Popular Science Monthly/Volume 28/February 1886/Recent Experiments in State Taxation
| RECENT EXPERIMENTS IN STATE TAXATION. |
By HENRY JAMES TEN EYCK.
TO growl is the privilege of the tax-payer. To secure the entire amount of the necessary revenue with the smallest growl is the aim of the legislator. Probably there is no more unpopular official than the tax-gatherer. Among persons of property the idea seems to prevail that taxation is a kind of robbery which is to be evaded if possible. It is true that the public treasury has often been filled simply that thieves might plunder it, or that worthless citizens might be supported at public expense, as a reward for their political work. This is the case particularly in the administration of municipal affairs. The national and State governments have been conducted, in spite of the observance of the odious spoils system, with an efficiency and economy unequaled by but few great business houses. Even better service would undoubtedly be obtained if the public had a fuller appreciation of the truth of the old paradox that the dearest labor is the cheapest. More liberal salaries for positions of trust and executive control would tend to elevate decidedly the standard and ability of the men in the public service. But, unfortunately, propositions of this character do not meet with general approval. The vulnerable spot of the American is his pocket-book. When an official lays his hands on that, the victim resents the attack with indignation, and submits, after loud protestations and threats, to the demand for his money, only out of respect for the superior power of the law. The dominant party, in attempting to carry on the government satisfactorily, and, at the same time, not arouse the voter who pays the taxes, has a difficult problem to solve. In the United States, where the voter is the ruler, political managers find it essential to continued success to make the drafts on the ruler's pocket-book as light as possible. All parties would be happy if the public treasury could be filled by the touch of a magician's wand, so that taxes might be abolished. But, as they are a necessary evil, a scheme of taxation without lamentation is what is wanted. In the law laid down by Professor William G. Sumner, that taxation tends to diffuse itself, but on the line of least resistance, is found a hint for the basis of this scheme. Turgot, the great French financier, expressed the politician's idea very tersely when he said that the science of taxation is to pluck the goose without making it cry. In hunting for the line of least resistance, and the most scientific methods of plucking, several interesting experiments have been made of late in different States, where new sources of revenue have been sought from special taxes on corporations, railroads, telegraph, telephone, and insurance companies, collateral inheritances, and other classes of property which can be plucked without producing a cry liable to strike a chord of sympathy in the popular heart. In most instances these experiments have surpassed in their results the expectations of the proposers. Large revenue has been obtained without provoking even a murmur of disapproval from the voting classes. In Vermont, for example, no direct tax was levied in 1883 and 1884, the receipts under the corporation tax law paying the expenses of the State government. The Comptroller of New York received $9,569,161.35 in 1884, of which $1,603,612.75 were paid by corporations. Last year,[1] although the Wisconsin Legislature authorized a levy of 1240,000, the State Treasurer was not obliged to collect any direct tax, as the license-tax from railroads, insurance, telegraph, and telephone companies was sufficient to meet the current expenses. The Treasurer of Minnesota states that "the revenue from the corporation tax is steadily increasing, and if it should continue to increase, and the probabilities are that it will, as it has done for the last four years, it bids fair to pay all the expenses of the State government." In New Jersey there is no regular tax, except for schools, as the new railroad and canal tax law and the tax on miscellaneous corporations maintain the government.
These are striking illustrations of the workings of a new system of imposing special taxes on special classes of property, which was only first tried about ten years ago. The idea of treating railroads and corporations generally in a different manner in the tax levies from other kinds of property was a development, perhaps, of the granger and anti-monopoly movements. It is founded on the theory that parties enjoying special privileges from the State should share with the State, to some extent, the profits of their enterprises. If the Government gives certain individuals peculiar advantages and protection in the inauguration and prosecution of their schemes and business, it is held that they should make a return for the favors granted, in proportion to the success of their undertaking. In every State where the plan has been tried it has worked admirably. After a stout resistance on the part of the corporations, resulting in a judicial interpretation of all the provisions of the statute, the execution of the new law goes on smoothly in each State. The largest corporations naturally fight every encroachment on their sources of income, but when the law is once in full operation they submit gracefully. The various Legislatures adopting the system have endeavored not to make the tax too heavy. If the rate is moderate it inflicts no serious burden on the corporations, and yet brings a handsome sum into the public treasury. The benefits of this new plan have, so far, been appreciated only in the New England, Middle, and Northwestern States. Twelve States now impose special taxes on railroads and other corporations. In eight more, including three Southern States, insurance companies are subject to a special rate. The ordinary method of levying a direct tax on real and personal property still furnishes, in the large majority of States, almost the entire revenue. The old poll-tax remains a favorite form of taxation in parts of New England and the South, twelve States raising most of their school funds in that way. An examination of the tax laws of each of the thirty-eight Commonwealths indicates, however, a steady development of the idea of "taxation without lamentation." The attack is not confined to corporations. There is a reaching out in every direction for special subjects for taxation. If one State finds an object that can pay special rates without suffering materially, and without raising a popular outcry, other States follow in the line of the discovery. On the other hand, a number of experiments have been abandoned, after a year or two of trial, because the law was unconstitutional or unpopular. All the New England States have a tax on deposits in savings-banks. Maryland, Virginia, and Pennsylvania tax collateral inheritances. In New Hampshire the courts recently declared a law of this kind unconstitutional. Nine States derive part of their revenue from a tax on the liquor-traffic. Eight secure a considerable amount from licenses granted to trades and occupations by the State, instead of by the local authorities, as is the custom in most sections. A few of the oddities of taxation by States may be referred to here. Maryland last year obtained $110,050 from a tax on the commissions of executors and administrators of estates, one tenth part of the sum allowed them by the Orphans' Court being demanded by the State. North Carolina derived $63,000, in 1884, from a license of $100 on drummers. The declaration of the Ohio Supreme Court, last autumn, that the Scott liquor law was unconstitutional, has deprived the State of an annual revenue of over $50,000, and the cities within its borders of half a million. Pennsylvania and Virginia have income-taxes. Georgia gets $300,000 per annum as the rental of the Atlanta and West Point Railroad, and Illinois has seven percentum of the gross earnings of the Illinois Central Railroad, between $350,000 and 8400,000 a year, as a charter tax. In South Carolina seventeen companies paid a royalty, for the use of the phosphate-beds, of $154,318, which is about one quarter of the amount raised for State purposes. The occupation tax in Texas covers a very extensive list of trades and occupations. The total receipts of the treasury in 1884 were $1,539,918, and of this sum the occupation-taxes furnished $774,756. In Massachusetts there is a law for the taxation of corporations. The levy is made by the State; but the amount paid in is redistributed by the Stale to the cities and towns where the stockholders reside, and only so much thereof as is from non-residents remains in the State Treasury. Pennsylvania, by some strange process of reasoning, thinks that a man who owns a watch should pay a tax for the privilege. As only 45,590 watches are reported by a population of 4,500,000, the inference is, that the Quakers either conceal their time-pieces in an inner pocket, or regulate their lives by the town-clock or the sun,
A glance at the laws of a few States which have secured the most notable results in the direction of special taxation will show the scope and bearing of the movement. Pennsylvania may, perhaps, be called the pioneer. It has tried more experiments and probably reaches more special classes than any other State. The tax on the capital stock of all corporations, which yielded to the State $1,535,727.50 in 1884, is one half mill for each one per centum of dividend declared, provided the annual dividend amounts to six per centum or more. If the dividends are less than six per centum, or if there are no dividends, the tax is three mills upon each dollar of the appraised valuation, or market value, of the stock. A further tax of eight tenths of one per centum is imposed on the gross earnings of transportation and telegraph companies. This brought in last year $787,929.20. Insurance companies are assessed eight tenths of one per centum on gross premiums, and bank-stocks, mortgages, and loans of different kinds pay four per centum on every dollar of the value thereof. These special classes paid $954,843.59 in 1884. Collateral inheritances of over $200 are taxed three mills on every dollar. From this source $461,465.48 were derived. Tavern-licenses amounted to $426,429.19, and retailers' licenses to $301,393.42. Nothing illustrates better how effectively this system of special taxation can be applied than the fact that while the total receipts of the Pennsylvania State Treasury in 1884 were $6,226,959.38, only $502,025.43 were raised by a direct general tax. New York State, which is first in wealth and the amount of revenue collected, has not pushed the system to such an extent, although it is rapidly following in the course of its neighbor. The tax on the capital stock of corporations is only one half of that levied in Pennsylvania, namely, one quarter of a mill for each one per centum of dividends if the dividends equal or exceed six per centum, and one and one half mill upon each dollar of a valuation of the capital stock when they are under six per centum or nil. The tax on the gross earnings of transportation, navigation, telegraph, and telephone companies is one half per centum. This yielded in 1884 $1,603,612.75, insurance companies paying on their capital and premiums $241,676.15 of the amount. In Wisconsin, where special taxes have also worked well, the plan is somewhat different. The license-tax, as it is called there, applies to railroads, insurance, telegraph, and telephone companies. Railroads are taxed from five dollars per mile of operated road to four per centum of gross earnings, as follows: If the road earns less than $1,500 per mile, it is taxed five dollars per mile; on those earning more than $1,500 and less than $3,000 per mile, the tax is five dollars per mile, and two per centum on the excess over $1,500 per mile; on those earning $3,000 or more per mile, the tax is four per centum on gross earnings. Telegraph companies pay one dollar per mile for the first wire, fifty cents per mile for the second, twenty-five cents per mile for the third, and twenty cents per mile for the fourth and all additional. Telephone companies pay one per centum on gross receipts, and insurance companies two per centum on gross earnings. This tax or license is in lieu of all other taxes, and amounted in 1884 to: Railroads, $754,269.44; telegraph, $4,568.85; telephone, $1,169.26; insurance, $64,904.75; or a total of $824,912.30. Vermont, which pays nearly its entire expenses out of the special taxes, has a law somewhat similar to that of Wisconsin. It levies two per centum on railroads on the first $2,000 of earnings per mile. The rate increases one per centum for each additional $1,000 per mile up to $5,000, and on all earnings over $5,000 per mile it is five per centum. Insurance companies pay two per centum on gross premiums, and life-insurance companies in addition one per centum on all surplus over the necessary reserve computed at four per centum on existing policies. banks pay one half per centum on deposits; express, telegraph, and telephone companies, three per centum on gross earnings, and steamboats two per centum. These quotations are sufficient to show the methods of corporation taxation.
The expediency and justice of a tax on collateral inheritances is not 80 readily admitted. Although it has been enforced as a war-tax, it is somewhat of an innovation on the principles of taxation observed in this country. There is a slight flavor of communism in the idea, yet the proposition is not altogether objectionable, and may be sustained by good arguments. A law of a similar character has been in operation in England many years. It is held to be in the nature of a franchise or license tax, upon the right derived from the state of transmitting property, and is inflicted only when property is bequeathed out of the immediate family. If there are no constitutional objections, the recipients of the bequests certainly have no cause for complaint, if the Government compels them to pay a small share of their gift for its support. A Pennsylvania man, for instance, who receives a windfall of $100,000 from a distant relative or an intimate friend, will obtain no sympathy if he growls because he is obliged to turn over $3,000 of it into the public treasury. lie is better able to do so than any other man who has acquired his property by hard toil and individual exertion and enterprise. In Maryland the rate is two and one half per centum on every $100 of collateral inheritances over $500, and the tax yielded, last year, $86,218.46. The New York Legislature last winter passed a bill imposing a tax of five per centum on similar bequests. Although it aroused some opposition, Governor Hill signed the measure, with a recommendation that it be amended next winter so as to place the limit at $5,000 instead of $500, it being argued that in its present form it might place heavy burdens on poor persons who might receive small bequests of $1,000 or $2,000. It is estimated that the new law will yield annually in New York between $750,000 and $1,000,000. Evidences of the spread of the idea of "taxation without lamentation" are found in the recent proceedings of the Legislatures of other States. In Pennsylvania a bill was introduced, in April last, imposing a tax of five mills on the interest of deposits in savings-banks having no capital stock. There are obvious reasons for not taxing deposits in savings-banks, and it is to be hoped that this sort of special taxation will not be more extensively adopted. Notwithstanding the disastrous results, politically, in other States, of a heavy tax on the liquor-traffic, Illinois has just placed on its statute-books a law imposing a tax of $500 per annum on the sale of liquors, and $150 per annum on the sale of beer. In California, at the last session, a bill was passed to submit to the people an amendment to the Constitution providing that railroads shall pay an annual tax of two and a half per centum on gross earnings, and also that income-taxes may be assessed and collected from persons and corporations. The existing laws, and these recent efforts to secure additional statutes for raising the State revenues by means of special taxation, mark the development of new methods of taxation based principally on the growth of corporate wealth and the prosperity of certain privileged and, in some cases, like the liquor-traffic, objectionable classes of industry and business. The proportion of the States in which they are on trial is as yet small. The number, however, is steadily increasing. As the advantages of the new plan are brought more clearly before the notice of legislators, we may expect a revolution in State taxation. So great has been the progress in the past ten years that it would not be astonishing to see at the end of the next decade fully one half of the States levying merely a nominal direct tax, or none at all. Special privileged classes will probably bear the burden of State taxation in the future. The tariff will furnish the national revenue, and the main tax on real and personal property will be for the necessities of county and municipal government. The only danger lies in a tendency to overdo the matter. The special taxes must not be oppressive. The rights of the special classes, as well as of the other tax-payers, must be protected. If co-operation between the States could be assured, so that uniform and equitable rates might be established, great benefit would be derived by all property-owners.
- ↑ 1884. The article was written June, 1885.