample revenues. This has re- duced the tax on real estate, which, although high as com- pared with that on personalty, is not high compared with the tax rate on real estate in other states. Michigan with a twelve mill tax on the actual value of general property, in 1911, Wisconsin with a thirteen mill tax, in 1913, and New York with a seventeen mill tax, 1914, were all burdening real estate with a heavier tax than Pennsylvania with an eleven mill tax. These differences in the rate on actual value would appear even greater if real estate could be separated from personalty, for this is the average rate, in every case except Pennsylvania, for both realty and personalty, and realty under the general property tax always bears the larger share. Further than this, personalty is more success- fully reached in Pennsylvania than in most states with a local general property tax. One-fourth of the value of property taxable under the local personal property tax is reached. In other states, e. g. Illinois * and New York, 2 the proportion is much less. Apparently the higher rate on personalty is more than offset by the increased evasion. Better administration or new special taxes will be necessary if it is desired to make personalty pay a larger share. But when it is considered that real estate pays no state taxes, and that the local tax is smaller than elsewhere, it would seem that real estate is not overburdened, and perhaps could 1 Cf. J. A. Fairlie, Report on the Taxation and Revenue System of Illinois (1910), p. 2 et seq., p. 37 et seq. 2 Report of the Joint Legislative Committee on Taxation, New York, 1916, p. 69. 343] SEPARATION IN PENNSYLVANIA 49 bear the whole weight of local taxation without serious embarrassment. 5. EFFECT OF SEPARATION ON THE STATE TAX SYSTEM Turning to the state system under separation, there seems to have been no effort to equalize the burden of state taxes on the corporations. Following the usual custom of states, manufactures have been largely exempted lest they leave the state, and transportation companies, which cannot leave, have been most heavily burdened. There is further in- equality in the separate taxation o>f stocks and bonds. That corporation which has the largest proportion of its capital in stocks pays highest, for the tax on stock is five mills while that on bonds is only four. Further, in so far as the bonds are held by a non-resident, the corporation escapes entirely; for the tax is a tax on the holder, not on the cor- poration. More than this, the resident holders of the bonds of foreign corporations generally escape, since the state may not collect the tax through the corporations, even though it be doing business in the state, while the resident holder of domestic bonds pays. There are other inequali- ties which have no apparent economic reason. To cite a specific instance, gas companies are not subject to the gross receipts tax while electric light companies are. The com- petition between these two classes of corporations makes the tax on electric companies a serious handicap. These inequalities could for the most part be remedied by a gross or, better yet, a net earnings tax widely applied. They are not a fault of separation, and there is no reasonable doubt, judging from the experience of states employing the gen- eral property tax, that if these corporations were taxed under the direct tax the inequalities would be magnified many times; and, furthermore, the state would obtain less revenue. 50 SEPARATION OF STATE AND LOCAL REVENUES [344 Centralization of administration, which is so widely favored at the present time, has apparently been slightly checked by separation in Pennsylvania. There is nothing to prevent such centralized administration under separation, but there is less incentive in the absence of a state direct tax. The collateral inheritance tax, licenses, and the taxes on writs, wills and deeds, and fees of office are locally ad- ministered; but, being state taxes, the administration is carefully supervised by the state auditor general. This was also true of the personal property tax before it was turned over to the localities. But, except for the examination of accounts of county officers by expert accountants under the direction of the auditor general, and the requirement that the county commissioners shall furnish certain statistical in- formation concerning assessments and taxation to the sec- retary of internal affairs, no attention is paid to local tax administration. Were the real estate and personalty taxes used by the state they would doubtless be subject to the same state control as the other locally administered state taxes. Separation has doubtless retarded central control of local revenue, but it does not prevent it. The need of such control is great, for the local officials are unable, or unwilling, to correct the inequalities of assessment between the different assessment districts of each county on which the county tax is levied, and between the different properties within one assessment district. The secretary of internal affairs is urging the extension of his powers to give him the right to supervise local assess- ments and taxation, and to advise local officers and institute proceedings against those who fail to comply with the law. There is no reason why such supervision should not be maintained, though little has thus far been done to obtain it. Owing to the very effective corporation taxes the state system has been successful from the standpoint of yield. 345 ] SEPARATION IN PENNSYLVANIA The corporation taxes may have their shortcomings, but they have at least proved highly productive and state reve- nues up to the present time have been ample. Ninety per cent of the receipts of the general fund come from taxes and licenses. Seventy per cent o one-third of all revenue. * Lotteries, which were at times resorted to for special purposes, e. g., educa- tion, roads and charities, were found to be very remunera- tive, and auction duties for a time yielded from one-fifth to one-sixth of the total state revenues. The returns from 1 While the growth of separation in New York began as an effort to reach personalty through classification, the fact that separation was urged as a reform measure by Professor Seligman and others was un- questionably in part responsible for its final attainment. 2 Sowers, op. cit., pp. 324-326. 353] SEPARATION IN NEW YORK 59 this last source, together with the proceeds of salt works and a special steamboat tax, were for a time diverted to the insatiable canal fund. The expenses of new departments created by the state for the regulation of banks (1839), railroads (1856), and insurance companies (1859) were easily met by fees levied on the companies concerned. The general property tax, after its introduction in 1842, was expanded to meet the rapidly growing expenditures until it became an intolerable burden, borne only as long as made necessary by an urgent demand for money and the extrava- gance, unresourcefulness and procrastination of the legis- lature. Finally in 1880 a law was enacted levying an annual tax on the franchises of corporations, joint-stock companies or associations doing business in the state. 1 This tax was not comprehensive. It aimed only to reach the intangible prop- erty of certain corporations for state purposes. Many cor- porations were exempted, remaining under the general property tax for state and local purposes. Even those liable continued to pay state taxes on their real estate and local taxes on property in general. The local systems remained unchanged. No property was exempted from local taxes. But the new tax marked a turning point in methods of state taxation, and more than that, it soon yielded large revenues. A great deal of litigation followed the enactment of this law, but with little effect on the yield of the tax. The law was amended wherever it was found defective and the comp- troller was granted large powers in enforcing it ; so that in time, and with a few changes, it reached most of the cor- porations liable. 2 From this beginning the present system of corporation taxation has grown. Briefly it is as follows : An organiza- tion tax of one-twentieth of one per cent (with $5 as a 1 Sowers, op. cit., p. 152 et seq. 2 Ibid., p. 152 et seq. 60 SEPARATION OF STATE AND LOCAL REVENUES [354 minimum) is imposed on every stock corporation incor- porated in the state. 1 This tax when originally imposed in 1886 was one-eighth of one per cent, but was reduced in 1901 owing to competition from New Jersey and Connec- ticut. 2 Foreign corporations other than banking, insurance and loan companies pay a license tax of one-eighth of one per cent on capital employed within the state. 3 This is paid on such capital when the company begins to operate in the state and on any increase in the capital thereafter. A general franchise tax is imposed on both domestic and foreign corporations, being an annual tax on the franchise of corporations, joint-stock companies or associations doing business in the state, the value of such franchise to be determined by the value of capital stock employed in the state during the year preceding. The law as first enacted (1880) taxed total capital stock, but this was later (1885) amended to make only that portion of the stock used within the state taxable. The present rates are one- fourth of one mill for each one per cent of dividends, based on the par value of capital stock, of every corporation declaring divi- dends of six per cent or more ; 1.5 mills per dollar of capital stock (the value of capital stock being net assets or average selling value according as one or the other is higher) on those corporations declaring dividends of less than six per cent whose assets exceed their liabilities; and three-fourths of one mill per dollar, computed on average selling value, on corporations paying no dividends or insolvent corpora- tions paying less than six per cent. 4 All banks, trust and savings companies, insurance, title guaranty and surety companies, laundering, manufacturing and mining companies, having at least 40 per cent of their l Tax Law, 1915, sec. 180. 2 Report of the Comptroller, 1901, p. xxxvi. 3 Tax Law, 1915, sec. 181. 4 Ibid., 1915, sec. 182. 355] SEPARATION IN NEW YORK 6l capital stock invested in property in the state, and water, light, heat and power companies are exempt from this tax. 1 Domestic savings banks have, since 1901, paid a fran- chise tax of one per cent on par value of surplus and un- divided earnings. 2 Foreign bankers are subject to a tax of five per cent on interest or other earnings on money em- ployed within the state. 3 Domestic trust companies pay a franchise tax of one per cent on average capital stock, sur- plus and undivided profits. 4 National and state banks have paid, since 1901, a tax of one per cent on average capital stock, surplus and undivided profits assessed to the share- holders at the place where the bank is located. 5 This tax is distributed among the different tax districts according to the proportion that the tax rate of each district bears to the total tax rate, including county and state, of property in that district. Individual bankers pay no special state tax. Insurance companies, which were first specially taxed in 1880, have been subjected since to taxes on gross premiums at frequently changing rates and with varying exemptions. The rates vary and are based upon gross premiums for business done within the state. Life, casualty and health insurance companies of the United States pay one per cent on premiums ; those of foreign countries pay two per cent. Domestic (New York) fire insurance companies pay one per cent to the state; those of foreign countries pay one-half of one per cent. (Fire insurance corporations of other states or countries pay also two* per cent to local fire depart- ments. ) Domestic marine insurance companies pay one per cent; those of other states, two per cent; and those of for- eign countries, 2.5 per cent. Surety companies pay one per cent. Fraternal and mutual benefit associations are exempt 1 New York Tax Law, 1915, sec. 183. *Ibid., sec. 189. *Ibid., sec. 192. 4 Ibid., sec. 188. 5 Ibid., sec. 24. 62 SEPARATION OF STATE AND LOCAL REVENUES [356 from this tax. Domestic mutual life-insurance companies are exempt from the personal property tax. 1 Water, light, heat and power companies have, since 1899, been taxed one-half of one per cent on gross earnings within the state and three per cent on dividends in excess of four per cent declared on paid-up capital. 2 Elevated and surface railways not operated by steam pay a state tax of one per cent on gross earnings within the state plus three per cent on dividends in excess of four per cent declared on paid-up capital. A leased railroad pays only the tax on dividends. 3 All other transportation and transmission companies must pay a tax of one-half of one per cent on gross earnings from intrastate business. This is in addition to the capital stock tax, state taxes on real estate and local general property taxes. 4 Special franchises are classified as real estate, and are as- sessed by the state tax commissioners, such special fran- chises being the value of the privilege of using streets and highways, together with the value of real estate and tangible property thereon. These special franchises are placed on the local rolls and taxed locally at the same rate as other prop- erty. Other real estate of corporations is separately as- sessed by the local officials. Corporations are further subject to the general property tax of the various local taxing districts in which they are lo- cated. In consequence some corporations are paying as many as eleven different kinds of taxes. 5 The inexcusable ambiguity of many of the laws adds to the confusion of this system. 1 New York Tax Law, 1915, sec. 187. * Ibid., sec. 186. 3 Ibid., sec. 185. *Ibid., sec. 184. 6 Conference, 1909, p. 182. 357J SEPARATION IN NEW YORK 63 In developing a system of special taxes New York has by no means confined herself to corporation taxes. Other sources, some of which have at times proven even more lucrative than the corporation taxes, have been developed. The first of these is the inheritance tax. A law was passed in 1885 which placed a tax of five per cent on all bequests to collateral heirs where the estate exceeded $500. l This remained with slight alterations until 1892 when a tax of one per cent was placed on all estates over $10,000 going to direct heirs. No important changes were made after this until 1910 in which year the law was completely revised. The tax was graduated, running as high as twenty-five per cent. 2 But the next year it was again revised and brought down to a more moderate scale. As it now stands the basis of the tax is the individual bequest, not the total estate. The exemption for direct heirs is $5,000, for collateral $1,000. The rate on direct heirs is one to four per cent, and on col- lateral heirs, five to eight per cent. 3 This applies to all tangible property in the state and intangible property of residents only. 4 In 1887 a five per cent tax was levied on gross receipts from admissions to race tracks. This grew to yield a con- siderable revenue, but the proceeds were used for prizes at county fairs, not for general expenditure. 5 It was repealed in 1910. An excise tax placed on liquor in 1896 yields large rev- enues. A slight income was obtained from this source be- ginning in 1892, but with the establishment of a state license system in 1896 with charges according to the character of 1 Sowers, op. cit., p. 169. ^Conference, 1910, p. 302. 3 Tax Law, 1915, sec. 220. 4 Before 1911 the state had attempted to tax the intangible property of non-residents also. 5 Sowers, op. cit., p. 178. 64 SEPARATION OF STATE AND LOCAL REVENUES [358 the business and the population of the city where it was located, the yield to the state rose to over $3,500,000, and has been growing steadily since. This is collected by the state and half of the proceeds are redistributed among the localities. 1 A motor vehicle tax of $5 to $25 2 first imposed in 1904, now yields a considerable revenue which goes entirely to the state. In 1905 a tax was laid on all transfers of shares of stock at the rate of two per cent on $100 par value. This has become an important source. Also in 1905 a mortgage tax law was first passed levying an annual tax of one-half of one per cent on all recorded mortgages. It yielded to the state nearly half a million dollars the first year. It was changed in 1906 to a recording tax of one-half of one per cent. 3 By 1915 it was producing over $3,000,000, half of which was retained by the state. Finally, in 1911, a secured debt tax law was passed, sub- stituting a low rate tax for the ineffective personal property tax on securities. The rate was made one half of one per cent of face value. 4 In 1915, and again in 1916, this law was amended so that secured debts registered before Janu- ary i, 1917 might obtain a five-year exemption on the pay- ment of three-fourths of one per cent. 5 3. EFFECT OF SEPARATION ON THE LOCAL FISCAL SYSTEM The localities find the present system far from satisfac- tory. Some cities have raised their rates of assessment slightly. In New York City the rate has been raised to 1 Sowers, op. cit., p. 177 et seq. * New York Highway Law, 1915, sec. 282. 8 Conference, 1912, p. 251. 4 Ibid., 1913, p. 151 et seq. 5 Ibid., 1916, (1917), p. 400. 359] SEPARATION IN NEW YORK 65 approximately 100 per cent. This has been done because of the ten per cent debt limit, but such action would not have been taken if there had been any expectation of a return to the state direct tax. Aside from this important exception there is little indication that separation is responsible for any appreciable advance in the ratios of assessment. Rural districts still assess at ratios averaging about 70 per cent. But it is the taxation of personalty which causes the most dissatisfaction. Not only are there varying ratios of as- sessment for different classes of property in the same dis- trict, but also there are varying ratios for the same classes of property in different districts, and even within the same dis- trict; further much taxable wealth evades the tax entirely, and much is exempted which should be taxable. The per- centage of the total assessment roll represented by personal property varied from less than one per cent to over 21 per cent in fifty-three cities of the state investigated in 1915. Less than one-fourth of these cities obtain more than $2,000 from personal property. 1 The rapid growth of expendi- tures greatly aggravates these inequalities. But the evils of this system are the evils of the general property tax, not of separation. It is of course conceivable that if the state depended more largely on the general property tax it would have more effective central supervision although as a matter of fact the state general property tax has not in the past brought effective state control with it. The state has the power and perhaps the duty even though it derives no revenue from the general property tax, to supervise local as- sessments ; but with no direct financial interest it has not the incentive which it otherwise would have, and it may be that state control has developed more slowly than it would have with a large state direct tax. New York state has never for 1 Joint Legislative Committee, 1916, p. 69. 66 SEPARATION OF STATE AND LOCAL REVENUES [360 long been wholly independent of the general property tax. It is impossible to say whether or not greater dependence on this source would have brought more effective supervision of local revenues. It can be said, however, that separation has brought cer- tain concrete gains to the localities. Unlike Connecticut, Vermont and California, no property has been removed from local taxation, except certain securities, which, though form- erly taxable by the localities, were of little consequence since most of them escaped. Following the enactment of the se- cured debts tax of 1911 the assessed value of personalty taxed locally for local purposes fell five per cent below that of the previous year and between 1911 and 1912 it fell three per cent. 1 To what extent this decrease is due to the exemptions resulting from this law cannot be ascer- tained. The assessed value of personal property is subject to violent fluctuations entirely apart from exemptions. Be- tween 1900 and 1905, before any exemptions had been made, the variations ranged from a ten per cent decrease to a 22 per cent increase. The removal of mortgages from local assessment, 1906, caused a somewhat heavier decrease; but the localities suffered no loss in consequence, since half of the mortgage tax was refunded to them. 2 To the extent that the state has gone elsewhere for its revenues the local tax system and the local taxpayers have benefited. And since all of the figures indicate that the owner of tangible personalty, as compared with the owner of intangibles, such as corporate stock, was unjustly burdened, the change was beneficial. Assuming that the revenue now derived by the state from special sources would have been obtained in the absence of these from the general property tax, the taxes on 1 Cf. discussion in Conference, 1913, pp. 203-204. 2 Report of the New York State Tax Commissioners, 1906, p. 12. 361] SEPARATION IN NEW YORK 67 general property were in 1911 approximately 12 per cent less than they would have been under the old system. The actual gain to the taxpayer in 1915 was thirty cents on $100 of taxable property. All of this, of course, he pays to the state in other forms, such as taxes on transfers, or on in- tangibles which before evaded the tax. But the new taxes, in so far as they are based on income, as is the gross earn- ings tax, or are progressive, as is the inheritance tax, or reach intangibles which before escaped, more nearly accord with ability. Concerning the other side of local taxation under separ- ation, viz., the tendency toward extravagance which might result from the removal of the state direct tax, it is difficult to draw any conclusions. The localities depend on the gen- eral property tax for from seventy to eighty per cent of their revenues. 1 So it has been the property tax that has in large measure borne the burden resulting from the rapid growth of local expenditures in recent years. Such phenomenal growth is apparent in all of the states, being quite as characteristic of those without separation as of those with. An increase in unnecessary and undesirable expenditure might take place when reductions in the state tax were made, but the very rapid advance of the past few years in New York began shortly before 1900, when the state tax was still nearly three mills, and has not lessened with the return to this tax in the last six years. 2 This does not suggest that local officials have attempted to take advantage of the change. 4. EFFECT OF SEPARATION ON THE STATE FISCAL SYSTEM The new scheme of taxation, inaugurated in 1880, and since readjusted and enlarged as the exigencies and whims of a moment dictated, is far from satisfactory. The state 1 Computed from data in Wealth, Debt and Taxation, 1913, vol. ii. *Cf. data in Annual Report of the Comptroller, 1916, pp. 132-135. 68 SEPARATION OF STATE AND LOCAL REVENUES [362 drifted toward separation as the line of least resistance. The absence of restrictions in the constitution made special taxes possible, and they were found to be productive and easy to exact. But such a planless, patchwork system, if system it may be called, could not bring equality. It was developed according to no consistent or clearly denned prin- ciples, and it had no purpose other than that of obtaining sufficient revenues to meet immediate demands. These rev- enues it did for a time realize. The legislature continued occasionally to make appropriations without authorizing suf- ficient taxes to meet them, but in spite of this the debt was practically cancelled by 1892, and however great the dis- satisfaction caused by the inequalities of the tax burden, the good financial condition of the state invited delay in remedy- ing them. In 1906 it was found unnecessary to levy a state direct tax, and though the debt was now again growing rapidly the state revenues were so large that the tax com- missioners even considered the problem of distributing a sur- plus among the localities. Such a surplus did not material- ize, however, and in a few years the enormous increase in the debt placed heavier demands on the financial system than it could meet. In 1911 it was found necessary to return to the direct tax, which has since supplied a large proportion of the state revenues. 1 Until some decisive action is taken to obtain revenues in some other way this must continue and 1 Comparison of Direct Taxes and Total State Taxes, New York, 1911-1916.* Year Trtal Tax Direct Tax I9II ...... $41,473,377 $6,072,766 14.6 1912...... 54,73>57 11,022,987 20.1 1913 ...... 50,431,940 6,460,093 12.8 1914 ...... 42,588,418 ......... 1915 ...... 61,244,030 20,519,716 33.5 1916 ...... 536o4,o55 ......... * Compiled from Reports of the State Tax Commissioners. 363] SEPARATION IN NEW YORK 69 increase. It was estimated in 1915 that the state would need in the immediate future from twenty to thirty million dollars more revenue than the present system has been yielding. 1 Thus the state has failed to obtain sufficient revenues without the general property tax. The rapid rise in ex- penditures, due in large part to the interest on the huge canal and highway debts, far exceeded the yield of the regular state sources, and there was no elastic tax to meet the need. This increased expenditure may be extravagant, though the great increase in apparently desirable state activities suggests that for the most part it is not; but whether extravagant or not it is not due to separation. There is no apparent relation between expenditure and the amount of the direct tax in New York. The recent very rapid rise began about 1902 while there was still a state direct tax and with the re- turn to the direct tax there has been no sign of retrench- ment. 2 Such rapid increase is characteristic of all of the 1 Conference, 1915, p. 127. 3 INCREASE IN ORDINARY EXPENDITURES SINCE 1908.* v Percentage of Increase Over Year Precediu? 1909 15 1910 10 1911 2 1 9 12 15 1913 6 1914 2 1915 II 1916 5* 1917 I2 b 1918 13' * Annual Report oj the Comptroller, / obtain equal assessments, or at least to avoid the injustice of unequal assessments. 3 The special commission reporting in 1887, which recom- mended the creation of a tax commission, had disapproved of the removal of the state direct tax, which it considered to be a check on extravagance, but its investigations showed 1 Report of Special Commission, p. 14. 2 Tax Law of Connecticut, 1906, sec. 2413. 3 Governor Bulkeley, Message to the General Assembly, January, 1889. ^S SEPARATION OF STATE AND LOCAL REVENUES [372 wide variations in the ratios of assessed to real values in the different towns and between different classes of prop- erty. 1 To avoid this evil it favored apportionment accord- ing to population. No action was taken upon this recom- mendation. In 1889 a new collateral inheritance tax was imposed, and the method of taxing express, telegraph and telephone companies was changed. Also, by an investment tax law, certain personal property, before escaping, was reserved exclusively for state purposes. These changes enabled the general assembly to authorize the treasurer, June 22, 1889, to suspend the state tax payable in November 1890. The primary purpose of this measure was to get rid of unequal assessments. 2 For nearly twenty years following this change it was not found necessary to revert to the direct tax for state reve- nues. Under this system the local divisions were given the general property tax for their exclusive use. This tax they were to apply to all property not specifically exempted from taxation or reserved for state purposes. The changes made by separation and the other financial reforms of that year in the state tax system were not rad- ical. The loss from the general property tax was in large measure offset by the gains from the new collateral inheri- tance tax and the tax on choses in action. Some of the corporation taxes were considerably altered and somewhat increased, but the subjection of these corporations to special x The average was 67 per cent. In one case unimproved land was assessed at 33 per cent, improved at 60 per cent of actual value. Re- port of Special Commission, p. 9. 2 The special taxes introduced in 1889 and the changes made in certain corporation taxes in that year (which made it possible to abolish the state general property tax) were the direct result of the recommenda- tions of the Special Commission of 1887. (Report of the Special Com- mission, passim.) 373] SEPARATION IN CONNECTICUT 79 and frequently changing state taxes was an old story. 1 The problem of reaching corporations, particularly public utili- ties, had arisen early in Connecticut, and special state taxes, first in addition to, and later in place of, the general prop- erty tax, were devised to meet the situation. A modest beginning was made in 1849, when a state tax was imposed on shares of railroad stock owned by non- residents. The following year the rate was reduced and the tax was extended to all shares, wherever owned. In 1862 the rate was raised and horse railways were included. Except for increases in rates, in 1864 and 1865, and a num- ber of deductions, which, to the detriment of the revenues obtained, were permitted from time to time, the tax re- mained in this form until 1889. Mutual life-insurance companies and savings banks were next subjected to special taxes. In 1851 insurance com- panies were taxed on total cash capital due to the com- panies. The rate of this tax has been changed from time to time, but the base has remained practically the same. Fire-insurance companies were added in 1872. Savings banks were taxed on deposits in 1851 and were exempted from other taxes. This tax still continued in 1889, although the rate had frequently varied, and increas- ing deductions had been made. During the period from 1857 to* 1875 building associations were included. The pressure for funds brought about by the Civil War, which resulted in raising the rates of the special taxes already established, also led to the introduction of new taxes. First, in 1862, came a three-fourths of one per cent tax on telegraph companies on all property within the state, to be in lieu of all other taxes. In 1864 this was changed 1 For a detailed history of the development of corporation taxes see Report of the Special Commission on the Taxation of Corporations, 1913, passim. go SEPARATION OF STATE AND LOCAL REVENUES [374 to a tax on every message sent from offices within the state. The next year a third form of taxation was tried, viz., one on all gross receipts collected within the state. This remained until 1889 when a fourth method was intro- duced, a flat rate per mile of wire. In 1864 express companies were singled out for special taxation, a tax on gross receipts paid within the state being imposed in lieu of other taxes. The rate was raised in 1865, and again in 1889 when the tax was restricted to gross receipts on business transacted entirely within the state. Banks were chosen for special legislation in 1866, when a tax was imposed on the market value of stock held by non-residents, Not until 1882 were telephone companies sufficiently de- veloped to call forth special legislation. In this year they were removed from the general property tax and a tax on gross receipts collected within the state was imposed, to be abandoned in 1889 for a flat rate of seventy cents on transmitters and wire per mile. This brief account shows not only that Connecticut began early the taxation of corporations, but likewise that she had experimented even before 1890 with practically every conceivable type of special corporation taxes, although such public utilities as car, gas, electric and water companies, and all manufacturing and mercantile corporations were not then included. In this way the state, during the forty years from 1849 to 1889, gradually removed from local taxation and appro- priated for her own use large and increasing sources of revenue. The readjustments which these changes necessi- tated in the local tax systems could not have been serious for not only was the change gradual, but the sources appro- priated were for the most part unimportant at the time of 375] SEPARATION IN CONNECTICUT g r appropriation, either being undeveloped or evading in large part the local assessor. Moreover, the problem of local finances only became acute at a much later date. 2. TAX SYSTEM IN 1889 The local systems were not disturbed when separation was accomplished in 1889. The general property tax sup- plied them with from two-thirds to three-fourths of their revenue at this time, other important sources being local licenses, state subventions for education and poor relief, and earnings of institutions. 1 The changes made in express, telephone and telegraph taxes in this year, of course, had no effect on the localities, since these sources had been long since removed from local taxation. And of the two 1 new state sources created, the inheritance tax exempted no* prop- erty from local taxation while the low rate tax of two mills on choses in action, although nominally withdrawing a con- siderable source, in reality took scarcely anything, since the securities reached by this tax had before largely evaded the local assessor. The valuation o one-fourth o shifting the en- tire burden of state revenue from general property to spe- cific forms of property, particularly intangibles, was ob- tained. This was a real gain ; and, as explained above, 1 the localities did not take advantage of it to raise their tax rates unduly. Thus it is seen that no very decided advantages were gained from separation. On the other hand, only one of the evils generally attributed to it, viz., the inelasticity of such a system, was incurred. Extravagance in state expenditure was not encouraged by the lack of a direct tax. On the contrary, the inelasticity of the system apparently acted as a far more effective check than a direct tax. The new system supplied sufficient reve- nues for some time. Although the state was forced to sus- pend its policy of paying off the debt in 1892 and in 1896 the treasurer made an appeal for new sources of revenue, 2 the increase, if rather small, was steady year by year, and the state eventually succeeded, not only in keeping expen- 1 Supra, p. 84. 2 Treasurer's Report, 1896, p. 6. 88 SEPARATION OF STATE AND LOCAL REVENUES [382 ditures within revenues, but also in continuing to pay off the debt. No sinking fund was maintained, but an increas- ing surplus resulted in a falling-off of the net debt begin- ning with 1898. The reduction of the funded debt was begun in 1900, and so* faithfully was this policy pursued that the debt fell from $3,240,000 in 1899 to $844,000 in I9O8. 1 This was made possible in part by the restriction of state activities .and in part by the steady growth of revenues, the latter being due rather to the development of corpora- tions subject to state taxation than to changes in the tax system. Revenues increased fifty-six per cent in the period 1890 to 1905, as compared with thirty per cent from 1875 to !89O. 2 It seems safe to assume that this increase was, if anything, less than it would have been under a direct tax, for revenues at the beginning of this earlier period had been forced abnormally high to meet the heavy debt remaining from the Civil War. Moreover, the later period was one of rapidly growing expenditure throughout the country. Connecticut was not obtaining excessive revenues and was not pursuing a spendthrift policy; but rather was practising strict, possibly even un- wise, economy, in order to reduce her debt and keep outgo below income. And so successful was this policy that in 1907 the cash balance in the treasury exceeded the funded debt and an actual surplus was realized. This prosperous condition of the treasury was of short duration. That same year the legislature authorized bonds to the extent of $6,500,000 for highways, armories, libra- ries and other public buildings. This has since been fol- lowed, under protest from the treasurer, 3 by the authoriza- 1 Treasurers Report, 1899-1908. 2 Computed from data in Treasurer's Reports, 1875, 1800, 1905. 3 Ibid., 1912, p. 6. 383] SEPARATION IN CONNECTICUT 89 tion of further issues, until the funded debt in 1915 ex- ceeded $13,000,000. The burden of interest which this saddled on the state, together with increases in appropriations for other pur- poses, increased expenditures to such a point that the finan- cial system of the state was unable to* meet the situation. Moreover, the freeing of the toll bridges in 1907, and the changes in the inheritance tax, and military commutation and poll tax, of 1909, only aggravated matters, and it was found necessary to resort to< temporary loans. Thus the legislature of that year was forced to authorize the levy of a direct tax of 1.5 mills for 1910 and 1911 in order to alleviate conditions. The lack of an elastic source of revenue was the real de- fect of separation. The direct tax was not continued in 1912 and 1913, much to the distress of the treasurer, but was again authorized in 1914 and 1915 at the rate of one mill. In this latter year it supplied 17 per cent of all reve- nue, being the largest single source. In spite of this the debt has continued to rise, and other revenue sources and systems have been eagerly sought, with the result that in 1913 a gross earnings tax was introduced for telegraph companies at 3 per cent, telephone companies at 4 per cent, and car companies, which had never before been subjected to a special state tax, at 2 per cent. Also the tax on gross earnings of express companies, though it was reduced to 2 per cent for all companies, was extended to the state's share of gross receipts on interstate business. 1 These changes were followed in 1915 by the application of the same gross receipts tax at the rate of 3.5 per cent to steam railroads, 4.5 per cent to electric railroads, and 1.5 per cent to gas, electric and power companies. These latter 1 Conference, 1912, p. 306. o/) SEPARATION OF STATE AND LOCAL REVENUES [384 were not removed from the general property tax. Manu- facturing and mercantile corporations were subjected to> a state tax of 2 per cent on net incomes in addition to the local general property tax. The low rate tax on intangibles was made more effective by attaching a 10 per cent penalty to estates the securities of which had been evading the four- mill tax. Further, apportionment by expenditure was in- troduced to be applied to the direct tax, in the hope of avoiding the injustice of unequal assessments and gaining greater equality. And to prevent the danger of further un- wise legislation a finance board was created, comprising thirteen members (three citizens, three state officials and seven members o of assessed to true value of real estate was fifty-four per cent, 2 but it is believed by state officials and others acquainted with conditions in New Jersey that this ratio is seventy per cent or higher. 3 To what extent this is due to efficient admin- istration, and to what extent separation is responsible, can not be determined, but separation, by doing away with one of the motives for undervaluation is perhaps a contribut- ing cause. Only to a limited extent does separation remove the causes of inequalities or the inequalities themselves, as far as the general property tax is concerned, but through the use of special taxes, which separation requires, certain classes of property are much more effectively reached and the burden on unclassified property subject to the general property tax is lightened. Further classification for local purposes, per- haps with certain exemptions, and more efficient and more centralized administration, will go far toward equalizing local taxes. New Jersey has already attempted some centralization of administration. By acts of 1846, 1873 and 1883 county offi- cials were granted powers of equalization within their coun- ties, but with little effect. To cite one example, Hudson County, after having benefited for nearly twenty years from the services of a county board of equalization showed as- sessments in 1890 ranging from thirty-three to eighty per cent of true value. 4 In 1906 all existing county 1 Report of Commission to Investigate Tax Assessment in . . . New Jersey, 1912, p. 16 et seq. * Wealth, Debt and Taxation, vol. i, p. 16. 3 This is the view of Mr. A. C. Pleydell of the New York Tax Reform Association. 4 Mathews, op. cit., p. 729 et seq. 393] PARTIAL SEPARATION IN NEW JERSEY 99 TABLE V * GROWTH OF ASSESSED VALUES Date Taxable Values Percentage Increase 1895 $786,998,100 1900 891,237,300 13 1905 1,153,683,000 29 1910 2,045,898,200 78 boards of equalization were abolished, and new boards, appointed by and responsible to the governor, were created, with the result that assessed values rose enorm- ously. Equalization was not made a state matter until 1891, when, following the recommendations of a special commission of 1890, a state board of taxation was created. This board was not very effective at first, since it was given no power of raising valuations, but this was remedied in 1894 and the board was granted really more powers than it had the time to use. 2 It was superseded by a state board of equalization in 1906 with more members and larger powers, including that of removing local asses- sors guilty of wilful negligence. The board has not in practice been able to enforce this last power, since " wilful negligence " is difficult to prove. 5 It has, however, larger powers than are generally granted to central boards, and is using them very effectively. 4 This shows that centraliza- tion, which is generally conceded to be highly desirable, is entirely compatible with separation, and has not, in this case at least, been discouraged by lack of immediate state interest. The state school tax, since nine-tenths of it is apportioned to the counties on the basis of what the counties have contributed, and only one-tenth on the basis of children Compiled from Reports of the New Jersey State Board of Equali- zation, 1890-1910. 2 Mathews, op. cit., p. 733- 3 Ibid., p. 735. * Since merging with the state board of assessors, 1915, this board is known as the state board of taxes and assessment. I0 o SEPARATION OF STATE AND LOCAL REVENUES [394 of school age, can hardly be held responsible for the state's efforts to centralize and equalize local systems. There are still gross inequalities. Neither separation nor centraliza- tion has as yet completely eliminated these ; but centralization has done away with a great many of them, and doubtless will abolish many more, though probably some will remain as long as the localities retain a system which has the general property tax for its central tax. The local districts have had no difficulty in obtaining suf- ficient revenues, for very little property has been removed from local taxation. Only the " main stem," tangible per- sonalty and franchise of railroads and canal companies, and the franchise of certain other corporations are reserved exclusively for state taxation, and a large share of the rev- enues from these are returned to the localities for the sup- port of schools. In consequence the local divisions do not suffer. The state system seems to be equally satisfactory. There is no complaint of extravagance. Expenditures are much the same as in similar states. Per capita governmental cost payments in 1913 amounted to $2.58 in New Jersey as com- pared with $2.55 for the Middle Atlantic States, and $2.30 for all. 1 The corporations are not heavily taxed, and the debt is very small, and is exceeded each year by the cash balance. The taxation of corporations is based on the as- sumption that there is a value over and above the value of the tangible property, which is not reached under the gen- eral property tax. To reach this franchise various forms of taxation have been introduced ; but whether the tax takes the form of a gross earnings, gross premiums, or capital stock tax it can in no case, except where net earnings are less than twenty per cent of gross, and the rate of the tax is five per cent, exceed 1.2 mills on total valuation of the cor- 1 Wealth, Debt and Taxation, 1913, vol. ii, p. 40. 395] PARTIAL SEPARATION IN NEW JERSEY IO i poration, assuming the average rate of return on capital to be six per cent. This would not be a serious additional burden even were the corporations taxed locally to their full value; and in consideration of the fact that the localities do not tax the full value of tangible property it is safe to say that the corporations as compared with real estate, are un- dertaxed rather than overtaxed. All railroad and canal property which is not locally taxed is taxed by the state at the same rate as property taxed locally, and consequently pays somewhat more than other corporations, and probably somewhat more than property in general, since the property assessed by the state is presumably assessed nearer true value. There is little equality between the different classs of cor- porations. Mining and manufacturing companies are exempt from state taxation, and of those corporations sub- ject to the capital stock franchise tax the larger ones pay less owing to the regressive rate. Insurance companies pay- ing on gross premiums pay at varying rates. Street railways pay five per cent on gross earnings to the local tax districts, and other public utilities, except railroads, two per cent. Centralization of administration has been adequately con- sidered under the local system. 1 It need only be added that the state board of equalization and state board of assessors were merged in 1915 in order to secure further equality, as well as efficiency and economy. This and other minor changes mark a growing centralization of administration. The revenues of the state have proved ample, contrary to the experience of most states that have attempted separa- tion. This is due to the fact that New Jersey is the home of much of the wealth employed in New York ; for a large num- ber of corporations which operate for the most part in New York have obtained their charters in New Jersey. Twenty- five per cent of all state receipts and seventy-nine per cent 1 Supra, p. 98 et seq. I0 2 SEPARATION OF STATE AND LOCAL REVENUES [396 of the revenues of the state fund were derived from cor- porations in 191 3- 1 The result has been that the state has for more than thirty years enjoyed a surplus. But a sur- plus of any size has generally been found to encourage un- necessary expenditures. The state has no tax which it can adjust to needs. The railroad tax has, since 1906, been made equal to the average rate on other property locally taxed, but the state has returned all above the one-half per cent previously obtained, to the localities for schools. But even were the state to keep the tax there would be no neces- sary relation between the changes in local needs and the changes in state needs. All other taxes are at fixed rates. The state has, through subventions, turned over a large amount of its revenues to the localities, giving them, since 1897, in addition to the proceeds of the school tax, the entire yield from certain railroad property, and, since 1906, part of the yield from all railroad property. Even so a cash sur- plus has accumulated and there has been no debt, as in Pennsylvania, to absorb it. The surplus of the sinking fund exceeded the debt from 1898 until 1902. The sinking fund was abolished in this year, but the small debt which still con- tinued has been more than covered by the cash and securi- ties 2 of the state. The state apparently has not suffered from this surplus. In 1 88 1, three years before the passage of the important cor- poration tax laws, revenues were found sufficient to omit the state tax but only for one year. Increasing appropriations of the legislature made it necessary to return to it the next year, and after its omission in 1883, even with the new corporation taxes, the comptroller complained of the extravagant appropriations of the legislature and 1 Report of the Treasurer, 1913. * Wealth, Debt and Taxation, 1913, vol. i, pp. 166-167. 397] PARTIAL SEPARATION IN NEW JERSEY insufficiency of revenues, and it was found necessary for some years to borrow to meet current expenditure. The growth of the new sources, however, soon made revenues ample. The floating debt was cancelled in 1891 and a considerable surplus was realized each year there- after. 1 Rising expenditure, principally for new build- ings, led the comptroller to give warning, in 1896, that if such expenditure continued it would be necessary to levy a state tax again. But retrenchment followed, and in 1898 the comptroller declared the financial condition of New Jersey to be more satisfactory than that of any other state. 2 The surplus continued to rise until 1903, when in- creasing appropriations for new buildings, for increased ex- penses of institutions, and to counties for schools again re- duced it, and in 1907 the comptroller once more was forced to remind the legislature that such appropriations would necessitate a state tax. 3 Again appropriations were reduced and the surplus rose in response. There is no indication in this of any gross extravagance or misuse of funds, although it may be that there was no great demand for many of the public buildings erected. The custom of increasing appro- priations to counties for schools has done much to reduce the surplus. But the action of the legislature suggests throughout an effort to accommodate expenditures to reve- nues. It can hardly be hoped to secure even a crude adjust- ment of revenues to expenditures without an elastic tax. To adjust expenditures to revenues is likely to lead to ex- travagance in case the revenues are large, or to failure to make needed expenditures in case revenues are small, al- though it is conceivable that a state might spend a growing income to good advantage. If, on the other hand, no ad- justment is made, a deficit or a surplus is inevitable. 1 Report of the Comptroller, 1891. 2 Ibid., 1898, p. 7. *Ibid., 1907, p. 2. CHAPTER VII PARTIAL SEPARATION IN VERMONT I. HISTORY OF TAXATION IN VERMONT VERMONT, in common with the other New England states, employed the general property tax as the principal state tax for nearly a century. This source of revenue began to decline in importance after the Civil War, but was not given up entirely for state use until 1902. It is still employed by the state for school and highway purposes, but the yield is returned to the local districts although not in proportion to assessed value. As in other states where the general property tax has been abolished for state pur- poses the state reserves the right to levy a direct tax at any time, and such a tax was actually levied in 1914, and again in 1916. TABLE VI GENERAL PROPERTY TAX IN VERMONT, 1870-1916 1 r.*, i !>****<*<, Percentage of Revenues Year General Revenue General Prop* ty from Property 1870 ........ ^562,621 $Si$,4* 91 1880 ........ 477,688 384,734 81 1890 ........ 692,257 353,412 51* 1900 ........ 938,490 346,8n 37* 1910 ........ 1,230,644 ...... 1914 ........ 2,114,567 241,225 n* 1916 ........ 2,953,704 ...... * This tax was levied only every other year after 1884. Consequently it did not play such an important role as these percentages indicate. 1 Compiled from Reports of the Auditor of Accounts of Vermont for these dates. 104 [398 399] PARTIAL SEPARATION IN VERMONT Early general property taxes were levied on a grand list, which was at first made up of different classes of property listed at various percentages of actual value according to kind and value. 1 Unimproved land and some buildings were exempt. 2 In 1841 these classes and exemptions were abolished and all property was placed on the grand list at one per cent of its estimated true value. Thus the general property tax was made an equal tax on all classes of prop- erty. 3 No other important changes were made in the tax although its administration was the cause of considerable legislation. Immediately following the law of 1819, which first put the assessment of real estate on the basis of actual value, inequalities led to the establishment of both county and state boards of equalization. 4 This was followed by a number of acts aiming to reach personalty more success- fully and to equalize the assessment of real estate, but the tax was not sufficiently burdensome to cause serious com- plaint until after the Civil War, for Vermont never became involved in the policy of state aid to' railroads and canals which brought many of her neighbors into< such serious financial straits. Beginning about 1870, however, increas- ing complaints aroused investigation and reform. 5 Low and unequal rates of assessment were found; personalty was rapidly disappearing from the lists, and what remained was assessed at even lower and more varied rates than real estate. The state and county boards of equalization, while preventing some of the more glaring inequalities, were un- 1 Carriages, for instance, were listed at 12 per cent, cash at 6 per cent and dwelling houses valued at less than $1,000 at 2 per cent, those over that being 3 per cent. (F. A. Wood, " Finances of Vermont," Columbia University Studies in History, Economics and Public Law, 1912, vol. Hi, no. 3, P- 32.) *Ibid., p. 30. *Ibid., p. 38. 'Ibid., p. 34. ~Ibid., p. 101 et seq. I0 6 SEPARATION OF STATE AND LOCAL REVENUES [400 able, and in some cases unwilling, to accomplish any real equality. 1 To remedy matters, listers were invested with greater powers, and penalties for failure to enforce the law were made more severe; but the growth of corporation taxes, and the consequent decrease in the state tax on gen- eral property, relieved the situation before any important steps had been taken to secure greater equality. In 1882 state equalization was given up entirely. 2 The appearance of special taxes not levied on the grand list 3 began with bank taxation in 1818. The tax was de- termined for each bank as incorporated, and was generally on profits, although in some instances it was placed on capital value. 4 These taxes did not take the place of the tax on shareholders and soon disappeared. After 1854 the tax on shares of non-residents only was paid by the banks to the state. 5 This was distributed among the counties. Similar taxes were applied to the profits of domestic fire- insurance companies in 1829. Foreign fire-insurance com- panies had, since 1825, been taxed on gross premiums col- lected within the state. Various acts followed, including, in 1854, a retaliatory law. 6 These were the only efforts made to reach corporations before 1878. Most of the laws were soon abandoned and apparently none of them ever were seriously enforced or were productive of much revenue. In 1878 banks were again chosen for special taxation. This time savings banks were taxed on deposits and accu- 1 Wood, op. cit., p. 101. *Ibid., p. 103. 3 Poll taxes have always been an appreciable source of revenue, and income taxes were levied until 1850, but these were levied on valuations placed on the grand list with property. 4 The rates on profits varied from 6 to 12 per cent; those on capital value from one-third to one-half of one per cent. 5 Wood, op. cit., p. 45 et seq. *Ibid., p. 47. 4 oi ] PARTIAL SEPARATION IN VERMONT mulations. This tax, except that part of it levied on de- posits owned by non-residents, was returned to the towns. It was revised in 1882, being made a strictly state tax, and applying only to deposits under $1,500. Deposits in excess of this amount were taxed by the towns to the individual owners. Trust companies were taxed in the same manner. 1 These taxes did not take the place O'f local taxes on shares. Various changes in rates and exemptions followed. At present both savings banks and trust companies are taxed seven- tenths of one per cent on all deposits regardless o>f size and without deductions for real estate. Such deposits are exempt from local taxation. National banks have been taxed in the same manner since 1906 on all deposits bear- ing over two per cent interest. The tax is optional, the bank being privileged to leave such deposits under the general property tax. 2 The year 1882 marked the real beginning of the present system of corporation taxation. Insurance companies, do- mestic and foreign, \vere, beginning in this year, taxed two per cent on premiums and assessments received within the state, with a retaliatory measure added in 1888. Domestic life-insurance companies were in addition taxed one-half of one per cent on surplus over four per cent of policies less the value of real estate. This tax was raised to one per cent in 1890, and in 1908 was applied also to domestic fire, acci- dent and fidelity companies. 3 Railroads were taxed on gross earnings under the law of i882. 4 Though subject to certain specific provisions pre- vious to this time, they had remained under the general property tax. In 1890, following a decision of the Ver- mont supreme court declaring this provision of the law 1 Wood, op. cit., p. 81 et seq. 2 Ibid., p. 84. *Ibid., pp. 85-86. 4 Ibid., p. 86 et seq. I0 g SEPARATION OF STATE AND 'LOCAL REVENUES [402 unconstitutional, a tax of seven-tenths of one per cent on valuation was imposed instead, with an optional tax on gross earnings of 2.5 per cent. The latter was generally chosen. These rates were raised in 1904, 1906 and 1908, as the result of a report in 1900 which showed real estate to be paying four times what railroad property was paying. 1 At present railroads pay a tax on valuation at the rate of 1.25 per cent. The optional gross receipts tax was repealed in 1912. 2 Express, telegraph, telephone, steamboat, car and trans- portation companies were also brought under the gross earnings tax of i882. 3 All of these companies, except ex- press and telegraph companies, which had been taxed on gross earnings since 1880, had been under the general prop- erty tax up to this time. In 1890 the tax on steamboat, car and transportation companies was changed to one on val- uation, with an optional tax on gross earnings. The rates of these taxes are at present one per cent on valuation and 2.5 per cent on gross earnings. Express companies re- mained under the gross earnings tax until 1906, when a flat rate of $8 per mile of road over which their business was carried on was substituted. This was later raised to $20, and in 1915 reduced to $16. Telegraph companies remained under the gross earnings tax until the law was contested in 1892. Then, to obviate difficulties, the legisla- ture made the tax one of sixty cents per mile of one-line wire and forty cents for each additional mile of wire, with the alternative of a three per cent tax on gross earnings received within the state. This remains today. No change in tele- 1 Double Taxation in Vermont. Report . . . t o the Legislature of 1900, p. 38. 2 Report of the Commissioner of Taxes, 1914, p. 4 et seq. 3 Wood, op. cit., p. 92. 403] PARTIAL SEPARATION IN VERMONT phone company taxation was made until 1902, when the gross earnings tax was replaced by one on transmitters and miles of wire. In 1904 the alternative of a gross earnings tax was offered. 1 Both of these taxes were abolished in 1914 and a tax of 1.25 per cent on actual value was im- posed. 2 The gross earnings tax on sleeping-car companies was replaced in 1904 by one of seven-tenths of one per cent on valuation, and parlor and dining car companies were in- cluded. Thus at present express companies pay a flat rate; rail- road, telephone, sleeping car and dining and parlor car com- panies pay on valuation, and other transportation companies, including telegraph companies, have as an alternative, which is generally taken advantage of, a gross earnings tax. Insurance companies are taxed on gross premiums, and bank and trust companies on deposits, with the alternative of the general property tax. No attempt has been made to reach the other classes of corporations except under the general property tax, and manufacturing and mining com- panies may be specifically exempted from that tax for a period of ten years. Graduated incorporation taxes have been levied since 1898, and annual license taxes on all corporations, domestic and foreign, of from $10 to $50 have also been levied since The preponderance of the agricultural element in the legislature where the corporations are not adequately rep- resented accounts for the popularity of corporation taxes. The state derives by far the larger part of its revenues from these sources. The only other important revenues 1 Wood, op. cit., p. 95. * Report of tJie Commissioner of Taxes, 1914, p. 19 et seq. * Wood, op. cit., p. 96. IIO SEPARATION OF STATE AND LOCAL REVENUES [404 are from licenses and a five per cent collateral inheritance tax, introduced in 1896. TABLE VII 1 SOURCES OF STATE REVENUE, EXCLUSIVE OF LOANS, VERMONT, 1916 Source Amount Per cent of Total Total ^2,953,704 100 Corporation 1,582,077 53.5 General Property 316,104 10.7 Inheritance 101,593 3.5 Miscellaneous 95393o 32.3 REVENUES FROM CORPORATION TAXES, 1916 Total $1,582,077 100 Banks and Trust Companies 7557^2 47.8 Railroads 54938o 34.8 Express, Telegraph and Transportation . 26,054 1.6 Telephone 44>356 2.8 Insurance 174,661 n.o Annual License Tax 3 r o84 2.0 Annual Charter Tax 280 o.o* * Less than one-tenth of one per cent. The grand list tax, which has always been of the nature of a general property tax, and since 1841 has been dis- tinctly such a tax, is the backbone of the local fiscal system. It supplied 71 per cent of revenues in I9I4- 2 Licenses, re- ceipts from public lands, and subventions, however, have been at various periods of considerable importance. Subven- tions consist principally of the proceeds of educational and highway funds and of the state school and highway taxes, and are devoted to these specific purposes. The school tax of five mills (now eight mills) was first levied in 1890 and the highway tax of five mills in i892. 3 They are appor- tioned in part according to the number of schools and miles 1 Compiled from the Report of the Commissioner of Taxes and Report of the Treasurer, 1916. 2 Computed from data in Report of the Treasurer, 1914. 3 Wood, op. cit., p. 115 et seq. 405 ] PARTIAL SEPARATION IN VERMONT 1 1 x of road, in part according to local expenditures for these purposes, thus obtaining a redistribution which favors the rural districts at the expense of the urban districts. These taxes are the result of Vermont's system of representation in the state legislature which gives the rural districts a disproportionate share of seats in the legislature, but if official reports may be trusted they are highly satisfactory. 2. EFFECTS OF SEPARATION Separation has arisen in Vermont largely as a result of the peculiar system of representation just referred to. The agricultural interests have been eager to shift the burden of taxation as far as possible to the corporations, and they have been in a position to do so. The amount of corporate wealth in the state is not large, but the corporations have borne the weight of the state expenditures without serious inconvenience. Separation, owing to the levy of the school and highway taxes, has never been complete. These taxes are levied in proportion to assessed value, but, unlike New Jersey, are distributed entirely according to other standards, and con- sequently leave the same incentive for the localities to under- assess property as exists under a tax for state purposes. Nevertheless, most of the effects of separation have been realized, for the tax is small, and in any case the removal of the state tax seems to have little effect on local assessments. Further, the tax is for purposes which are or have been until recently ordinarily considered local. Revenue for strictly state purposes is entirely separate and, to the extent that corporation taxes are depended on, separation of source is complete, since the property of these corporations is re- served exclusively for state taxation. What is generally held to be the chief gain of separation the removal of the state general property tax has been realized; and likewise the chief defect inelasticity of revenues. II2 SEPARATION OF STATE AND LOCAL REVENUES [406 There is no suggestion that separation has encouraged extravagance on the part of the localities. As already ex- plained, such extravagance, if it occurred, would be only an immediate and temporary result. The declining need of revenues resulting from the relief from war expenditures/ and the rapidly rising value of taxable property during the period of growing separation, and the rising expenditure due to increased governmental activities in the later period of achieved separation are not peculiar to Vermont. Sim- ilar changes are reflected in the tax rates of other states. The sharp decline in the rate on general property from 1880 to 1902 is due only in part to the reduction of the state tax, since this tax never rose above fifty cents in the decade pre- ceding 1880, and still averaged nearly ten cents annually (though levied only once in two years) in the twenty years following. Whether or not local officials took advantage of the decline in rate cannot be determined from the tax rates. There appears to be no specific complaint of ex- travagance. The rate of assessed to actual value of real estate in 1912 was seventy per cent according to federal census estimates. This is comparatively high, being exceeded by only nine states. There is little complaint of inequalities. That in- equalities exist, here, as elsewhere, has been noted. 2 The usual complaints of undervaluation of real estate and total evasion of personalty are made ; the usual causes incompe- tence or dishonesty of assessors and the difficulties of reach- ing intangibles under the most favorable circumstances are assigned; and the usual remedies centralization of admin- istration and low rate taxes on intangibles are suggested. Yet inequalities are not as serious as in many states. An 1 Cf. Wood, op. cit., p. 79 et seq. 2 See Commissioner of Taxes, Special Report Relating to Taxation, 1902, pp. 46-47; Report of Commission on Taxation, Vermont, 1908, p. 20. 407] PARTIAL SEPARATION IN VERMONT investigation made in 1900 revealed the fact that the lowest rate of appraisal in towns was 66.7 per cent and that the average rate of assessment in counties was from 78 to 96 per cent. 1 Some slight changes have been made, but if the average rate of assessment of real estate was 70 per cent in 1912, as compared with 71.7 per cent in 1900 (as given in the federal census), 2 apparently neither separation nor im- proved administration has proved effective. The real griev- ance of the bearer of the general property tax is, however, the large number and the inequalities of the exemptions. Personal property exempted on account of deductions for indebtedness alone amounted, in 1902, to 65 per cent of all personalty listed; in 1910 it was equal to 72 per cent. 3 No provision was made for deduction for debts on real estate, but recently (1915), to< avoid double taxation, mortgages have been exempted. 4 Attempts to abolish many exemp- tions and secure a low-rate tax on intangibles have been unsuccessful. Exemptions are not, perhaps, as serious a matter as they are usually asserted to be, since the property exempted is in large part the property o>f corporations taxed by the state, and intangibles, which usually escape anyhow under the general property tax; but the tax rate of $1.81 (1912), while not high, measured according to assessed val- uation, 5 is high when the rate of assessed to true value is considered. It means a rate of approximately 13 mills (or more since real estate bears a much larger proportion of the tax than personalty) on actual value. 6 It is also high com- 1 Report on Double Taxation, p. 35. 2 Wealth, Debt and Taxation, 1913, vol. i, p. 16. 3 Wood, op. cit., p. 107. 4 Report of Commissioner of Taxes, 1916, pp. 16-17. 5 The rate on assessed valuation was exceeded in 1912 by thirty states. Wealth, Debt and Taxation, 1913, vol. i, p. 751. *C/. Pennsylvania with a rate of II mills (1912), Michigan, 12 mills (1911), Wisconsin, 13 mills (1913), and New York, 17 mills (1914). These states are all industrially far in advance of Vermont. II4 SEPARATION OF STATE AND LOCAL REVENUES [408 pared with the taxes on corporations. Those corporations subject to the ad valorem taxes, assuming their assessed val- uations to be equal to real, pay from seventy cents to $1.25 (cf. real estate with a tax rate on real value of $1.27). Those subject to gross earnings taxes pay less. Thus real estate, except that classed as operative property of corpora- tions, is paying more than other property in the state. Separation has not resulted in a light burden on such prop- erty, although the revenue for state purposes and per capita state expenditures are relatively high in Vermont is derived entirely from other sources. The explanation is that Vermont, like California and Connecticut, has deprived the localities of the privilege of taxing the property of those corporations which are taxed by the state. Also, as has been mentioned above, there are a large number of exemp- tions, some of which perhaps are not justifiable. This has resulted in concentrating the burden of relatively small taxes 1 on a small amount of property. On the one hand, separation has removed the burden of the state tax from general property ; on the other it has narrowed the base for the local tax. To measure the gain or loss to the owner of real estate is practically impossible; but while the gain or loss must vary from district to district and from property to property, it is almost certain that, taking the state as a whole, real estate, particularly that in rural districts, where there has been less corporate property to exempt, is paying less than it would pay under a general property tax for state and local purposes. Special corporation taxes cen- trally administered, even when low and permitting many exemptions, reach corporations far more effectively than the general tax ; and the more corporate property pays the less is borne by other property. 1 In 1913 only three states, Alabama, New Mexico, and North Carolina, collected smaller local revenues per capita than Vermont. (Estimated from data in Wealth, Debt and Taxation, 1913, vol. ii.) 409] PARTIAL SEPARATION IN VERMONT The first effect on the administration of the general prop- erty tax of the effort to separate revenues was a step toward decentralization; for while the state undertook central val- uation of corporate property for state purposes, it gave up (1882) the function hitherto exercised of equalizing local assessments the assumption being that the removal of the state tax would remove the causes of inequalities, and that the greater powers and penalties given the listers at the same time would be sufficient to cope with the situation. When it was realized that greater equality had not been ob- tained, agitation for state control again arose. An inves- tigation made in 1908 showed the existing administrative provisions to be both inadequate and unenforced, and in consequence the commissioner of taxes was given enlarged powers in 1910 which permit him to instruct local listers and require them to make any returns he may desire. 1 Effective central control has not yet been attained, but the tendency is decidedly in that direction. Separation does not do away with the need of such centralization, nor does it prevent it although in the case of Vermont it has appar- ently retarded it. Local divisions have obtained revenue without difficulty. The withdrawal of corporate property from local taxation has been gradual and in consequence readjustment has not been difficult. Further, the control of the distribution of school and highway taxes by the state has relieved the poorer districts. The burden on realty is heavy and local expenditure is rising rapidly ; but the localities do not appear to be suffering seriously and the agitation for a low-rate tax on intangibles and the abolition of many of the present exemptions may at any time result in legislation which will relieve real estate. 1 Wood, op. tit., p. no. SEPARATION OF STATE AND LOCAL REVENUES [410 The reports of the state officials are singularly non- committal as to the working of the present system and the activities of the state legislaure, offering no praise and making no complaint. The financial condition of the state appears, however, to be very good. Receipts are generally slightly in excess of disbursements, and the small funded and floating debt is easily covered by the cash and securities of the state, and in some years by the cash balance alone. 1 Expenditures have increased steadily and rapidly since 1880 (increasing four fold in the thirty years 1880-1 9 io, 2 and 65 per cent in the three years 19101913), 3 but they have readily been met. The general property tax was levied once in two years until 1902, but after that date it was found unnecessary until 1914, when a tax of one mill was again levied. During this period there is no evidence of extravagance. The rise in expenditure is due to the in- creased activities of the government, such as have been un- dertaken in recent years in all of the states those employ- ing the general property tax as well as those depending on corporation taxes. Per capita state expenditure is (1913) $6.54, 4 which is higher than that of any other New England state except Massachusetts. This can be accounted for by the very heavy expenditure incurred for education and the very considerable outlay for highways. In addition, the state support of charitable, correctional and penal institu- tions is generous, and a large number of commissions are maintained. Such expenditure is going on throughout the country and if in Vermont it is higher than in most states, at least there has been no complaint, and it has not resulted in a heavy burden on the corporations, which are paying 1 Wealth, Debt and Taxation, 1913, vol. i, pp. 208-209. 2 Computed from data in Wood, op. cit., pp. 140-141. 3 Computed from data in Treasurer's Reports for these years. 4 Wealth, Debt and Taxation, 1913, vol. ii, p. 40. 4i ij PARTIAL SEPARATION IN VERMONT nj less than property locally taxed and no more than corpora- tions in most of the states where they are subject to special taxes. As for the equitableness of the state taxes, the central valuation of corporate property has been fairly successful, so that inequalities between the corporations of one class are small. No great effort has been made to obtain equality of the burden borne by different classes of corporations which is of less importance. Railroad and telephone companies pay $1.25 per $100 valuation, and car companies and banks (on deposits) pay seventy cents. Insurance companies pay from one to two per cent on premiums. Telegraph companies pay three per cent on gross earnings, which is probably less than other corporations are paying, though with no data on the ratio of gross earnings to actual value no exact comparison can be made. Manufacturing and mining companies, which are taxed under the general property tax with a ten-year ex- emption, probably pay least of all, owing to ineffective local assessments. Those corporations paying $1.25 on valua- tion, while paying nominally less than the general property tax rate, are, if assessed at true value, paying nearly as much as other property $1.25 as compared with $1.27 on actual value in 19^2. The tendency to increase the rates on corporations leads to greater uniformity as well as to greater revenues. Though uniformity in the treatment of different and non-competing classes of corporations is not of vital importance, and may not even be desirable in some cases, such uniformity is unquestionably better than hap- hazard differentiation which is not based on any fiscal principle. The administration of state finances has been centralized through separation. All assessments for state taxes are under the direct control of a commissioner of taxes who, with a few minor exceptions, has powers adequate to fulfil Hg SEPARATION OF STATE AND LOCAL REVENUES [412 his duties. Unfortunately his supervision does not extend to the valuation of corporate or other property taxed locally, though there is at present a tendency to extend his powers to this field. The revenues of the state have been kept a little in ad- vance of expenditures by means of frequent revision and increase in the rates of corporation taxes, but the growth of expenditures has absorbed increasing revenues very rapidly, and in the year 1914 it was found necessary to levy a small direct tax to meet a deficit incurred during the year preceding. There is no expectation of permanent utiliza- tion of this source, however. The natural development of corporate wealth will afford some increase, and manufac- turing and mercantile corporations, as well as some public utilities, are still untouched by the state. To remove these from local taxation would at present cause some hardship, even though the localities reach them most ineffectively, but a low-rate tax on intangibles and the removal of some of the present exemptions might be offered as compensation. Further the introduction of a direct inheritance tax and the application of progression to the collateral inheritance tax would doubtless create a lucrative source of revenue. Fin- ally, an income tax (which has been seriously recom- mended) could be made an unlimited source. The state has no appreciable debt and no stringency of funds has yet been felt; but expenditures have followed revenues so closely that it seems probable that unless the general property tax is going to be resorted to freely, as needed, some decisive action will have to be taken in a few years. CHAPTER VIII PARTIAL SEPARATION IN WEST VIRGINIA I. HISTORY OF TAXATION IN WEST VIRGINIA WEST VIRGINIA has in her constitution the provision, which she has tried in vain to abolish, that " taxation shall be equal and uniform throughout the state, and all property, both real and personal, shall be taxed in proportion to its value." Owing to this, West Virginia has never been able to employ special corporation taxes; but the state has suc- ceeded in obtaining large revenues from an inheritance tax, licenses, and franchise taxes ( for which last provision was specifically made in the constitution in I872). 1 The income from these sources is almost sufficient for state needs. As a result the state general property tax, except for school pur- poses, has been reduced until it yields a comparatively small revenue. This is the only instance of a state attempting, with fair success, to separate revenues without classifying property for taxation. The fiscal system of West Virginia is based on the gen- eral property tax and licenses, the usual form in the south- ern states. At the time that West Virginia was created as a separate state, in 1863, the Virginia system was continued, with the general property tax for the central tax of the state and of the local systems. The amount of state revenue which this tax yielded grew steadily until 1905, but the proportion of total state revenues from this source has gradually declined since 1875 ; for while the state direct tax increased but little more than one hundred per cent during 1 Constitution, article x, sec. I. 4i3] H9 I2 Q SEPARATION OF STATE AND LOCAL REVENUES these thirty years the total receipts increased nearly five hundred per cent. TABLE VIII i STATE GENERAL PROPERTY TAX IN WEST VIRGINIA, 1875-1915 ,p.-, /f nf Amount of State Percentage of State Year State Fund General Property Fund Yielded Tax by Property Tax 1875 #324>i95 244,926 79 1885 568,785 262,177 46 1895 1,135,694 375,644 33 '90S 2,352,317* 58o,994 25 1915 6,134,897 I,222,000t 20 * After 1904 the state fund included certain revenues from license taxes and later from the general property tax which are transferred to the school fund and some from public service corporations which are refunded to the local districts. t According to the State Tax Commissioner (Second Annual Report of the State 7^ax Commissioner, 1915-1916, p. 23) this tax will be used in the immedi- ate future only for the cost of permanent improvements to state buildings and institutions. This will reduce it materially. However, if West Virginia should be forced to assume her share of Virginia's debt which seems probable at the present writing, the state tax might again be resorted to for large revenues. The general property tax early met with the criticism that was being accorded to it in all parts of the country. A special tax commission, reporting in i884, 2 estimated that the amount of intangible property evading taxation was $50,- 000,000, and that the ratio of assessed value to selling price in the different counties varied from 19 to 226 per cent. 3 This commission also called attention to the difficulties of collecting taxes, particularly those of the railroads. Al- though these were subject to a certain amount of state super- vision, having been assessed by the board of public works, and having been required to pay taxes to the state treasurer, Compiled from data in Biennial Reports of the Auditor of West Virginia, 1875-1915. * Preliminary Report of the West Virginia State Tax Commission, 1884. 415] PARTIAL SEPARATION IN WEST VIRGINIA I2 i since 1869, the auditor and county sheriffs were unable to collect delinquencies. In 1870 only one-third of the taxes due were collected. 1 These difficulties led the counties to compromise with the railroads for the amounts due them. This and the evasion of personalty resulted in throwing an increased burden on real estate, until in 1884 it was paying 65 per cent of all taxes. 2 New taxes on corporation char- ters (1885), and on collateral inheritances (1887), were imposed following this report ; but no great effort was made to improve administration. Probably the burden of taxa- tion did not weigh sufficiently heavily. The rate on assessed value during this time was high, but this was due to the low rate of assessment. It has been estimated 3 that realty and tangible personalty were taxed at this period at from 10 to 60 per cent of actual value. In consequence this high rate was not for the most part bur- densome, although the inequalities were quite as serious here as in other states. A second tax commission, in 1902, reported with more effect, 4 and in 1904 a special session of the legislature re- vised the entire system, with the aim of centralizing the ad- ministration of the state and local taxes and abolishing, or at least greatly reducing, the state direct tax, replacing it with other taxes. To this end a number of measures were en- acted. A state tax commissioner with some power of con- trolling local administration, was created ; but in the absence of the power of appointment and removal his action was largely advisory. He was, however, given the power of appointing special assessors for an entire reassessment of real estate in 1905 at its " true and actual value," instead of 1 Preliminary Report of Tax Commission, p. 40. *West Virginia, State Tax Commission, 1884, Final Report, p. 40. 3 Conference, 1910, p. 168. *Ibid., pp. 167-168. I2 2 SEPARATION OF STATE AND LOCAL REVENUES [416 " fair cash value " as hitherto. He was further invested with the power of collecting the inheritance tax, which had up to that time been ineffectively administered by county officials. The assessment of all public-service corporations instead of only railroads as before was made a duty of the state board of public works. License taxes were revised, the state tax on general property was reduced to five cents per $100 valuation, and the limit on the rate of levy for local purposes was further reduced. 1 In 1906, and again in 1908, with the hope of raising valuations, the limits were put still lower. 2 The result of this legislation was, in the five years from 1904 to 1909, to increase the assessed value of real estate 3.43 times, to increase -that of personalty 2.75 times, and that of public-utility property 8.75 times. 3 As a result of this the tax rate for all purposes was at the same time reduced from $2.15 to 85 cents. The combined state and state school taxes were 4.5 cents in 1910.* Most of the rev- enue thus collected was used for school expenditure, less than $100,000 being used for state purposes. Thus the state has successfully reduced the tax on general property, and in- troduced as far as the constitution will permit other sources. Gross receipts taxes were levied on express and insurance companies, beginning 1864, and telegraph companies, begin- ning in i882. 5 The return from these taxes was, however, negligible, except from the tax on insurance companies, which since 1882 has risen rapidly. The gross receipts taxes 1 Conference, 1910, pp. 169-170. 2 The present maximum rates are 10 cents for state and state school purposes, 30 cents for county, 35 cents for municipal, and 15 cents, 25 cents, 10 cents and 5 cents, respectively, for various local school pur- poses. (Wealth, Debt and Taxation, vol. i, p. 101.) 3 Conference, 1910, p. 171. *Ibid., p. 173. 6 Laws of West Virginia Relating to ... Taxes, 1887, ch. xxxiv, sec. 13. 417] PARTIAL SEPARATION IN WEST VIRGINIA on express and telegraph companies were abolished in 1901, and mileage taxes on foreign companies were established. These are in addition to the state and local property tax. In 1904 the taxation of all public utilities was brought under state control. 1 License taxes, which were borrowed from the Virginia system, yielded more than three-quarters of a million dollars before 1914; but in that year prohibition was introduced, and since approximately four-fifths of the revenues from licenses had come from liquor licenses, this source is now of slight importance. An annual license tax on the charters of cor- porations, graded according to the amount of authorized capital stock, and differing for domestic and foreign cor- porations, was first imposed in 1885. It has developed into a lucrative source of revenue. The collateral inheritance tax law enacted in 1887 proved ineffective as long as it was under local administration ; but with central administration, undertaken in 1904, the yield was greatly increased; and the revision of the law and the addition of a direct inherit- ance tax, in 1909, have made it one of the leading sources of revenue. The present rates are one to three per cent on direct inheritances with a $25,000 exemption, 2 and three to five per cent on collateral heirs with no exemption. 8 Local revenues are derived mainly from the general prop- erty tax although poll taxes are an important source for school purposes. 4 2. EFFECTS OF SEPARATION West Virginia had the good fortune to start free at a period when other states were most deeply in debt. The 1 Conference, 1910, p. 170. 2 For the estate, not the individual bequest. 3 Conference, 1910, p. 289. Wealth, Debt and Taxation, 1913, vol. ii. 124 SEPARATION OF STATE AND LOCAL REVENUES [418 period of extensive borrowing for internal improvements and for the encouragement of private enterprise was over, and the Civil War was nearly ended. The third of Virginia's debt which was assigned to the new state she refused to assume. In consequence no appreciable debt has ever ac- cumulated, and since 1895 the state has been totally free from debt. 1 This freedom from handicap has been the chief cause of West Virginia's prosperous financial condition. and has made the small general property tax possible with- out the imposition of heavy corporation taxes. The local governmental cost payments (including counties and all local districts of over 2500 population) were, in 1913. $18.50 per capita. 1 Only five states had lower costs per capita, and taking state and local payments together only two states, Alabama and New Mexico, paid out less than West Virginia. The local per capita general property tax was smaller in only seven states. These small revenues and expenditures are not, of course, solely due to early freedom from debt The state has not extended its activities as rapidly as most of the neighboring states. The per capita general property tax was. in 1912, $7.67.* Nine states had a lower per capita rate at this time. The average rate on assessed valuation was 86 cents per $100. This is lower than that of any other state, the next lowest being $1.02 (in Kansas). If assessed values are only 49.7 per cent of true value, this makes a tax rate on real value of 41.1 cents. No state has a smaller rate on actual value. The burden of the general property tax has always been 1 Wealth, Debt and Taxation, vol. i, pp. 216-217. In 1912 West Virginia was the only state without a debt though in Pennsylvania the assets of the sinking fond exceeded the debt, {Wealth, Debt and Taxation, 1913, voL i, passim.) 1 From data in Wealth, Debt and Taxation, 1913, voL ii. PARTIAL SEPARATION IN WEST VIRGINIA light, but the assessment has not always been accurate. The ratio of assessed value to actual value is still, according to the census report, 1 only 49.7 per cent (1912), but, beginning in 1904, the state has taken heroic measures to attain equality, and the increased limitations on the tax rates and the centralization of administration, have tended to equalize assessment ratios, and probably to raise them. 2 Central control has been well developed. The state tax commissioner, appointed in 1904, collects the inheritance tax and some of the licenses. He also has general control of other taxes, although he acts chiefly in an advisory capacity, meeting with the board of public works, offering sugges- tions and requiring reports from local financial officials, and requiring them to keep levies below the maximum limit. County assessors are still elected, and these value corporate property, other than that of public service corporations, as well as that of private individuals ; but the assessments made by the state-appointed assessors in 1905 have at least given them a standard for their work for a time. All of the prop- erty of public service corporations is assessed by the board of public works, which is made up of state officials. There is no state board of equalization, but appeals from the county boards to the circuit court are provided for. 3 This system has supplied the state with ample revenues. Not only has the state no debt, but, in 1912, the cash and securities of the state were in excess of two and a half 1 Wealth, Debt and Taxation, 1913, vol. i, p. 16. 2 The state tax commissioner, while quoting no definite ratios asserts that the ratio of assessed to true value has been raised decidedly. {Con- ference, 1910, p. 171; 1909, p. 347). He is further quoted by the com- missioner of corporations (Bureau of Corporations, Taxation of Cor- porations, pt. vi, 1915, p. 69) as putting the ratio of assessed to actual value at 70 per cent. The increase of taxable values would seem to support this statement. 3 Conference, 1910, p. 168. I2 6 SEPARATION OF STATE AND LOCAL REVENUES [420 million. The adoption of prohibition in 1914 is cutting down revenue, 1 and the state, although up to this time it h->.s been somewhat backward in governmental activities, is r N beginning to expand its functions. Even so there seems to be no immediate danger of shortage of revenues. West Virginia is far from having abolished the state gen- eral property tax. The state derives only a very small por- tion of its revenues for strictly state purposes from the locally administered general property tax; but if the school tax which is paid to the state and then distributed accord- ing to the number of children of school age in each district is included, it amounts to fourteen per cent of total revenues. If, further, the tax on public service corpor- ations is included, and this tax is distinctly an ad valorem tax (differing from the tax on other property only in being centrally administered), the general property tax may be said to equal twenty per cent of the revenues of the state fund. 2 To this extent sources are not separated. How- ever the other eighty per cent is quite separate; license taxes, the taxes on insurance companies, and the collateral inheritance tax are distinctly state taxes. West Virginia has been striving consciously to attain separation under the handicap of a constitutional provision preventing classifica- tion for taxation. If the state should succeed in removing this barrier, as it is trying to do, it seems probable that separation will be completed. *By approximately $1,000,000: one quarter of a million for the locali- ties and three quarters for the state. 2 Exclusive of that part of the public-service corporation revenues returned to the localities. (Estimated from Auditors' Reports.} CHAPTER IX SEPARATION IN CALIFORNIA I. INTRODUCTION CALIFORNIA alone of those states achieving separation of revenues accomplished it at one move. In all of the other states the change was gradual. Special state taxes, particularly special corporation taxes, were experimented with first, when they were found to provide sufficient revenues for state use the general property tax was grad- ually reduced, and finally omitted altogether. The constitution of California, after its revision in 1879, did not, as did many state constitutions, require that taxa- tion be " equal and uniform," but it did provide that " all property in the State . . . shall be taxed in proportion to its value" 1 This was interpreted to mean the same thing, and so prevented classification for taxation. Without clas- sification separation was impossible. A clause preventing the release of the local divisions from their proportionate share of state taxes was a further barrier. 2 Prior to 1910 almost no special taxes, aside from inheri- tance and poll taxes, were employed. Corporations paid fees and annual licenses, but their property was taxed under the general property tax locally administered except that the franchise, roadway, roadbed, rails, and rolling stock of railroads operating in two or more counties, although taxed as other property, was assessed by state officials. The only 1 Constitution, sec. i, art. xiii. 2 Ibid., sec. 10, art. xi. 421] 127 I2 g SEPARATION OF STATE AND LOCAL REVENUES [422 special corporation tax was one on the premiums of foreign insurance companies. The people of the state amended the constitution in 1910, following the recommendation of the commission on reve- nue and taxation, by repealing all of the clauses preventing separation, and at the same time, not satisfied to leave the development of new methods of taxation to the action of the legislature, they devised and incorporated in the consti- tution an entire new system of state taxation involving the separation of sources of state and local revenues. 2. HISTORY OF TAXATION IN CALIFORNIA The general property tax was introduced in California in 1850, the first year of its existence as a state. The other sources of revenue devised in that year were a poll tax, a military commutation tax and a number of licenses. These taxes, excepting a license tax on foreign miners, were locally administered, and the local divisions shared in them. 1 All assessments of property were subject to review by the court of sessions (later by the county board of supervisors), acting as a county board of equalization, but inequalities were complained of from the beginning. In 1869 the state controller asserted that some land was assessed as low as 10 per cent of actual value, and that the inequalities within counties were so great that equalization by a state board, which was then being advocated, would scarcely touch the difficulty. 2 Such a board was created, however, in 1870. The investigations of this board revealed the fact that some land was assessed as low as 4 per cent of real value, and that the county boards of equalization, when equalizing at 1 W. C. Fankhauser, " Financial History of California." University of California Publications in Economics, vol. iii, no. 2, 1913, ch. 2, passim. 2 Biennial Report of the State Controller, California, 1867-69, p. 10. 423] SEPARATION IN CALIFORNIA all, were doing so by reducing valuations of the assessors. The ratio varied between different counties, from 15 to 80 per cent, and was estimated to average 42 per cent. 1 In 1872 the powers of the state board of equalization were enlarged so as to permit it to make additions to, or deduc- tions from, individual assessments with the result that the total valuation of property in the state was. more than doubled in that year ; but these powers were removed in the following years, until by 1876 the board became a purely advisory body. 2 Largely in consequence of this, valuations dropped (1874) more than $100,000,000. With the new constitution of 1879 and the act of 1880 the state board of equalization was invested with the powers of equalization by counties, and assessment of part of the property of rail- ways, 3 which last had hitherto rested in local hands. The board was not permitted, however, to raise or to lower in- dividual assessments, 4 and assessed valuations remained low and unequal. They were estimated to average 60 to 70 per cent in i882, r> 75 per ' cent in i888, 6 and 50 to 60 per cent in ic)o6. 7 Furthermore, under this system real estate everywhere was bearing an undue share of the taxes as compared with personalty. It is not un- reasonable, in the light of earlier assessment returns, to suppose that personalty should amount to at least fifty per cent of the total assessment roll, yet in 1905 real estate paid 85 and personalty 15 per cent of the entire state tax, ^ankhauser, op. cit., p. 191. z lbid., p. 238. 3 General Code, sec. 3665. 4 Wells, Fargo and Company vs. the State Board of Equalization, 56 Cal. 194- 5 Report of the California State Board of Equalization, 1882, p. 8. 6 Ibid., 1888, pp. 4-5. ''Report of the Commission on Revenue and Taxation of California, 1006, p. 63. I3 SEPARATION OF STATE AND LOCAL REVENUES [424 while in 1860 real estate had paid 54, and personalty 46 per cent. From 1872 to 1903 the personal property on the assessment roll remained stationary, while the assessed value of real property increased more than threefold. It was estimated that farmers were paying a tax equivalent to ten per cent of their income, while the tax on manufacturers was only equivalent to a two per cent income tax. 1 Such was the administration of the general property tax. which was supplying more than half of the state's revenue. Corpo rations, except foreign insurance companies, were, as stated above, taxed entirely under this tax, aside from minor licenses and incorporation fees. Until 1879 all railroad property had been locally as- sessed. The lack of uniformity and equality resulting- from this method led, in 1879, to putting into the hands of the state board of equalization the assessment of part of the property of railroads operating in more than one county. The collection of the taxes was left at first to county offi- cials, but owing to the trouble made by the railroads these supervisors often accepted smaller sums than were due lest they secure nothing at all. In 1883 the state controller was made responsible for the collection of these railroad taxes and better results were obtained ; however, there was still a great deal of litigation, based largely on the question of whether or not a state might tax a railroad incorporated under the laws of the United States. This was finally set- tled in favor of the state 2 and back taxes were paid in 1894. The system of taxing railroads, as it stood before the amendment of 1910, was as follows: All railroad prop- erty operated in more than one county, i. e., the franchise, 1 Transactions of the Commonwealth Club of California, vol. iii, 1908, p. 104. 2 People vs. Central Pacific Railroad Company, 105 Cal. 576, and Central Pacific Railroad Company vs. California, 162 U. S. 91. 425] SEPARATION IN CALIFORNIA roadway, roadbed, rails and rolling stock was assessed by the state board of equalization, this assessment being ap- portioned among the counties and local divisions in propor- tion to the railroad mileage in each. Until 1906 the board attempted to ascertain the actual value of railroad property, but after 1906 it substituted an assessed valuation which, when added to the valuation placed on locally assessed operative property, would yield, at the tax rate of the pre- vious year, a sum equal to four per cent of gross receipts from operation. This method was easier to apply and the re- sults were believed to be substantially the same. The as- sessment of all other property was left to< local assessors. All state and county taxes levied upon the assessments made by the state board were paid directly by the railroad to the state, which paid to the counties their share, levied at the rate on other property in each county. 1 In addition to* these taxes, the railroad paid directly to the counties, taxes on the property assessed by the counties, and to the cities, and to the counties for special school pur- poses, taxes levied both on the mileage and on other prop- erty in the cities or in the school districts. State adminis- tration, as far as it went, was fairly satisfactory. The total yield from this source in 1904 was nearly $2,000,000. But the system was unnecessarily complex. Street railroads were assessed locally and taxed in much the same manner as other property. The Pullman Company and some other car companies, before 1910, were assessed by the state board of equaliza- tion, the assessment being based on the number of cars operated within the state during the year and the state's proportion of those used in interstate business. They paid 1 For a discussion of the methods of taxing railroad and other cor- porate property before 1910, see the Report of the Commission on Revenue and Taxation, 1906, passim. I3 2 SEPARATION OF STATE AND LOCAL REVENUES [426 taxes on that assessment as well as on local assessments in the same manner as railroads. The amount paid in, in 1905, was $18,831, the larger part of which was paid by the Pullman Company. Other car, freight and express companies came under the law of 1905 imposing an annual license tax on all corpora- tions. They also paid license taxes in some cities. In addi- tion, state and local divisions obtained what they could through the general property tax. In 1905 express com- panies paid in taxes, exclusive of licenses, less than $15,000, most of which was paid by Wells, Fargo and Company. Many of the small companies escaped entirely. Telegraph and telephone companies were assessed locally and taxed under the general property tax. In addition, the telephone companies were subject to local licenses. Under this system the taxes on telephone companies amounted to 2.65 per cent of gross earnings; those on telegraph com- panies equaled 1.66 per cent. Light, heat, and power companies were likewise assessed and taxed under the general property tax. Their taxes amounted to about 3.03 per cent on gross earnings. Under the same system water companies in 1905 paid 7.09 per cent on gross earnings, except the Spring Valley Water Company, which paid 16.09 P er cent. 1 The provisions for the taxation of banks before the amendment were difficult to apply and unjust when applied, and the results were most unsatisfactory. National banks, owing to the conflict between California, and federal stat- utes, could be taxed only on real estate. The revenue laws were amended in 1899 to reach such banks more effectively, but the amendment proved defective and was finally de- 1 No objection was made to this heavy tax since the company was permitted to charge rates yielding a " fair return " on capital, and thus easily compensated itself for the loss in taxes. (Commission on Revenue and Taxation, 1906, p. 216.) 427] SEPARATION IN CALIFORNIA clared unconstitutional, in 1904, on the ground that it dis- criminated against national banks, inasmuch as they were taxed on the value of shares, which includes good will, and state banks were taxed on property, which does not include good will. No further attempt was made to tax the na- tional banks except on their real estate, and in consequence they were paying in taxes less than one-fifth of what they would have paid if assessed as other property. State commercial banks paid taxes on all property, with the privilege of deducting debts from solvent credits. Since the bank's debts, which included the amount owed to de- positors, generally exceeded the credits, their deduction left nothing, or at least very little, which could be taxed. The deposits were taxed to the depositors, and as they were rarely reported a large amount of taxable property (equal to about one-fifth of the total assessment roll) escaped. The tax on general franchises was applied to these banks, the valuation being made by subtracting the value of tan- gible and exempt property from the market value of the stock, and assessing the remainder at a fraction (about one- fourth) of the value attained to allow for the under- assessment of other property and to avoid taxing good-will. The banks paid this under protest, claiming that good-will which should not be taxed was included, but one decision * stated that all corporate excess was taxable even though it included good-will. Savings banks were taxed in the same way, except that their solvent credits were taxed without allowance for de- posits. The result was that they were paying a much higher tax than the commercial banks, although their tax was not excessive. In 1905 the taxes levied on national banks in California equaled twenty cents on one hundred dollars of capital; 1 Bank of California vs. San Francisco, 142 Cal. 276. SEPARATION OF STATE AND LOCAL REVENUES [ 42 g those on state commercial banks equaled eighty cents on one hundred dollars ; and those on savings banks amounted to one dollar and twenty-five cents. Another objectionable feature of this system of taxation, in addition to its inequitableness and inadequacy, was the restriction on the field of investment. Owing to the ad- vantage of owning the untaxed stocks and bonds o*f Cali- fornia corporations there was a tendency to exclude foreign capital. 1 The taxation of insurance companies before 1910 was characterized by a lack of uniformity. There was discrimi- nation between life- and fire-insurance companies, between domestic and foreign insurance companies, and between foreign insurance companies of different states. Foreign insurance companies were subject to the only special cor- poration tax in California a tax on gross premiums. 2 The method of taxing foreign life-insurance companies was slightly different from that of taxing other foreign in- surance companies, although the burden of the tax was approximately equal on both. Owing to a retaliatory pro- vision only companies incorporated in Connecticut, New Hampshire and Minnesota, which had the lightest insurance taxes, came under the rate provided. All domestic insur- ance companies were taxed under the general property tax. In addition, agents or companies were subject to local license taxes. Under this system the companies paid, in 1905, $148,000. Industrial corporations in California were taxed entirely under the general property tax before the amendment of 1910. The franchise value, which was recognized as a 1 Report of Commission on Revenue and Taxation, 1906, p. 239 et seq. 'This tax was imposed by laws of 1903 and 1904. A gross premium tax on foreign insurance companies had also been levied for a brief period once before (1864-1872). (Fankhauser, op. cit., p. 201.) 429] SEPARATION IN CALIFORNIA value arising from the privilege of corporate existence (with or without special privilege) common to all corpora- tions, was specifically included in the value thus taxed. 1 Assessments under this method were most irregular. Many, and in some years most, counties reported no assessable franchises, although they doubtless possessed some. Fur- ther, the amount assessed varied greatly from year to year. In 1896, for example, the value assessed was but little more than a quarter of the value two years before. 2 An incor- poration fee, graduated according to capitalization (some- times referred to as a tax on the franchise " to be ") was also imposed. The remainder of the revenue for state purposes was ob- tained from the poll and inheritance taxes, fees, and in- come from state lands, institutions and other property. The poll tax was an annual state tax of two dollars. It was estimated that about one-half of the men subject to the tax avoided paying it. 3 The inheritance tax was at first (begin- ning 1893) levied on collateral heirs only, but in 1905 it was extended to all heirs, and the tax was graduated. The revenue from these sources, together with that from corporation license taxes and taxes on insurance premiums constituted the revenue from separate sources, which formed a large and gradually increasing part of the total state in- come before 1910. It amounted to about thirty per cent of the total revenue in 1900, and about forty-four per cent in Aside from the difficulties everywhere encountered in trying to use the general property tax as the central state tax, 1 Report of Commission on Revenue and Taxation, 1906, p. 267 et seq. 2 Ibid., p. 58 et seq. See also C. C. Plehn, " Taxation of Franchises in California," National Municipal Review, vol. i, no. 3, p. 34. 1 Report of the Commission on Revenue and Taxation, 1906* p. 48.' * Computed from data in the Reports of the State Controller for these years. SEPARATION OF STATE AND LOCAL REVENUES [430 evils resulted from this system which were peculiar to Cali- fornia. 1 In a state where population is evenly distributed and conditions are fairly homogeneous the system might have worked very well. But in California there are two large, thickly populated commercial regions, and outside of these a vast area which is agricultural or mountainous, and sparsely settled. Whenever an attempt was made in one of these commercial centers to tax the franchise of a corpor- ation the corporation simply moved its " head office " to some rural place where the assessor could not reach it. 2 An even greater evil resulted from allowing the counties to collect a tax from railroads according to the mileage with- in the county. There are three gateways of traffic in Cali- fornia which take the through lines east over large unin- habited areas. The result of subjecting these lines to local taxation was to give large sources of revenue to counties having little need of money and contributing little to the value of the sources which they tapped. San Francisco County taxed twelve miles of railway while San Bernardino County taxed seven hundred miles. San Francisco County, in 1910, received 1.5 cents per capita from railroad taxes while San Bernardino County received $2.68. Some coun- ties received even more than San Bernardino per capita, the highest obtaining nearly $4. San Francisco's railroad tax that year amounted to 0.073 P er cent f ner property tax; Placer County's equaled 37.6 per cent. 3 Another evil of the system, similar to the one just men- tioned, was that the large power plants in the Sierras brought in a disproportionately large revenue to the sparsely settled counties in which they were located. 4 1 Conference^, 1911, p. 115. 2 This has also occurred in New York. Report of the Joint Legis- tive Committee on Taxation, 1916, p. 93. 3 Computed from data in Controller's Report, 1909-1910. 4 Conference, 1911, p. 117. 43 1 ] SEPARATION IN CALIFORNIA TABLE IX l CALIFORNIA STATE REVENUES, 1900, 1910 Source Amount 1900 Per cent 1900 Amount 1910 Per cent 1910 Total ........... ... $10,290,866 loo $16,931,166 General Property Railroad Separate Sources 6,797,034 278,335 3,215,497 66 3 31 8,436,048 437,744 8,058,175 Total, FROM SEPARATE SOURCES #3,215,497 loo Poll Inheritance Insurance Corporation License, Other 50,038 12 2 2,375>723 73 883,640 5,305>6i2 100 50 2 48 100 8 5 9 67 Before separation local revenues were obtained principally from the general property tax. The county and state prop- erty taxes were based on the same assessment; but cities often reassessed their property at a higher rate in order to keep their tax rate below the limit imposed by their charters. In the year 1909-10 the towns obtained $20,000,000 from property taxes, this being nearly two-thirds of their total ordinary revenues. 2 The remainder was derived from licenses, fees and fines. The counties in the same year obtained from ths source $26,000,000, just two-thirds of their ordinary receipts. They also obtained $6,500,000 as subventions on account of railroad taxes collected by the state, and as aid to schools. Other important sources of county revenue were licenses, fees, fines, interest on county moneys, commissions, and county poll taxes. 3. ACHIEVEMENT OF SEPARATION IN 1910 As early as 1894 the growing dissatisfaction with the 1 Compiled from data in Controller's Reports. * Annual Report of Financial Transactions of Municipalities and Counties for the Year 1911, passim. SEPARATION OF STATE AND LOCAL REVENUES [432 existing revenue system resulted in the appointment, by the legislature, of a committee of investigation. The recom- mendations of this committee were acted upon by the legis- lature but failed to produce any desired reform. 1 The mat- ter came up again in 1899, when a committee of three senators was appointed by the legislature. This committee investigated, and reported in 1901, but its recommendations were rejected. 2 In 1903 Governor Pardee in his inaugural address recommended further investigation with a view to fiscal reform. 2 He advised a gradual rather than a radical change in the system. This was followed in 1904 by the endorsement by the Commonwealth Club of California of the propositions ( i ) to abandon the attempt to support all of the departments of government by the same method; (2) to give up the endeavor to reach intangible personalty in the hands of the owners; and (3) to cease trying to use the general property tax for both state and local purposes. 3 In 1905 Governor Pardee urged the legislature to propose a series of amendments to the constitution increasing the powers of the legislature in matters of taxation, and as a result of this an act was passed by the legislature creating a commission on revenue and taxation for the purpose of in- vestigating the revenue system and recommending a plan of revision. This commission was composed of two senators, two assemblymen. Professor Carl C. Plehn and the gov- ernor as chairman. After examining the systems used in other states and investigating conditions in California the commission published a report of its findings in 1906. The plan of revision recommended was the separation of the sources of state and local taxes and the ultimate abandon- 1 Fankhauser, op. cit., p. 368. 2 Ibid., p. 369. 8 Commonwealth Club, vol. i, June, 1904. 433] SEPARATION IN CALIFORNIA ment of the general property tax by the state. 1 A constitu- tional amendment was necessary to effect this. The legislature adopted a resolution proposing the neces- sary amendment in March 1907. It was submitted to the people in November 1908, but was defeated by a majority of more than 25,000 votes. 2 The defeat was believed to be due largely to the political intrigues of corporations and interests whose taxes would be increased by the new system 3 although almost the only undisguised opponents were the city assessors, whose services, it was supposed, would be dis- pensed with under the new system, since the expected rise in the assessment ratio would make unnecessary the separate valuation of city property to keep the tax rate below the limits set by the city charters. Some opposition came from the Commonwealth Club of California because it was felt that an income tax on corporations would be fairer, and because no change was made in the manner of electing the state board o^ ^ - *, n Rate per $100 assessed value 'ZZtSZ "ttZSSr 1910-11 $1.47 $1.47 1911-12 1.69 1.51 1912-13 1.58 1.37 I9I3-M 1-75 M 2 1914-15 !-7 6 i-53 In spite of the increased local rates, due to the increasing demand for revenue and to the withdrawal of operative property, non-operative property is taxed less under separa- tion than it would have been under the former system. 1 Computed from data in Reports of the State Board of Equalization. 2 Computed) from data in Report of the State Controller. 3 This rate is the ratio of total taxes (Panama-Pacific Exposition tax included) to the appraised value of property, as made by the state board (Reports of the State Board of Equalisation, 1914, 1916) ; which appraised value is, as nearly as could be ascertained, equal to the full cash value of property. It was estimated before separation that under the new law this rate would be $1.00 per $100 on the real value of all property, in whatever manner or by whatever agent taxed. 4 Estimated from data in Annual Report of Financial Transactions of Municipalities and Counties of California, 1911-1915. SEPARATION OF STATE AND LOCAL REVENUES [446 Assuming that the same amount of revenue would have been collected for local purposes under the old system, had it remained in use, a rate of $2.29 on all property would have resulted in the same revenue as was raised by a rate of $2.53 in 1913. Consequently if a state tax of thirty cents per $100 * had been added to this the tax rate on property would have been $2.59, or six cents higher than it actually was in 1913. Thus while the burden on property is heavier than it was before separation, it is not as heavy as it would have been had the old system remained. Turning to the burden on subjects taxed by the state, it will be seen that a decided increase has been realized. Through the method oif capitalizing net earnings already explained 2 the commission computed the rate of taxation on gross earnings which would equal, according to its esti- mates, one per cent of the capital value of the different public service corporations. Applying the same method in 1911, with the gross and net receipts for that year, approx- imately the same results were obtained except for express and car companies. These results are as follows : TABLE XI s RELATIONSHIP or NET TO GROSS RECEIPTS OF CALIFORNIA PUBLIC UTILITIES, 1906 AND 1911 Class of Utilities 1906 Percentage 1911 Percentage Steam and Street Railroads 36.00 36.86 Gas and Electric 36.00 * 38.23 Telegraph and Telephone 20.00 21.10 Car Companies (Pullman) 36.00 l 14.55 Express 15.00 8.64* 1 (See p. 153). '(Seep. 153). Approximately the excess of the state tax under the former system over the Panama- Pacific Exposition tax under the present system. 8 Supra, p. 142 et seq. 3 Special Report on the Relative Burden of State and Local Revenues, 1912, pp. 16-17. 4 Because of the rapid depreciation peculiar to these companies the commission, in 1906, found it impossible, or at least impracticable, to 447] SEPARATION IN CALIFORNIA In the cases both of the car and the express companies, the percentages recommended by the commission, four to five per cent in the first case, and three per cent in the second, were reduced by the legislature to three and two per cent respectively. Thus these companies have not been unduly overburdened. 3 But the ratio of net to gross earnings is found to vary greatly with different companies. These variations were computed in 1911 to be as follows: TABLE XII* RATIO OF NET TO GROSS EARNINGS OF CERTAIN PUBLIC UTILITIES IN CALIFORNIA Railroads and Street Railways Deficit to 62.0 per cent Gas and Electric Companies Deficit to 75.5 per cent Telegraph and Telephone Companies 0.5 to 90.0 per cent The computations for express and car companies included in each case only a single company, viz., Wells, Fargo and Company and the Pullman Company. compute the ratio of net to gross receipts. Instead an estimate was made of the value of the property by ascertaining the cost of con- struction and equipment. It was assumed, in taking this " book value," that should it be higher than the cost of reproduction, the difference would be more than made up by the value of the franchise, which was not included in the cost of construction. It was found that one per cent of this cost was about the same as five per cent of gross earnings, and consequently a rate of four to five per cent on gross earnings was recommended by the commission. 1 The inaccurate computation of the ratio of net to gross receipts, 1906, was due to insufficient information. The Pullman Company did not in that year furnish the board with a statement of earnings and this estimate was made from what data could be obtained elsewhere. s This is for Wells, Fargo & Company only. It includes what is paid to the railroads for "express privileges." Were these payments ex- cluded from the estimates of gross receipts (the law forbids their exclusion) fifteen per cent would still be the ratio of net to gross receipts. *Cf. present rates, supra, p. 144. 4 Special Report on the Relative Burden of State and Local Revenues. 1912, passim. ! -4 SEPARATION OF STATE AXD LOCAL REVENUES [448 The state board of equalization, in order to test further the burden of the new taxes, made valuations of the com- panies by the " stock and bond " method. This method consists in ascertaining the market value of stocks and bonds, and multiplying the number outstanding by their respective prices. The ratios of taxes to valuations ob- tained by this method are as follov. TABLE xm 1 RATEOT TAXATKNI rexfioo ACTUAL VALUE ro* Pcvuc UTILITIXS, CAIIFOUOA. (GoTEKDiG OHLT THOSE COMPANIES VALUED), 1912-1916 1912 '9*4 1916 Raflroads aad Street Raflvajt 1^91 $1.10 $1.31 Gas aad Electric. .75 :S ijo8 Telegraph aad Telephone J)\ 1.12 1.40 Car Companies. .88 1.54 1.30 The low rate obtained for gas and electric companies (which have the same ratio of net to gross receipts as railroads) is explained by the fact that many of them are just developing, and are not yet operating to full capac- ity. Consequently their present earnings are small as com- pared with their expected future earnings. In the comparison of individual companies within the same class, wide differences in the tax burden are found. The rate obtained by this method varied for railroad com- panies from .34 per cent to 1.66 per cent; * in other words, some roads were paying five times as much in taxes on their estimated stock and bond valuation as other roads. Considering only those roads valued at over $5,000.000, the difference was less, being from .42 to 1.07 per cent The variation in gas and electric companies was from .31 to 441 per cent; i. e. 9 some companies were paying $1.00 * Reports of State Board of Equalization, 1912-1916. * Special Report on the Relative Burden of State and Local Revenues, 1912, p. 19 et seq. 449] SEPARATION IN CALIFORNIA in taxes where others were paying $14.28. When only those companies of $5,000.000 capitalization are considered, the variation is from .31 to 1.18 per cent Telegraph and telephone companies were paying any- where from 63 cents on $100 to $2.50; or, excluding the companies under $100,000 capitalization, from 71 cents to $1-57- In 1916 the discrepancies appear to be much smaller. owing in part to more accurate accounting in 1916, in part to some inflation of values in 1912.* But variations are still large. The burdens are resting by no means equally on the different classes of corporations or on die different cor- porations of the same class. This is, of course, assuming that " equality " means equal taxes for equal capital value. If gross earnings may be accepted as the criterion, then equality has been attained There are no data to show equality as measured by net earnings,, which is the more satisfactory standard. In comparing the present burden on public utilities with that before 1910, by means of the rate on gross receipts, a decided increase is shown : TABLE xnr ESTIMATED RATE oat C-* n v i Parpi<> OF PUBLIC UTILITIES, 1905 ASO> ACTUAL RATE, 1915 dma foof 1915 Street Raflwars ........................ AJOI Express ............................... 0.514 TetepboBe. ........................... **s +90 Telegraph ............................. ij66 _ - 1 Light, Heat and Pawn .................. jjoj :_: Water ................................ * PfeKm, "Stock and Bond Vataatiao of Pabfic Utifitics in Cafi- fornia. 1 * Report of Staff Tax Comrntissiom, 19161, p. iz. ^Report of Commission on Rmmme and Taxation, 19061 p. 6B; Report of State Board of EguaSaatm, 19161 p. 33. 156 SEPARATION OF STATE AND LOCAL REVENUES [450 The taxes paid by the railroads for state and county pur- poses on the assessments of the board of equalization were, in 1910-11, $2,163,226, including rolling stock. The re- maining taxes, paid on operative property as assessed by local assessors, amounted probably to between six and seven thousand dollars. Thus the total of taxes paid on operative property was nearly a million less in 1910-11 than in 1911- 12, when $3,736,000 were paid into the state. 1 The larger gas and electric companies paid, in 1911-12, about sixty per cent more in taxes than they had been paying; telephone companies had their taxes increased by one hundred per cent, and telegraph companies by two hundred per cent ; car companies were increased by fifty per cent. The greatest increase was for express companies whose taxes rose by five hundred per cent. 2 Bank and franchise taxes being ad valorem, it was un- necessary to make any special computations. Their taxes equaled one per cent of assessed value in 1911 and 1912, and the assessed value approximates true value as nearly as it can be estimated by the board. In 1905 state commercial banks had been paying eight-tenths of one per cent on their capital, savings banks 1.25 per cent, and national banks two-tenths of one per cent. 3 Bank real estate is assessed locally at from twenty to sixty-five per cent, averaging about forty per cent of its true value. 4 Corporations were assessed on franchises in 1911 at $167,500,000 and in 1913, $184,994,300, as compared with $29,190,000 under local assessment in 1910 and $20,142,- ooo in 1906. The taxes paid on franchises were $1,619,- 1 Report of the Controller, 1912, pp. 10-11. * Conference, 1911, p. 127 et seq. 3 Cf. supra, pp. 133-134- 4 Compare with the rate of assessed to real value of 45.1 per cent on other property. Special Report on State and Loral Taxes, 1912, p. 14. 451] SEPARATION IN CALIFORNIA 600 in 1911-12 and $1,557,500 in 1913-14, as compared with $700,600 in 1910-11 and $366,600 in 1906-07. l Thus under the new system there are being taxed between $100,- 000,000 and $200,000,000 of franchise value which escaped entirely under the old system. Of the $29,000,000 assessed in 1910, a large part was on public service corporations now reached through the gross earnings tax. Therefore the amount of taxes obtained from those corporations pay- ing over $1,500,000 in 1911 and 1912 was considerably less than $700,600 in 1910. The tax on insurance companies produced $520,200 in 1911-12, and $760,300 in 1913-14. In 1905 only $48,000 were obtained from this source. To sum up, the rate levied on property taxed locally, while it has advanced slightly since 1910, has not advanced to the point which it would have reached under the old sys- tem. The burden has been shifted in some measure from such property to corporate property, which is now paying this as well as its share of the normal increase due to' in- creased governmental expenditures. In consequence, be- tween corporate property and the property of individuals some appreciable equalization has been realized. But among ! the various kinds of property under the general property tax, among individual properties of the same kind in the same county, and among the properties of different classes of corporations and of different corporations of the same class, there are still serious inequalities not so great, to be sure, as before 1910, but still far from even approximating equality. 7. REVENUES AND ASSESSMENTS UNDER THE NEW SYSTEM Along with this shifting of the burden has gone a large l Cf. data in Reports of State Controller. 158 SEPARATION OF STATE AND LOCAL REVENUES [453 increase in revenues in all of the divisions of government. It was anticipated that the cities would be the greatest losers from the change, 1 since as cities they gained nothing through the removal o>f the state tax (the tax for state purposes having been collected through the counties), while through the withdrawal of operative property, three fourths of which (74.4 per cent 1912) is found within the cities, they would lose heavily. As a result of this it was feared that, since the tax rate is limited by their charters, their revenues would be greatly reduced and serious consequences would ensue. These fears have not been realized. The total value of operative property withdrawn from municipal taxation was, in 1912-13, $245,000,000. This is thirteen per cent of the total value of municipal property, 2 and it included seventy- four per cent of all of the operative property in the state. Some of the towns contained no operative property, but in several the amount withdrawn was over twenty per cent. In San Francisco the operative property (equal to thirty-eight per cent of all operative property) amounted to fifteen per cent, as assessed in 1912; in Los Angeles, twenty-one per cent. s Following the withdrawal of operative property some increases were made in the ratios of assessment. Los An- geles claimed to have raised her ratio of valuation about ten per cent in the year 1911.* The ratio has been raised in Oakland from fifty to sixty per cent, in Pasadena from sixty 1 Special Report on First Effects of Separation, 1911, p. 21. 'Computed from Financial Transactions, 1912. The value of all operative property in the state equaled twelve per cent of the total value of all property. (Report of the Controller, 1912.) 3 Report of the State Board of Equalization, 1912, pp. 20-21. 4 It was in Los Angeles that half of the increase in city assessment rolls for that year took place. Special Report on First Effects of Separation, 1911, p. 21. 453] SEPARATION IN CALIFORNIA to sixty-seven, and in Sacramento from sixty to sixty-eight.' 1 None of the other large cities has raised its ratio, although the ratios are only forty to fifty per cent in most of them. To what extent smaller cities have raised their ratios no attempt has been made to determine, but owing to the limi- tation of the tax rate some cities have probably been forced to raise their valuations in order to obtain sufficient revenue after the withdrawal of operative property. An examination of the fluctuations of the city tax rates shows no abnormal change. There are more increases than decreases, but this is attributable to growing bonded indebt- edness and broadening departmental activities, a natural result of the growth of cities. No difficulty has been encountered in securing sufficient revenue for municipal purposes. TABLE XV s MUNICIPAL PROPERTY TAX Percentage of Re Year No. of Cities Total Receipts Gentral^Property *** Tax 1910-11 133 $46,134,517 20,045,405 43 1911-12 191 46,777,804 21,476,153 46 1912-13.... 218 60,551,300 24,711,884 48 1913-14.... 233 66,830,330 29,714,855 43 1914-15.... 240 68,724,579 31,625,161 46 The increase in municipal taxes shown in this table is due in some measure to the larger number of cities included in the estimate each year, but this accounts for only a small part of the growth, since the towns added are small. Eighty per cent of the increase in revenue in 1912 took place in the fifteen largest cities. 1 Census Report, Financial Statistics of Cities, 1909, p. 240 et seq.; 1915, p. 318. 2 Financial Transactions, 1911-1915. !6o SEPARATION OF STATE AND LOCAL REVENUES [544 The changed system does not seem to have affected the amount of city revenues in any way. Receipts from the property tax, which are the only ones which might be affected by separation, have remained the same relatively to the receipts from other sources, as shown in the above table. San Francisco* showed a net gain of approximately $300,- ooo in 1911-12 and $150,000 in 1912-13. l Berkeley alone of the larger cities obtained less revenue from the general property tax the first years after separation. The amount of bonded debt outstanding in the munici- palities in 1911-12 was $65,573,033. The bond refunds paid in the year 1911-12 to the municipalities were $421,- 997, over $300,000 of which went to Los Angeles and San Francisco. In 1912-13 it was $507,330 and in 1913-14, $517,599. The amounts thus received have increased in- stead of diminishing, owing to the increase of operative property and to the raising of the ratio of assessed value of operative property above that of non-operative property (which the local assessors have tended to do), and because the interest and principal on bonded indebtedness, which were formerly paid out of the earnings of the public util- ities for which the bonds were issued, are now being paid from taxes. * However, as the bonds are retired the amount will gradually decrease. The cities, then, have not suffered from the new law as was feared. While the actual gains and losses have not been computed, it is evident that, with perhaps a few ex- ceptions, neither has been very great San Francisco, with a loss of fifteen per cent of her assessment roll, and Los An- geles, with a loss of twenty-one per cent, actually gained 1 This is the only city for which a computation of net gain has been made. (Special Report on State and Local Taxes, 1912, p. 23. Special Report on the Effects of Separation, 1911, p. 17.) 2 Report of Controller, 1916, pp. 21-22. 455] SEPARATION IN CALIFORNIA through the change 1 gain from the removal of the state tax exceeding loss through the withdrawal of operative property and many other cities seem to have done likewise. Tax rates have not increased abnormally, nor have the revenues decreased. Very little data have been collected concerning the effect on the different districts, but the state board of equalization stated 2 that the losses were small, and in most cases cov- ered by the reimbursement for bond taxes. Provision has been made for reimbursement by the counties for any losses occasioned by the withdrawal o. I9 SEPARATION OF STATE AND LOCAL REVENUES [484 This inelasticity has thus far proved to be the insur- mountable obstacle which has prevented the continuation of separation. No system of separation has included a variable state tax, and only under very favorable circumstances have the states been able to meet their needs without one. Dela- ware and West Virginia, with comparatively few state activities, and light expenditures, have not suffered ; neither has New Jersey with her large returns from incorporation fees ; nor Pennsylvania with her well-developed corporation taxes. But Connecticut, New York and Vermont have one by one returned to the state general property tax, and Cali- fornia, in her efforts to avoid it, is continually searching for new sources of revenue. Apparently the states cannot perform their proper functions without a variable tax. Central governments in Europe have operated successfully without such a tax, but central governments in Europe have been for the most part thrifty and far-seeing; their expenditures have increased less rapidly and less spasmod- ically; their administration has been more responsible and more efficient. In the United States administration has not yet attained the efficiency and responsibility which would make such a system feasible. A variable tax is at .present essential. Such a tax might be obtained by making the rates O'f corporation taxes variable, although this has never been advocated. Or the income tax which is meeting with such favor might be introduced at a variable rate. With the introduction of an income tax for state purposes com- plete separation of source disappears and is replaced by what Professor Plehn has designated as " true separation." This system would destroy none of the advantages of sep- aration of source with the exception of the rather doubtful advantage of the allocation of revenues according to the origin of the values from which such revenues are derived. And this system would supply, as separation has not always 485] CONCLUSIONS done, sufficient revenue. For even though the rates were fixed, they could be changed enough from time to time to keep a close correspondence between revenues and expen- ditures. To sum up: Separation of source has been introduced primarily to improve financial administration and increase revenues. It has improved administration of state finances to the extent that it has put important taxes in the hands of state officials, but local administration is little better than before. This, too, must be put under central control to be made efficient and can be, for separation of source does not necessitate separation of administration. There is noth- ing inherent in separation of source which will either achieve or prevent efficient local administration. Revenues are increased with the creation of the new taxes which are generally introduced with separation. Such increase of revenues from taxes not paid directly by all property owners has not increased extravagant expenditure appreciably, principally for the reason that the control of the people at large is not sufficiently direct to* be effective even when they feel the tax. Popular control of expendi- tures depends upon, the form of budget procedure. The in- crease of revenues at first brings relief toi an overstrained system, but the new system is not sufficiently elastic to ex- pand rapidly with growing needs. Consequently complete separation has been generally abandoned. There are no advantages to be derived from complete separation of sources which cannot be derived in other ways, and there is little likelihood that it will become a per- manent feature of any state's system; but as a transitional stage in the movement from the general property tax widely applied to classification for taxation it will doubtless play an important part. In the states where it has been intro- duced thus far it has been a mark of progress. BIBLIOGRAPHY GENERAL WORKS Adams, H. C., Science of Finance (New York, 1899). Bastable, C. F., Public Finance (3d. ed., London, 1903). Eastman, F. M., Taxation For State Purposes in Pennsylvania (Phil- adelphia, 1898). Ely, R. T., Taxation in American States and Cities (New York, 1888). Grice, J. W., National and Local Finance (London, 1910). Nead, B. M., Financial History of Pennsylvania, 1682-1881 (Harris- burg, 1881). Ott, F., Die Vermdgens- und Einkommens-Steuer in der Schweiz (Zurich, 1914). Plehn, C. C., Government Finance in the United States (Chicago, IQI5). Seligman, Edwin R. A., Essays in Taxation (8th ed., London, 1913). Scheftel, Y., Taxation of Land Value (Boston, 1916). REPORTS OF FEDERAL OFFICIALS Bureau of Corporations, Special Repot t on Taxation . . , 1912 (1913); Taxation of Corporations, Pts. i-vi (1909-1915). Bureau of the Census, Financial Statistics of Cities, (1909-1915); Financial Statistics of States, (1915); Wealth, Debt and Taxation, 1913 (1915, 2 vols.). REPORTS OF STATE OFFICIALS Arizona: State Tax Commission, Report, 1912. California: Commission on Revenue and Taxation, Report, 1906; Report, 1910; Constitution, 1879. State Board of Equalization, Biennial Report; Special Report on Taxation Showing First Effects of Separation, (1911); Special Report on the Relative Burden of State and Local Taxes, 1912, (1913)- State Controller, Annual Report of the Financial Transactions of Municipalities and Counties; Biennial Report ; Revenue Laws, 1912. State Tax Commission, Report, 1917. 192 [486 487 ] BIBLIOGRAPHY Connecticut: Governor (Bulkeley), Message to the General Assembly, January, 1889. Special Commission on the Subject of Taxation, Report (1887). Special Commission on the Taxation of Corporations, Report ,1913. Tax Commissioner, Address . . . Before the Farmers' Association of the General Assembly, March 10, 1909; Biennial Report; Information Relative to the Assessment and Collection of Taxes, 1913 ; Quadriennial Report of Indebtedness and Ex- penditures of Municipalities (1884-1916); Tax Law. Treasurer, Annual Report. Delaware: Auditor, Annual Report. State Revenue and Taxation Commission, Report, 1909. Treasurer, Annual Report. Florida: Tax Commission, First Biennial Report, 1914. Illinois: Special Tax Commission, Report on the Taxation and Revenue System, 1910. Kentucky: Special Tax Commission, Report, 1912-1914. Minnesota: Tax Commission, Biennial Reports, (1908-1912). Nebraska: Special Commission on Revenue and Taxation, Report, 1914. New Jersey: Commission to Investigate Tax Assessments, Report, 1912 (1913). Comptroller of the Treasury, Annual Report. Board of Equalization of Taxes, Annual Report. Treasurer, Annual Report. New York: Comptroller, Annual Report; Annual Tabulation of Statements of Desired Appropriations. Joint Legislative Committee, Report, 1916. Tax Commission (Board of Tax Commissioners), Annual Report; Tax Law. North Dakota: Tax Commission, Biennial Report, 1914. Pennsylvania: Auditor General, Annual Report; Compendium and Brief History of Taxation (1906). Secretary of Internal Affairs, Annual Report. Treasurer, Annual Report. 1 94 BIBLIOGRAPHY [ 4 gg Rhode Island: Board of Tax Commissioners, Annual Report, 2923. Vermont: Auditor of Accounts, Report. Commission on Taxation, Report (1908). Commissioner of State Taxes, Biennial Report; Special Report Relating- to Taxation, 2902. Report to the Legislature of 2900 on Double Taxation in Vermont. Treasurer, Biennial Report. West Virginia: Auditor, Biennial Report. Constitution. Department of State Tax Commissioners, Annual Report, Audit of the Finances. Tax Commission, Preliminary Report, 2884; Final Report, 2884. PROCEEDINGS AND BULLETINS OF CONFERENCES AND ASSOCIATIONS Transactions of the Commonwealth Club of California, (San Francisco). Weeks, J. D., Address before the Managers' Association of Cincinnati and Hamilton Counties, Ohio, March 6, 2894. Proceedings of the National Conference on State and Local 7~axation (1907-1916). Chapman, D. B., Inequalities of Town Taxation in Connecticut, A Paper Read Before the New London Board of Trade, Feb. 12, 2889. New York Bureau of Municipal Research Bulletins. New York Tax Reform Association Bulletins. Pennsylvania Tax Conference, Report on Selling Price, Assessed Valu- ation and Taxation of Real Estate in Pennsylvania, 2895. Addresses and Proceedings of the State Conference on Taxation in the State of New York. ARTICLES IN PERIODICALS Adams, T. S., *' Separation of State and Local Revenues," Annals of the American Academy of Political and Social Science, vol. 58 (1915). js~**~* Worthington, T. K., " Historical Sketch of the Finances of Pennsyl- vania, ' ' American Economic Association Publications, vol. 2 (1888) . Schanz, G., " .Zur Frage des Steuer-Prinzips bei den Gemeindesteuern," Finanz-Archiv, 32 jhrg., erster bd. (1915). Journal des Economistes, 6 ser., tome 49, (1916). Matthews, J. M., "Tax Administration in New Jersey," Journal of Political Economy, vol. 20 (1912). Plehn, C. C., "Taxation of Franchises in California," National Mu- nicipal Review, vol. i, no. 3 (1912). 489] BIBLIOGRAPHY Bullock, C. J., " Separation of State and Local Revenues, " Quarterly Journal of Economics , vol. 24 (1910). Daniels, W. M., "Taxation of Railroad and Canal Property in New Jersey," Quarterly Journal of Economics, vol. 20 (1906). McCrea, R. C., "Taxation of Personal Property in Pennsylvania," Quarterly Journal of Economics , vol. 21 (1907). UNIVERSITY SERIES Columbia University Studies in History, Economics and Public Law. Sowers, D. C., "Financial History of New York State, 1798- 1912," vol. 57, no. 2 (1914). Vineberg, S., "Provincial and Local Taxation in Canada," vol. 52, no. i (1912). Wood, F. A., " Finances in Vermont," vol. 52, no. 3 (1913). Johns Hopkins University Studies in Historical and Political Science. Hollander, J. H., ed., " Studies in Taxation," ser. xviii, nos. 1-4 (1900). University of California Publications in Economics. Fankhauser, W. C., " Financial History of California," vol, 3, no. 2 (1913). VITA MABEL NEWCOMER, the writer of this monograph, was born in Oregon, Illinois, on July 2, 1891. She entered Leland Stanford Junior University in 1909, receiving the degree of A. B. from the department of economics in Jan- uary, 1913, and the degree o>f A. M. in June, 1914. Dur- ing the year 1915-16 she held the Garth Fellowship in Eco- nomics at .Columbia University, where she studied eco- nomics and politics under Professors Seligman, Seager, Simkhovitch, Mitchell. Chaddock, Beard and McBain. During the year 1916-17 she has acted as lecturer in eco- nomics in Barnard College. 197 LAST DATE rrF OF 25 CENTS OVERDUE. 2320 UNIVERSITY OF CALIFORNIA LIBRARY