CORNELL UNIVERSITY LIBRARY ysi^-^ a- .ariM," ky:\^ ^JBMMY. Cornell University Library HJ2438 .A7 1911 Report to the General assembly of Virgin olin 3 1924 030 265 361 \\<\ Cornell University Library The original of this book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924030265361 REPORT TO THE General Assembly of Virginia BY THE TAX COMMISSION APPOINTED TO MAKE AN INVESTIGATION OF THE SYSTEM OF ASSESSMENT, REVENUE AND TAXATION NOW IN FORCE IN THIS STATE. William Hodges Mann, Chairman J. Taylor Ellyson Richard Evelyn Byrd Robert R. Prentis A. M. Bowman Douglas S. Freeman, Secretary Richmond. Va. Printed by Order of the Commission, 1911. w GQUK'l l-l UHlVlf'gliY The Richmond Pkbbs, Inc. Pkintebb. TABLE OF CONTENTS. Letter of Transmittal .- v Summary of Recommendations vii Report of the Commission xi Appendix. Report of Tax Commission. LETTER OF TRANSMITTAL. To the General Assembly of Virginia: Pursuant of the act of Assembly, entitled "An Act to provide for the appointment of a commission upon the reform and revision of the tax and assessment laws of Virginia; to define its duties; provide com- pensation for its members and to make an appropriation therefor," approved March 14, 1910, the undersigned organized on June 28, 1910. Douglas S. Freeman of the city of Richmond was chosen as expert member and Secrecary of the Commission. In submitting herewith the results of our investigation we are glad to report harmony among the members of the Commission. We regret however, the resignation of Senator George B. Keezell, which left a vacancy in the Commission. We could have wished that the ripe experience of this gentleman had been brought to bear on our work. It has been our purpose, throughout our work, to make such recommendations alone as were practical and operative. Many theories of taxation have in consequence been discarded and many plans of reforms have been rejected because, in our judgment, they were not of practical value to the Commonwealth. The recommen- dations which follow we believe to be of immediate importance, practi- cal, advisable and feasible. Following our report will be found an Appendix containing the various reports filed with us by our Secretary. In these will be found all the tables and detailed information to which we refer elsewhere. Respectively submitted, William Hodges Mann, Chairman J. Taylor Ellyson Richard Evelyn Byrd Robert R. Prentis A. M. Bowman Dec. 16, 1911. Report of Tax Commission. vii SUMMARY OF RECOMMENDATIONS. 1. To create a permanent unpaid Tax Commission of nine existing State officers with a paid executive officer, which Commission shall have power (1) to equalize assessments among the counties and cities of the State by fixing a standard valuation for each class of tangible personal property, an average per acre valuation for each county and average frontal valuations for each city; (2) to remove Commissioners of the Revenue for violation of the law or for neglect of duty ; (3) to formulate reasonable rules and regula- tions for the uniform assessment of improvements and for the general enforcement of the revenue law. 2. To provide proper appeal from the rulings of the Tax Commission, in fixing averages and standard valuations, said appeal to lie to the Circuit Court of the city of Richmond. 3. To require the statement of the exact valuable consideration in- volved in the transfer of real property in order to form a basis for an average per acre or frontal valuation. 4. To abolish the land Assessors as .separate officers of the law and to provide for the assessment of lands and improvements by Commissioners of the Revenue. 5. To reduce the State tax on stocks, bonds and other evidence of debt to 25 cents on the hundred dollars' valuation and to limit the local tax to the same amount. 6. To make any class of property subject to lien for taxes due on any other class of property. 7. To require local Treasurers to mail tax bills to all tax-payers whose bills exceed $2.50, exclusive of polls. 8. To give Commissioners of the Revenue power to modify, after five days' notice, any tax return which they may believe to be errone- ous, giving the tax-payer the right of appeal. 9. To exempt from taxation by any locality the bonds of all other Virginia localities when such bonds are not taxed by the locality issuing them. 10. To place all public service corporations on a gross earnings basis of taxation as soon as the decisions of the Federal Courts will warrant such action. 11. To require an accurate report of the gross earnings of all telephone and telegraph, express and passenger car service companies. viii Report qf Tax Commission. 12. To increase the tax of passenger. car service companies from $2 the mile to $4 the mile ; and to increase the tax on express companies from $6 the mile operated to $7.50 the mile operated, requiring the latter to pay a tax for each line of steamships operated over the same course. 13. To impose a tax on the property of freight car service corpora- tions used in the State. 14. To make the following changes and additions to the specific license taxes: a. To increase the license of the dealer in options from $200 to $300. b. To increase the stock broker's license from $100 to $150 in small cities and from $250 to $350 in larger cities. c. To increase the pawnbroker's license to $500 and to reduce the interest rates chargeable 50 per cent. d. To provide a fine of $100 in addition to the penalities already prescribed for violation of the money lenders' act. e. To make clear the distinction between eating houses and houses of private entertainment. f. To include professional baseball games in those subject to taxation as public performances. g. To increase the license of venders of medicine from $25 to $100. h. To impose license registration taxes on certain classes of in- vestment companies. i. To extend the license tax on traveling companies of gypsies to each individual clairvoyant, medium, astrologer, etc., and to make this tax $500. 15. To require every firm, corporation, etc., operating in Virginia to report to the Tax Commission the amount of all salaries, fees, etc., paid by such firm, etc., to any citizen of Virginia in excess of $1,000 the year, said reports to be forwarded to the Commission- ers of the Revenue and to be prima facie evidence of assessment with income in that amount. 16. The amendment of the Mineral Assessment law to provide (a) that the assessment be made in every year by the Mineral Assessor and the Commissioner of the Revenue, (b) that in case of dis- agreement between the assessing officers, the opinion of the Min- eral Assessor shall prevail, subject to appeal; (c) that notice of appeal from any assessment be served on the Corporation Com- mission. Report of Tax Commission. ix 17. To abolish the 10 per cent, offset in the bank tax, now allowed for debts due by shareholders. 18. To increase the tax on the manufacturers of fish oil and manure from one-half of one per cent, to one per cent, on sales. 19. To impose on Commissioners of the Revenue the duties now per- formed by Examiners of Record and to abolish the latter as officers of government. 20. To presecute vigorously the examination of the books of local assessing officers and to establish a uniform system of bookkeep- ing among them, under the general supervision of the Tax Com- missioner. 21. To equalize assessments and to bring them to the constitutional valuation, with a view to the ultimate separation of the sources of local and State revenue. Report of Tax Commission. REPORT OF THE TAX COMMISSION. Detailed Recommendations. To reduce the burden of taxation by equally distributing it among the tax-payers of the Commonwealth has been the prime object of our investigation. We have not sought additional sources of revenue, except as we have found property escaping taxation ; we have not recommended the imposition of added taxes in a single instance, except where such increase was essential to equalization; we have rather sought to devise laws which will yield a proper and stable revenue to the Commonwealth while equitably exacting as little as possible from the tax-payers. By keeping this object constantly before use, we have striven to formulate a code which will speedily and notably reduce the taxes of all those who now bearing an undue part of the public burden. From the first we have been guided by a few leading principles. The first of these — confirmed by investigation — is that not all our tax laws need reform. Some of them might well become a model for all States, though others are a sad warning as to the possibilities of unjust legislation. Our reference to the latter, however, is not to be construed as discounting the former. While reforming those laws which are unjust, unequal in their operation, or false in their theory, we have felt that we should not proceed upon the theory that whatever is, is. wrong. We should rather remember that the reform of a comparatively few laws, in some essential respects, will bring the whole code to the standard of our model laws and will give Virginia a tax code which will encourage industry, properly distribute the public burden and operate justly on all citizens. We have become convinced, in the same way, that the road to successful tax reform is by evolution and not by revolution. Some laws there are on our statute books which cannot be justified and which must give place to new and revolutionary laws; but these are few in number. The great body of our laws needs only to be readjusted to changed economic conditions. xii Report of Tax Commission. Again, our work has convinced us that while our problem is confined to a comparatively few laws and is evolutionary in char- acter, it is likewise in large measure a problem of equalization. We need, in a word, not so much to reform the laws as to reform the administration and to see that the laws are equitably en- forced. If this be done, substantial justice will be attained. The tax on lands is a case in point. The law is a wise one, its basis is absolutely sound and its fundamental justice cannot be questioned. Yet as this law is administered, it works the grossest possible inequality and frequently places on one citizen a tax four times as great as that paid by another man on property of the same value. If, therefore, this tax be equalized through sane and proper administration, what appears to be a gross evil will readily be corrected. We have likewise sought to remember, in framing our recom- mendations, that our problem is constructive, not destructive. It is easy to criticise and easy to overthrow. It is easy to declare a certain class of property is escaping taxation and it is easy to impose a tax which will yield a large revenue from that class. But this is not the true policy of taxation. Rather it is to devise laws which will not "tax progress"; but which, by justice and honest administration, will establish equality among all tax- payers and encourage economy and industry. Too much tax legislation of the past has been brigandage and too much adminis- tration has been destructive. Our laws must be based upon the theory that the duty of the State is to aid those from whom it derives its revenue and to render the best possible service, in every way, with the funds received. We have dwelt at length upon these facts, because they will be found to underlie all the appended recommendations. We have striven to recommend reform only where reform is needed; we have sought revolution only where evolution is impossible; we have tried to regard the end of taxation as constructive; and we have aimed to so equalize the general burden as to accomplish a genuine reduction in the tax rate. Separation. Much of our work has been elimination. This has particularly been the case with the question of separating or segregating the sources of revenue. The Assembly, in the act creating the Report of Tax Commission. xiii Commission, instructed it to report on this subject in detail and to outline, if possible, some method of separation. We are con- vinced that in spite of certain defects which have not been given proper consideration in the past, separation is a wise policy. It conforms to natural conditions, places property where it can best be taxed, simplifies regulation, promotes harmony in taxation and has, in many cases, been the means of a substantial reduction in tax rates. But these advantages cannot at present be attained in Virginia. The ideal basis of separation, as generally urged, is that of taxing corporate property by the State and of taxing private property, real and personal, by the locality. As this would mean a net loss to the State of $2,013,386.62 with a return of but $1,496,296.00, such a plan is, of course, impossible at this time. Various modification of the plan have been suggested, the most feasible of which is to require the localities to pay their misde- meanor criminal expenses, in addition to giving up corporate property in exchange for the exclusive right to tax real and per- sonal property. Yet this, with possible reductions in the ex- penses of collecting and assessing taxes, would mean a net loss to the State of $214,400.00. The only other class of property suited for separation is business licenses, but even if thesd'be separated, the margin of gain to the State is only $381,603.81. In other words, if the State tax corporations and licenses exclusively, and make the localities pay their misdemeanor criminal expenses, while taxing lands and personal property exclusively, the State will gain $381,630.81. Although this is probably a safe margin against loss, despite the fluctuations to which the State's revenue will be subject, we cannot recommend this method of separation. It presents objections and difficulties which are insurmountable. For ex- ample, it deprives the localities of their most desirable revenue, while giving them in return the revenue which is hardest to collect; it requires the continuance, at the present rate, of certain corporation taxes which need equalization and adjustment; and, above all else, this plan of separation will mean a net loss to at least thirty counties and a loss to practically all the small towns of the State. The loss to the counties of the corporate property, now assessed at the local rate, will not be compensated for by the real and personal property returned them and now taxed at the xiv Report of Tax Commission. State rate. The towns will be decided losers, not only on this account, but because of the fact that the license taxes, which they would lose, are among their surest and most reliable sources of income. We have attempted to devise other methods of separation which will leave the State a safe margin without endangering the interests of the localities; but we have been absolutely unable to do so. The reason for this is fundamental and indicates the line of true reform. As long as the localities assess their property below the market rate, they will lose by any system of separation which will give them the- revenue from this source, at the State rate, while taking from them corporation property, which is assessed at a standard figure and is taxed locally at the rate of the county levy. These objections to this system, and the detailed information regarding the operation of the various plans of separation, will be found discussed fully in the report of the Secretary to the Commission. To conclude, we can recommend no plan of separation at this time, and must express the opinion that equalization and uniform assessment are prerequisites to separation. As soon as property is uniformly assessed at the rate required by the constitution, the State can devise a plan of equalization which, in protecting the State, will not be inimical to the interests of the localities. Partial Separation. Desirous of having those benefits to be gained by separation, we have endeavored to formulate some definite pjan of partial separa- tion. As the personal property assessment is perhaps the most difficult single schedule of the tax bill, and as personal property can manifestly be taxed better by the locality than by the State, we have sought some plan by which personal property could be separated for the exclusive use of the localities. Various plans were worked out in detail, but it was soon found that just as complete separation worked injustice to the counties, so partial separatilon was unfai% to the cities. In the appendix to this report will be found the details of these plaps, none of which is in anywise successful. This method of separation, indeed, is sub- ject to even greater objections and its operation is beset with more obstacles than is a plan of complete separation. Our de- Report of Tax Commission. xv liberate judgment is that separation, complete or partial, must be postponed for a number of years. The First Essential of Reform. Unable to recommend a policy whereby real and personal property could be separated for the exclusive use of the localities, we were forced to a general reform of our property tax laws where they showed signs of weakness. In this we found that the desired end of equalization, and, indeed, of every reform in the property tax laws, depended upon one absolute essential. This is the immediate creation of some centralized administrative au- thority to supervise and to equalize the assessments of real and personal property. As has been said, the greatest fault of our system is that it operates unequally on tax-payers. That it so operates is due to the fact that the assessment of property is left entirely in the hands of local officers, who are practically without responsibility to the Commonwealth. The land assessor and the Commissioner of the Revenue, the most important single tax officers — are local officers. Whether elected by the people or appointed by the court, they are responsible to the locality. They naturally feel that their citizens should not bear an undue burden of taxation ; and to make sure that they do not, these officers underassess property to an extent that is almost beyond comprehension. The laws are utterly inadequate to control them. These officers are responsible to the Auditor of Public Accounts only in the most perfunctory way, and, in the present situation, cannot be com- pelled to tax their own citizens as the citizens of other localities are taxed. If the land assessor and the Commissioner of the Revenue of Grayson County for instance, wish to assess lands and personal property at twenty per cent, of what they are worth, they cannot at present be compelled to do otherwise, even though the citizens of Loudoun and Fauquier be compelled to pay four times as heavy taxes as the citizens of Grayson. The absence of centralized administrative authority is responsible for the worst single feature of our tax laws — that a numerical minority of our people compel the majority to bear their burdens and pay for the administration of justice, the enforcement of law and the education of their children. xvi Report of Tax Commission. Nor is this all. Throughout our study of the administration of all the tax laws, we have observed the crying need of some central body to which local officers should be responsible and to which they could look for instruction and suggestion. If a Commis- sioner of the Revenue desire information as to the rate at which and the manner in which personal property should be assessed, he has only the Auditor's report and the statutes for his guidance. If a land assessor violate the law, reduce assessments to a ridicu- lous figure and favor his friends, he is well-nigh immune from puni jhment. There is none who can hold him to the performance of his duty, aid him in his work, instruct him in the methods to be pursued or counsel him in solving his difficult problems. If there be confusion in the assessment of transferred bank-stock, there is no central officer who can be called on to affect justice; if infor- mation be available in one district regarding taxable values in another, there is no central officer to spread this information. Laws there are, and to spare, but there is no agency to consolidate the enforcement of these laws. If our investigations have convinced us of one paramount truth it is that the Commonwealth can never hope to reduce the burden of taxation, to restore equality and to remedy existing evils until it establishes some central authority which will see to it that the property of every county and city is assessed in the same manner, at the same rate and on the same basis. Any reform of our tax laws without this fundamental is wasted money and wasted energy. On the other hand, if such a body be established, it will do more than ail other agencies that can be devised to reduce and equalize the tax burden. Throughout our recommendations, it will be found that we have premised reform upon the creation of a Tax Commission with power to equalize assessments and to hold local assessing officers to a strict accounting. Ours is a system of local government. We believe in leaving to the locality as far as possible the a,dministration of its own affairs; and we interfere, by statute, as little as possible with the conduct of the local government. This is as it should be. Yet this spirit of local independence can be carried so far that it will block progress and estop justice. Nowhere is there greater liability to this than in the administration of the tax laws. Every locality should unquestionably select its own officers and levy its own taxes in the manner that seems best to it; but the State Report of Tax Commission. xvii should see to it that no one locality be able to so reduce its con- tribution to the State as to put a burden on other localities. Centralization of administration on the one hand should not injure the locality; on the other hand it should be sufficient to protect one locality from another. No honest tax-payer will suffer and no community will be damaged by the creation of a tax administrative body, shaped to meet these requirements. Organization of Proposed Commission. Realizing that a Tax Commission is absolutely essential, we have examined in detail the systems in use in other States in an effort to determine what form of Commission is best. Our con- clusions may be stated in the following order: 1 . The Commission must have power to fix average assessments but should not be burdened with appeals in individual cases. 2. The Commission should act as a trial court in cases where a local assessment officer has failed in the discharge of his duty. 3. The Commission should be composed of men representing the entire State and familiar with conditions throughout the Commonwealth. 4. The Commission should have power to formulate rules and regulations for the enforcement of the revenue laws and should be authorized to fix the rates at which improvements are to be assessed. 5. The Commission should have an executive officer, vested with temporary powers in the vacation of the Commission and given general supervision of the work of assessment. In shaping these principles to suit conditions in Virginia we have thought that the Commission should only have such powers as were essential to the work of equalization and to the enforce- ment of the law. With limited resources, it is manifestly im- possible to establish a commission which can be in permanent session and can hear appeals in tax cases. But it is necessarj' to have a Commission which can fix averages in the manner to be described below, can pass on the cases of assessment officers guilty of violating the law and can adopt such rules for the guid- ance of Commissioners of the Revenue as are necessary for the equal enforcement of the law. With these ends in view we recommend : xviii Report of Tax Commission. 1. That a permanent Commission be created composed of the Governor, the President of the Senate, the Speaker of the House, the Chairman of the Corporation Commission, the Attorney General of the Commonwealth, the Treasurer, the Auditor of Public Accounts and the Chairman of the Finance Committees of the House and Senate. 2. That this Commission serve during the term for which the members thereof are elected or appointed, and that the members receive no pay for their services. 3. That this Commission meet annually, or more frequently on call, and have power (a) to fix an average rate at which property of specified classes may be assessed, (b) to fix the average rate at which land shall be assessed in the various counties and cities of the State, (c) to adopt rules and regulations for the uniform taxa- tion of improvements and for the enforcement of the revenue laws, and (d) to remove Commissioners of the Revenue who do not perform their duties as required by law. 4. That this Commission have an executive officer, known as the State Tax Commissioner, appointed by the Governor for a term of six years, who shall (a) gather data on which the Com- mission can fix the average assessment of real and personal property, (b) have general supervision of the work of assessment, (c) have power to suspend Commissioners of the Revenue for failure to discharge their duties, subject to final action by the Commission, (d) act as expert adviser to the General Assembly and to the localities in matters of taxation and (e) have general supervision of the collection of the income tax in the manner out- lined in a later section of this report. This system is a modification of that in use in West Virginia and is, in our judgment, the best that can be devised at this time for Virginia. The Commission will not be expensive to operate, and will not be clothed with arbitrary powers ; yet it will be able to restore that equality which all honest men desire by a proper assessment of property and it will be authorized to hold assess- ment officers to a strict accounting. We look to this as the most important reform that can be accomplished at this time and would regard its adoption as a marked step towards the solution of our vexing tax problems. With this essential defined, we proceed to a discussion of the specific reforms proposed in the various schedules of the tax law. Report of Tax Commission. xix The Land Tax Laws. The investigations made by the Commission show a deplorable state of affairs in the administration of the land tax law. This law, as has been said, rests upon a sound basis and should be one of the most productive of all the State's revenue laws. Yet examination discloses that its administration is extremely faulty and that as operated at present, it works injustice to thousands of tax-payers. As the data collected by our Secretary and ap- pended to this report makes plain, the assessment of lands is faulty in many respects. Above all else, the valuation of lands by local officers prevents a uniform assessment throughout the Commonwealth and breeds inequality and undervaluation. Lands are assessed at from 20 per cent, to 77 per cent, of their real value in counties and cities of the Commonwealth ; property worth at least $897,000,000 is assessed at but 53 per cent, of its fair market value ; many counties are paying four times as heavy taxes on their lands as are the owners of like property in other counties. The assessment likewise is made by temporary officers, many of whom are untrained and practically all of whom are without instruction or guidance in the discharge of their duties. Underpaid, unaided and unsupported, they cannot make a satis- factory assessment even where they try. They construe the law in divergent ways, they have no definite manner of assessing improvements, they lack tax maps and often omit valuable properties, they have no system for assessing town lots and they neglect to value standing timber. That some of the counties and cities have a satisfactory assessment and that some of the land assessors have shown a commendable zeal in the discharge of their duties is to be attributed to any other source than the excellence of our assessment laws. In reviewing these failings of our present land tax, we were im- pressed with the common origin of most of its faulty administra- tion. Our land assessment is a failure primarily because our assessors are without supervision of assistance in the discharge of their duties. Had they some central authority to which they were responsible, some authority which would define their duties and then hold them strictly thereto, our land assessors would produce uniform and satisfactory results. The first line of reform must be, therefore, to supply the need disclosed by these facts. XX Report of Tax Commission. The second line of reform is simple. If we want a scientific and equitable land assessment, we must have that assessment made by trained men. Instead of placing the complicated and exacting work of assessment in the hands of men who may never have had any previous equipment, we must either train these men in advance or place the work in the hands of men already schooled in the discharge of like duties. If this end be achieved, all of those failings which are attributable to the lack of skill on the part of our assessors will be remedied. Upon these premises, then, we base the following recommenda- tions for the assessment of lands and improvements: 1. That every person recording the transfer of real property be required to file with the clerk of the court a sworn statement showing the actual valuable consideration involved in the trans- fer. 2. That the proposed Tax Commissioner make an examina- tion of these transfers for the two years prior to each re-assess- ment of la,nds and from them make an estimate of the actual per acre price at which land has been sold in the county and the aver- age value at which standard lots are sold in the cities. 3. That the State Tax Commission, at its regular meeting, hear evidence as to the rate at which land in each county is sold and be empowered by statute to fix an average per acre valuation on the basis of the information thus secured. 4. That the Commissioners of the Revenue be then required to make the assessment of lands and improvements and to show on their books an average valuation at least equal to the average fixed by the State Tax Commission. 5. That any Commissioner of the Revenue failing to fix the average as required by. the rulings of the Tax Commission shall be subject to removal by the Commission. 6. That any county, city or town, or any twelve tax-payers thereof, be permitted to appeal from the average fixed by the Tax Commission, said appeal to lie to the Circuit Court of the City of Richmond. 7. That in fixing averages for local valuations the State Tax Commission be empowered to formulate rules and regulations for the uniform assessment of improvements and for like methods of assessment throughout the State. This system, which is modeled closely after that of Michigan, Report of Tax Commission. xxi has very decided advantages, most of which will be obvious at a moment's consideration. In the first place, it will secure equality and a full valuation of real estate in the Commonwealth. The figures at which land is sold are the figures at which land will be assessed. If, for any reason, the year's transfers in a given county do not show the average valuation, the Tax Commission will have power to fix the true average after hearing from the local authori- ties or interested tax-payers. With such an average fixed and enforced by uniform methods there can be no inequality. No county will be paying more than its share to the support of govern- ment. In the second place, the assessment will be made by trained men responsible to a central authority. It is perfectly obvious that their four years' experience in the assessment of personal property and of improvements qualifies the Commissioners of the Revenue for the discharge of the duties of land assessment. Their profession is that of assessing property. They know more of values than do any men in the locality and their long and varied experience will be brought to bear upon this vital work. That the Commissioners of the Revenue should be removable by the Tax Commission is obvious. In this way, and in none other, can they be held to a strict accountability and to a rigid enforcement of the law. In the third place, improvements and special values will be assessed in the same manner throughout the Commonwealth. The Tax Commission can prepare and issue such regulations as are now issued by the Tax Commissions of other States. These will lay down rules of procedure for all the cases which will arise in the average assessment district. They will inform the land assessor what allowance to make for deterioration in buildings, what allowance to make for the proximity of a railroad — in short they will insure a regard for the same essentials of assessment and will thus bring about that uniformity which is essential to equality in taxation. In the fourth place, the uniform assessment of lands and im- provements in this manner, at their fair market value, will make possible a speedy reduction in the tax rate. As is shown in the report of our Secretary on this subject, were it possible to assess lands at their fair market value, the Commonwealth would be able to reduce the tax on lands to 20 cents and would still have a xxii Report of Tax Commission. considerable increase in revenue. This reduction, of course, will only affect those whose valuation is now high, but its enactment would be a splendid advertisement for the Commonwealth and could not fail to attract capital. Conclusion. The reform of our land tax, it will thus appear, requires but few changes in existing statutes and no great outlay of public funds . Yet we are convinced that in no other schedule of the tax code can such marked improvement be had. The Assembly, in our judg- ment, should not delay placing the land tax on a stable and sure basis, just alike to the State and to its citizens. The Taxation of Personal Property. We have found in the schedule for the taxation of personal property the most complete breakdown of any tax law on our books. Inequality, undervaluation, neglect of the law, careless- ness of assessment, and, in some cases, illegal procedure are to be found at every turn in the administration of the laws by which personalty is taxed. How extensive is the undervaluation of property subject to taxation can probably never be learned, and how unjust is the operation of our property tax laws must remain problematical; but that some features of the present law are as bad as they can be, will not permit of dispute. The tables pre- pared by the Commission, and printed in the Appendix show in- equalities which are well-nigh unimaginable. As has already been said, our first aim was to devise a plan whereby the State could rid itself altogether of this tax and place its assessment in the hands of the locality. But this was found to be an impossibility at the present time. The cities, which con- tribute so large a part of the public revenue would be called upon, under plan of separating the personal property tax, to sacrifice some of their surest and best revenue to the State with no ade- quate return. Our only alternative, therefore, was to complete a plan whereby the various defects of the present assessment laws might be remedied, the whole brought down to date and the enforcement of the law placed under the supervision of that central authority which, as has been pointed out, is the sine qua non of reform. Report of Tax Commission. xxiii The plan upon which we have agreed and which we recommend to the Assembly is as follows: 1 . To authorize the Tax Commission to provide for the uniform assessment of the various classes of personal property in the same manner as it is to be authorized to fix average assessments of lands. 2. To empower the Commission to formulate rules and regu- lations to carry into effect the uniform assessment of personal property. 3. To authorize the Commission to remove after due hearing Commissioners of the Revenue guilty of violation of the revenue laws. 4. To reduce the State tax on stocks, bonds and other evidences of debt to 25 cent and to limit the local tax to the same amount. 5. To make any class of property subject to lien for taxes due on any other class of property. 6. To require local Treasurers to mail tax bills to all citizens whose taxes are in excess of $2.50 the year, exclusive of polls. 7. To authorize Commissioners of the Revenue to modify or to amend, after five days' notice, any interrogatory returned which, for any reason, the Commissioner shall believe to be erroneous, giving the tax-payer the right of appeal at present allowed by law. 8. To exempt from taxation by any locality the bonds of an- other locality, when the locality which issues them imposes no tax on them. Before explaining these recommendations in detail, we wish to point out two facts in connection with all of them. In the first place, we have not sought to devise machinery for tax inquisition. Instead of recommending laws which will place additional penal- ties on tax dodgers, or give to the Commissioners of the Revenue the power to pry into the affairs of the individual, we have pro- ceeded upon the principle that justice in matters of taxation will appeal to the average honest man. We have sought to make recommendations which, when enacted into law, will show the citizen that the State is willing to meet him half way, so to speak, and not to exact of him unreasonable taxes or to make improper demands. We are convinced that this is good policy as well as sound principle. In like manner it will be observed that we have not introduced any revolutionary methods of assessment. We have rather accepted and have modified for use in Virginia those xxiv Report of Tax Commission. laws which have been tried in other States and which have been found sound in theory and valuable in operation. We have eschewed experiments. Passing to a detailed examination of the various recommenda- tions made, the necessity of central supervision and the method by which we recommend that this be introduced, require little explanation. The whole is simple and necessary. Take, for instance, the application of this plan to the assessment of horses. The table printed in the Appendix, Chapter II, shows a most amazing inequality in the assessment of this property at present. As long as the method of assessment remains the same, there is little reason to believe that conditions will be improved. As long as the Commissioners of Revenue in some counties are not com- pelled to assess horses at more than $6 and as long as the locality has sufficient revenue without increasing the assessment, so long will the assessment remain low. But when the Tax Commission ascertains that the horses which are now assessed in a given county at $6 are worth as much as the horses in another county, now assessed at $40, it can raise the valuation to that figure, and can require the Commissioner to show on his books an average valua- tion equal to that required of a like county. When the Com- missioner of the Revenue knows that he will lose his office if he neglect to observe this regulation, the assessment of horses will soon be on an equitable basis. A Low Rate on Intangibles. The reduction of the tax rate on stocks, bonds and other evi- dences of debt may appear to be a somewhat revolutionary step at this time, but it is justified alike in principle and policy. It is a well known fact that only a small percentage of taxable stocks and like intangibles ever reach the tax-books. Here as in no other place "tax dodging" reaches its highest level. That such should be done is to be regretted, but that it is done is natural. When a citizen only realizes 3 per cent, on his investment, it is unreasonable to suppose that he should pay to the State 35 per cent, and to the locality from 80 cents to $1.71 thereof. He very readily feels that he is justified in evading a tax which takes from him more than it leaves. He knows likewise that his property assesses itself and at its full market value, while the tangible property of his neighbor is never assessed at its full value. To Report of Tax Commission. xxv meet this situation a number of States have adopted a law placing a low tax on intangibles— a tax not in excess of one-half of one per cent, of the principal. These States have found that this act of justice appealed to the average citizen. Men who had long concealed their intangibles realized that the low tax was reason- able and consequently reported their holdings. The result was, in almost every instance, an increase in the amount of Intangibles reported that more than compensated for the reduction in the tax. The table cited by our Secretary, showing the experience of Maryland with this law, illustrates this point to a nicety. We believe that the arguments in behalf of this reduction are valid and that the present tax on intangibles in the Common- wealth is unreasonable. Until all personalty is assessed at its full value, the present law discriminates against securities and taxes them at one hundred per cent, while taxing other personalty at a much lower figure. Even when all personal property be taxed at the full market value, the tax should be adjusted to the earning capacity of the property. Such a reduction would, likewise, be good policy. In our judg- ment, our citizens will see the equity of a low tax and will report their holdings. Certain it is that the adoption of such a law will attract capital to Virginia and will thus aid in upbuilding the State. The rate proposed for the taxation of intangibles — ^whether stocks, bonds, mortgages or other evidences of debt, is one-half of one per cent., gross. Half of this, or 25 cent on the hundred dollars valuation, should belong to the State; and an equal part should belong to the locality. This will only reduce the value of of a 4 per cent, investment to 3.50 per cent. Liens for Delinquent Taxes. The recommendation that any class of property be subject to lien for delinquent taxes due on any other class of property had its origin in cur investigation of the extent of delinquency in the assessment of taxes on personal property. We have found that the absence of legislation on this point has led many citizens who should pay their taxes to neglect them, with the result that as much as 19 per cent, of the personal property tax has been re- turned delinquent in a single year. At present, personal property xxvi Report of Tax Commission. can be levied on for taxes due on lands ; and lands can be levied on for taxes due on polls; but lands cannot be levied on for taxes due on personalty. If this be corrected, the personal property tax will be much more closely collected than at present. The Mailing of Tax Bills. We recommend the mailing of tax bills to all tax-payers whose accounts exceed $2.50, exclusive of polls. This is done to reduce delinquency and to save the Commonwealth the expenses of collection. Our State taxes, it will be recalled, are due December 1 ; our local taxes are due at such time as is fixed on by the locality. In addition, State and local licenses taxes may be due at still dif- ferent dates. The result is that the average citizen very readily becomes confused as to the dates on which his taxes are due and, in consequence, often lets them become delinquent without his knowledge. Even where he is anxious to pay, and cannot visit the Court House, he is in many cases ignorant of the amount of his taxes. If, therefore. Treasurers be required to mail post cards to tax-payers, informing, them that their State taxes of a certain amount will be due on a given day the memory of the tax-payer will be refreshed and his taxes, in most cases, will be forthcoming to save the penalty. This expedient has been tried in West Virginia with eminently successful results. Like experience with it in some of our Virginia cities has convinced us that it is em- inently practicable and wise. The expense should be put upon the Treasurer and not upon the Commonwealth, because this method of notifying the tax-payers certainly reduces the labor of the Treasurer and saves him from additional labors for which he received no adequate return in the additional commissions paid. dommissioners Should Have Power to Modify Interrogatory. We recommend, likewise, that where a Commissioner of the Revenue has reason to believe that any tax-payer has sent him an erroneous return, he shall notify the tax-payer to that effect, and after five days, shall modify the assessment to conform to a proper standard, giving the tax-payer the right of appeal. This is recommended to legalize what is now a common custom and an administrative necessity. Under existing laws, if a Com- missioner of the Revenue believe that a tax-payer is not returning Report of Tax Commission. xxvii a proper interrogatory, he can do but one of three things; he can either refuse to accept the interrogatory and assess the tax-payer, or he can report the tax-payer to the grand jury, with such evi- dence of fraud as he may possess, or he can accept an interroga- tory which he knows is unsatisfactory. In actual practice, rather than go before the grand jury the careful Commissioner has a conference with the tax-payer and, if possible, prevails upon the latter to modify the assessment. In some cases this is sufficient; but in other cases, lacking laws to uphold him, the Commissioner can do little. If he be empowered to tell the tax-payer that he will increase the assessment, and if the tax-payer be compelled to defend such an increase in court,' it seems only reasonable to believe that the original interrogatory will be more correct. This additional power is requested by many Commissioners of the Revenue and should be granted at once. If will be a genuine contribution to an equitable and just assessment. The Exemption of the Bonds of One Locality from Taxation by Another Locality. Legal exemptions are a fruitful source of evil. Once the State permits any class of property to escape taxation, those in- terested in the exemption urge its enlargement; a precedent is easily established which is difficult to abandon. For this reason, the makers of the present constitution were most cautious in granting exemptions and strictly limited the power of the Assem- bly in this respect. There is, however, one class of property which, in our judgment, should be exempted from taxation. This class is composed of the bonds issued by the localities. As the law stands at present, the city of Richmond has the right to issue bonds to a certain limit and can exempt them from taxation, thus creating a local demand for the bonds and enabling the city to secure its needed funds at a relatively low rate of interest. But the city of Richmond is authorized to tax the bonds of the city of Danville, thus counter- acting tha exemption given by Danville and limiting the market for those bonds to citizens of Danville or to extra State investors. In this way the Commonwealth invites one locality to exempt property and invites another to tax the same property. In our judgment the bonds of any Virginia locality, where exempted by the locality issuing them, should be exempt from all xxviii Report of Tax Commission. local taxation. This is simple justice and is entirely constant with the spirit of the constitution. In addition, such enactment will have an admirable effect upon municipal and county finance. It will create a healthy interest in Virginia securities; it will enable the counties and cities to place their bonds on a wider market than is now open to them, and will thus, in the end, aid them in placing good securities on the market at a low rate of interest. To summarise our recommendations on this subject, we believe that the personal property tax can be made an operative and pro- ductive tax and can be equitably administered if it be reformed in a few essential respects. Its administration must be centralized ; the men who execute the law must be responsible to the Com- monwealth; the taxation of intangibles should be on a sound and reasonable basis; the delinquent list should be carefully guarded. If these things be done, we can hope to preserve this tax in the code as a fruitful source of revenue. Public Service Corporations, Railroads and Canals. To the taxation of public service corporations we have given the attention which this great subject demands. Of all subjects of taxation none is more difficult, more complex or more involved. None offers so wide a ground for disagreement or such a basis for dispute. Various experiments have been tried in different States and several methods of taxation have been urged from time to time, but none of these completely fulfils the requirements of the situation. It may, indeed, be safely said, that this subject is still under discussion throughout the country and is no nearer solution than it was some years ago. Our study of the Virginia law for the taxation of railroads and canals convinces us that the defects which the administration of the law discloses are primarily due to the nature of the system of taxation. We endeavor to impose a double tax — a tax on the property of the railroad and a tax on its earnings. In so doing we are compelled to attempt a valuation of all the physical prop- erties of a railroad without assessing its franchise or non-physical values. Wherever this has been attempted it has been a com- parative failure. The properties to be taxed vary so much in character, their true value is so difficult to estimate and the basis Report of Tax Commission. xxix of valuation is so disputed that no American States have yet been able to devise any system which can truly be said to justly tax the physical properties of the railroads and canals. Yet the fact that a privilege, franchise tax is imposed while the franchise is not valued so confuses the public mind that any valuation placed upon railroad property is disputed. We believe that in view of these difficulties the present ad- ministration of the railroad tax in Virginia is as satisfactory as it can be until the system is changed, yielding as it does $1,776,000 in taxes the year. That it results in inequality among the rail- roads cannot be disputed; that it leads to confusion and misun- derstanding is generally conceded. Yet we think that this tax will compare favorably with like taxes in other States and yields a revenue as 1 arge as that secured by any State in like condition. We believe, however, that were it possible to place all rail- roads taxes on a gross earnings basis and to abolish all other taxes, several very desirable ends would be achieved. Equality among railroads would be restored, all possible grounds of dispute as to the justice of the tax would be removed and the railroads would be able to compute their taxes according to the standard by which all expenditures are regulated. Yet as the constitu- tionality of any system of gross earnings taxes has been disputed in some quarters, we hesitate to recommend any change in the present law until all doubts on this subject have been removed by the Federal Courts. In the meantime we recommend the study of this general subject and particularly of the report which our Secretary has prepared on this topic. The plan there submitted, while new, is approved by many experts on taxation and has very commendable features. Were it possible to impose a gross earn- ings tax with a differential modeled along the general lines sug- gested by Dr. Freeman in the Appendix, the gain would be great. Miscellaneous Public Service Corporations, Telephone and Telegraph Go's. Investigation of the taxes paid by telephone and telegraph companies in the State would indicate, at first sight, that the aggregate taxes of these corporations are very high, amounting to $101,824.51 or 5.97 per cent, of their reported gross earnings. We are unwilling to believe, however, that the true earnings are as small as are reported and think that faulty methods of book- XXX Report of Tax Commission. keeping have caused serious errors in computing gross earnings. This does not, however, apply to the larger companies, whose bookkeeping methods are admirable and does not indicate any intentional deceit on the part of any one. But if the earnings are not properly reported, it is highly desirable that the Com- monwealth have accurate information on this subject in order that it may adjust its taxes to the ability of the corporations to pay. We therefore recommend, as a first essential, that the Corpora- tion Commission be empowered to require the telephone compan- ies to keep their books in such a manner as to show their total intra-State earnings and to report the amount thereof, together with the percentage of operating expenses to gross earnings. When this information is available, the Assembly should, in our judgment, put these companies on an exclusive gross earnings basis of taxation. Such a system will end the many disputes as to the value of telephone and telegraph property, will give the State a sure basis for taxation and will adjust the tax to the real value of the property. Until this information be available, we think it unwise to amend the existing laws on the subject. Steamship Companies. Investigation of our system of taxing steamship companies dis- closes the fact that the Commonwealth is receiving very little return for the use of its waters by transportation companies. State and local taxes for the year 1910 aggregated only $25,811.53, though the business of these companies was large. We have, however, beerj met with an unsurmountable obstacle in seeking a reform of the laws on this subject. The decisions of t)ie Federal Courts have greatly limited the powers of the State in the taxation of steamship companies and have, in effect, pre- scribed that no State can tax these companies in any way except on their intra-State property and intra-State earnings. No State can get any return from the vast inter-State business originating or ending within its borders. For this reason it is impossible to amend or to extensively improve the present system. The Commonwealth is receiving little revenue, but it is receiving as much as it can hope for under present court decisions. There is, therefore, no reason to amend the existing statute on this subject. Report of Tax Commission. xxxl Express Companies. » Our study of the express business' has convinced us that a gross earnings tax should be applied here in an effort to reach the non- physical elements of value which constitute the earning power of these concerns. At present no earnings are reported and no basis for such an earnings tax is available. The first step towards this desirable end is, therefore, to require the express companies to- report their gross earnings in the State. At the same time we think that until these companies can be placed on an earnings basis, they should pay more than they do at present. A tax of $6 the mile operated yields $34,437.52, but this does not seem to us a sufficient return for the privileges en- joyed by the express companies. Their earnings are large, the dividends paid their stockholders are often enormous, and their business is one of the most remunerative in the country. If the present tax be placed at $7.50 the mile until it can be established on a gross earnings basis, substantial justice will be done. We have likewise observed that the express companies are assessed with only one mileage where they operate on two steam- ship lines over the same course. As the business done on each line is independent, productive and remunerative, we see no- reason why the companies should not pay two taxes. Car Service Companies. In some respects passenger car service companies are in a class, with express companies. Their tangible property subject to taxation is negligible, and a tax thereon is manifestly unproduc- tive ; yet their earnings are large and the profits to the stockhold- ers are great. None of the States has devised a law which can effectually tax: these corporations, and none of them has laws which are simpler and, in the main, more effective than that of Virginia. Yet if^ on the basis of accurate reports, a tax on earnings could be im- posed, the situation would be much improved. Until that time they should be compelled to make a larger return to the State for the privileges they enjoy. Accordingly we would recommend that the Corporation Com- mission be authorized to require the passenger car service com- panies to report their earnings in Virginia and a proper percen- xxxii Report of Tax Commission. tage of their gross inter-State earnings. The form of this report should be left to the Corporation Commission, since its exact phrasing, to conform to the decisions of the Federal Court, is in question. We likewise recommend that the license tax on these companies be increased from $2 the mile to $4 the mile. We have observed that there are a number of special freight car service corporations in the Commonwealth which operate lines under agreements with the transportation companies. These are not now taxed but should contribute something to the support of government. The Corporation Commission should be empowered to assess for taxation the property used by them in this State. Street Railways Companies. Our study of this subject has made it manifest to us that there is grave inequality in the taxation of street railway companies; but we are of opinion that this is due to the varying requirements of the local franchises accepted by these companies before they began operation. Accordingly, we do not see where any change can be made without injury to the municipalities; and are not prepared to recommend any change in the method of assessing the State tax which, in our judgment, is reasonable and fairly productive. Conclusion. Reviewing our recommendations as to the taxation of public service corporations, we are of opinion that these concernc one and all should be placed on a gross earnings basis of taxation as soon as the decisions of the courts will permit. This will require time, but the ultimate gain in justice, simplicity of administration and equality will be positive. Licenses. We are pleased to report that with few exceptions our schedule for the assessment of licenses is satisfactory. Yielding a large revenue it is generally well administered and is equitably adjusted. That some merchants are not paying a license proportionate to the full value of their privileges is unquestionable ; but that con- Report of Tax Commission. xxxiii ditions are no worse in Virginia than in other States is a source of congratulation. The present method of grading licenses is not perhaps the best that can be devised. A system of classification, which will adjust the license to the known margin of profit in the business, is per- haps ideal. The Commission believes that a further study of this subject by the State Tax Commissioner will yield information on the basis of which a just classification can be made; but we would not recommend any classification until it had been tested and scrutinized by experts. A single mistake in such a matter might cripple an important industry. Specific Licenses. We have made an investigation of the various items of the specific license schedule and have found that a number of the licenses are too low in proportion to the body of the schedule. Accordingly we recommend the following changes, each of which will be briefly explained : 1. To increase the license of the dealer in options from $200 to $300. 2. To increase the stockbroker's license from $100 to $150 in small cities and from $250 to $350 in larger cities. 3. To increase the pawnbrokers license to $500 and to reduce by 50 per cent, the interest rates chargeable. 4. To provide a fine of $100 in addition to the penalties al- ready prescribed for violation of the money lenders' act. 5. To make clear the distinction between eating houses and houses of private entertainment. 6. To include professional baseball games in the entertain- ments subject to taxation as public performances. 7. To increase the license of venders of medicine from $25 to $100. 8. To impose license registration taxes on certain investment companies. 9. To extend the license tax on traveling companies of gypsies to each individual clairvoyant, medium, astrologer, etc. and to make this tax $500. The reasons which have prompted these increases will be found discussed more or less in detail in the appended report of the xxxiv Report of Tax Commission. Secretary and need not be dwelb upon at length in this connection. In every instance, we have recommended increases either because the business was not paying in proportion to the privileges it enjoyed or else because the business was of such character as not to come within the proper field of licenses. Stock-brokers, for instance, are not paying as heavily as they should for the special privileges granted them; clairvoyants should be kept from the State by heavy license taxes. Dealers in Options. The present license tax on dealers in options is below the general standard of our laws. As these men speculate on staples, and as their profits are often large, they should be required to pay heavily. Stockbrokers. The margin of profit in this business is not large on the in- dividual transaction, but in the aggregate the business is most remunerative. Those who engage in it should be made to pay accordingly. Pawnbrokers. In recommending the increase in the pawnbrokers license from $250 to $500, and the reduction of the interest by 50 per cent., we have been impelled by two convictions. The first is that this business is scarcely reputable at its best and at its worst is a great problem to the police. Some pawnbrokers observe the law and assist the police in locating stolen goods; others are said by the police to act as "fences" for thieves. The second reason is that as this business is conducted at present it is the worst form of usury practiced in the country. Under Virginia law a woman compelled to pawn her wearing apparel for $20 and unable to redeem it for twelve months has to pay the pawnbrokers, in interest, 120 per cent, of the value of her property. We believe that a tax of $500 and a reduction in the rate of interest allowed will decrease the number of pawnbrokers, and, by requiring a heavey investment by pawnbrokers, will lead to a better observance of the law on their part. Report of Tax Commission. xxxv Eating Houses and Houses of Private Entertainment. These ancient itenas of the Hcense schedule have, by the lan- guage employed, been confused by Commissioners of the Revenue and have been the basis of disputes in some localities. If the definition of an "eating house" be modified to apply to persons "who furnish meals for casual visitors .... for consumption .... [in the house] .... and who do not furnish lodging ..." the meaning of the law will be clear. Public Performances. The present section relating to the licensing of public perfor- mances fixes the scale of the license according to the size of the town where the performance is held. While this is probably fair in some instances, the proper basis is obviously the size of the hall. A large hall in a small town may be more productive than a small hall in a larger town. The scale of fees outlined in the Appendix is therefore recommended. Baseball Games. It is, of course, contrary to the spirit of our government to tax sports where they are games between amateur athletes and are conducted purely for purposes of amusement. This, however, does not apply to games of baseball played by professional clubs, the members of which receive a fixed compensation for their services. These clubs are generally conducted by private in- dividuals or by stock-companies which are in the business for money. They should not, therefore, be excepted from the general provisions of the law and should be made to pay as are the pro- prietors ot other places for public amusement. Venders of Medicine. We doubt the wisdom of issuing a license to vend medicine to any other person than to a pharmacist or, in some cases, to a merchant. The policy of entrusting remedies to private individ- uals, without experience in the compounding of drugs, is but the encouragement of quackery. If, however, the license is to be granted, it should be at a higher figure. We beHeve that $100 is a fair return to the Commonwealth for the privilege conferred. xxxvi Report of Tax Commission. Investment Companies. The Commission has been informed that a bill will be introduced into the next session of Assembly providing for the examination and licensing of concerns selling certain classes of investment stocks. The law proposed is modeled after that adopted in Kansas in 1911 (Kansas Acts, p. 210), which aims only to reach concerns of doubtful solvency and honesty. This law is said to operate most successfully. The Commission wishes to commend this act and approve its principle. It is certainly poor policy for the State to allow concerns of this sort to sell stock to citizens of the Commonwealth without investigating, in any way, the character of the business. Clairvoyants, Mediums, Astrologers, etc. We recommend that a tax of $500 be levied on each individual astrologer, medium, palmist, clairvoyant, etc., who pretends to "tell fortunes," to read the future and the like; and we recommend that the act imposing a tax on traveling companies be modified accordingly. These persons are often frauds of the worst char- acter who deceive the ignorant and pray upon the emotions of the unlettered. They should be kept from practicing their wiles in the State and, for this reason, should be excluded by a prohibitive tax. It would be well to add to this section a clause providing that this tax shall not apply to persons practicing these arts at private entertainments and without reward. Conclusion. With these changes, we believe that the present license schedule will be found satisfactory. If its administration be placed under the direction of the proposed Tax Commission, we feel sure that a rigid and equitable enforcement of the law will result which will commend it to all citizens. Charters and Franchises. We have examined the present franchise and registration tax laws to ascertain if any improvements can be made therein. We have found that since these laws became operative a number of States have introduced similar systems of taxation, and have, Report of Tax Commission. xxxvii in some instances, adopted a scale of fees below that in use in this Commonwealth. It has been, suggested that Virginia reduce her fees accordingly, in order not to discriminate against those who take out domestic charters. Mature deliberation convinces us that this is not good policy for the present. We cannot hope to compete with some of the States in this respect and we cannot afford to so lower our charges on property of this class as to discriminate against other tax- payers. As our Secretary suggests, we must rely upon the ex- cellence of our general laws and the simplicity of our administra- tion to attract foreign corporations to our borders. We therefore recommend no changes in the present charter and registration fees. The Taxation of Incomes. The tables printed in Chapter IX. of the Appendix to this Report will show that our income tax is not yielding a revenue to the Commonwealth in proportion to its real value. This we attribute to the lax administration of the law, to the confused and conflicting computations of losses chargeable against income, and to the absence of central supervisory authority. The reforms that have suggested themselves to us are shaped to the causes contributing to the present situation. We must have a uniform enforcement of the law, a standard construction of deductable losses and, above all else, some centralized authority for administering the tax. Manifestly the proposed Tax Com- mission which is to formulate rules and regulations for the assess- ment of real and personal property should formulate like rules for the assessment of incomes and should see to it that Commissioners of the Revenue deduct losses in the same manner throughout the State. There is, however, one reform, dependent upon the creation of a centralized administrative authority, to which we look for much improvement in the enforcement of the law. This is the com- pulsory reporting of income, etc., paid citizens of the State. In brief, our plan is this: annually every firm, corporation, individual, co-partnership and firm, chartered, licensed, regis- tered or doing business in the State in any way, shall file on a blank to be furnished by the Auditor of Public Accounts a sworn xxxviii Report of Tax Commission. statement showing the amount of all fees, salaries, commissions, dividends (other than dividends on exempted stock) and other remuneration paid by such firm, etc., to any citizen of the State, in excess of $1,000 the year, together with a statement of the full name and legal residence of such person. This list must be filed with the State Tax Commissioner, who shall at once notify the Commissioner of the Revenue for the district where any citizen listed may reside, that income in this amount was paid the citizen. This will only be prima facie evidence of an assessment but it will undoubtedly be of great assistance to Commissioners of the Revenue. Such a system will not of course reach all persons, but it will affect employer and employee alike and can be administered with but a small outlay of the public revenue. We commend this plan most heartily and regard it as the most feasible modification of the English system than can be applied to this country. Mineral Lands. The law for the assessment of mineral lands, passed at the last session of Assembly, has brought about a marked improvement in the taxation of this property. The practical operation of the law, however, has shown that it is deficient in some respects. To strengthen it we recommend : 1 . That the assessment be always made by the Mineral Assessor and the Commissioner of the Revenue. 2. That in case of disagreement between the two, the opinion of the Mineral Assessor shall prevail, with appeal in any case to the Circuit Court of the county. 3. That notice of any appeal be served on the Corporation Commission before the same be heard in the court. The first of these recommendations meets what was obviously an oversight in the original act, which provides that the land assessor shall assess mineral lands in the years of the general assessment. Having paid for the services of an expert Assessor, and having trained the Commissioner of the Revenue in the valua- tion of mineral lands, the Commonwealth should certainly not hazard its good results by entrusting the assessment, in the fifth year, to the land assessor. The Commissioner of the Revenue and the Mineral Assessor, vvho have done the work for the four preceding years should certainly do it in the fifth. Report of Tax Commission. xxxix The second recommendation is but the reasonable extension of a successful law. The Mineral Assessor is trained in the valuation of this property throughout the State, he knows at what rates lands under improvement and unimproved lands are assessed in other counties ; he should certainly have the power to make a final assessment, subject to legal appeal, when the Commissioner of the Revenue will not fix the valuation of mineral property at rate equal to that at which it is assessed elsewhere in the Common- wealth. If the law remains unchanged, and our Mineral Assessor is only an adviser, general equalization — the best result of his work — ^will be sacrificed. The third recommendation is necessary in order that the Min- eral Assessors have notice of any appeal. As the matter stands to-day, an aggrieved tax-payer can go into court, have his assess- ment lowered and the Mineral Assessor will know nothing of the entire transaction until the changed figures are on the tax books. He must of course, be given proper notice in order that he may defend the interest of the Commonwealth. The Taxation of Banks. Consideration of the bank tax discloses evidence that the bur- den placed by the localities on the banks varies much and operates to establish inequality in taxation among the banks. But with this the Commonwealth has only an indirect concern: it desires and should legislate to protect the legitimate interests of all citizens, but it should not demand of the locality a special rate of taxation on any class unless such demand be absolutely es- sential to the welfare of the entire State. Thus, in our judgment, the State may require a low rate of taxation on intangibles, as a matter of prime concern to the whole Commonwealth, but it should not interefere with local bank taxation. The only serious defect which we have found in the State bank tax is that whereby the banks are allowed to deduct ten per cent, from the value of their taxable property on account of debts due by share-holders. In our judgment, this concession was made the banks solely because they were assessed at the full value of their property while other tax-payers were assessed at a comparatively low percentage thereof. Now that the Commonwealth plans to raise the assessment of all property to the same standard and to xl Report of Tax Commission. reduce the tax rate accordingly, there is not reason why a bad precedent should be allowed. We therefore recomrnend the repeal of the section allowing this offset of 10 per cent. Oyster and Fish Laws. Pending probable legislation on the oyster question, we feel that revolutionary tax legislation on this subject will be of tem- porary value only. Accordingly we recommend that with a single exception the oyster and fish tax laws be not amended until the Assembly take some permanent action on the entire subject. The only exception is that the law taxing the manufacturers of fish oil and manure be amended. The industry in question is a large one; the profits from it large; and dividends often reach 60 per cent, of the par value of the stock. The tax of $10 on $2,000 sales and one-half of one per cent, on sales in excess thereof is manifestly too low. If the tax be doubled the Commonwealth will receive a more adequate return for a very great privilege conferred. The Examiners of Records. Our study of the taxation of intangible personal property has made it necessary for us to investigate the work done by the Exami- ners of Records. We have found that this has been most thorough and we are convinced, from the evidence secured, that no fidu- ciary accounts of value are now escaping taxation. Above all else the people have been educated to realize this. Trustees are now making their calculations accordingly and make little effort to evade the taxes properly due on these schedules. We have found, however, that the work done by the Examiners is expensive and, since the examination of delinquent accounts, the work for which the Commissioners were first appointed, has in large measure been completed, we have sought to discover some method whereby this work can be done with the same success and at less expense to the people. We are opposed to the crea- tion or maintenance of unnecessary offices, and believe that the first duty of the State after securing an efficient administration ' of the law, is to have one as simple and as inexpensive as possible. We are convinced that the work done by the Examiners of Records can be done, and done as well by the Commissioners of Report of Tax Commission. xli the Revenue, if the latter are under the supervision of the pro- posed Tax Commission. The Commissioners are familiar with the property of all tax-payers and are in a position to estimate the probable value of the effects of testators. Moreover, they are constantly employed in the work of assessment and can there- fore do this work at much less expense than can the Examiners of Records. Accordingly we recommend the abolition of the office of Examiner of Records and the amendment of the act creating them so as to provide that the work be done by Com- missioners of the Revenue. The saving will be considerable and there will be no loss of efficiency. The State's Methods of Accounting. Finally, in reforming its assessment laws, the Commonwealth cannot afford to neglect its collection laws. The two are indissol- uble. No matter how effective may be our laws levying taxes, unless the revenue collected be carefully safeguarded, the Com- monwealth cannot give to her citizens that guarantee of a security which they demand. For this reason we feel that it may not be inappropriate to emphasize the importance of the work to be done by an expert accountant who can thoroughly revise and audit the books of our local collecting and disbursing officers. A uniform system of bookkeeping can easily be established which will be of as great service to the officers as to the people. A start has already been made in this direction. We recommend its vigorous prosecution and would suggest that this work be placed under the general direction of the proposed Tax Commissioner, who, through a deputy or in person, will have to visit the county seats and can examine the Treasurer's books and open a new set of books while collecting data regarding the assessment of property. In the end this would effect a considerable saving. General Conclusion. In conclusion, it will be observed that the reforms which we have recommended in obedience to the law creating the Commission, cover a number of items affecting a wide variety of our tax laws. Of all suggested legislation we regard as most important these three: an act providing for the creation of a permanent Tax xlii Report of Tax Commission. Commission, whose executive officer shall be paid; an act provid- ing for the removal of Commissioners of the Revenue for failure to obey the law, and an act providing for the more equitable assessment of the income tax. The first named is, as we have said, the absolute essential of tax reform. With it, the Commonwealth can accomplish the desired end gradually and surely ; equalization will be inevitable ; undervaluation will cease ; a reduction in the tax rate will rapidly follow. The plan is not expensive; the powers vested in the pro- posed Commission are by no means arbitrary; its work cannot but be productive of the greatest good to the Commonwealth. Next in importance is the law for the suspension and removal by the Tax Commission of Commissioners of the Revenue who violate the law. This is a companion act to that creating a permanent Commission and it will give the Commission the power to enforce the will of the people. Next in order comes the measure for the enforcement of the income tax law — a measure to which we look for substantial benefit and a wholesome equalization of the tax burden. These three laws should be enacted as soon as possible in order to meet the needs of the situation and to remedy evils which are daily more aggravated. But we regard all the proposed recommendations as of imme- diate importance and recommend their enactment at this session of Assembly. The time is ripe for tax reform; the Common- wealth is entering on a new era of prosperity. It is essential that the public finance keep pace with the needs of the State. REPORTS TO THE STATE TAX COMMISSION ON THE Reform of the Virginia Tax and Assessment Laws BY DOUGLAS S. FREEMAN, SECRETARY. Richmond, Va. Pbinted bt Obder op the Commission, 1911. TABLE OF CONTENTS. Preface xlvii Chap. I . Separation 1 Chap. II. Personal Property ' 20 Chap. Ill . Taxation of Lands and Improvements 120 Chap. IV. The Insurance Tax Laws 177 Chap. V. Banks and Trust Companies 211 Chap. VI. The Taxation of Railroads and Canals 229 Chap. VII. Miscellaneous Public Service Corporations. 320 Chap. VIII. Licenses 341 Chap. IX. Unclassified Recommendations 354 PREFACE IN revising these reports for final publication, the writer feels that he can add nothing to what the Tax Commission, in its report, has said of the importance and advantages of an immediate and thorough reform of our tax and assessment laws. His is rather the pleasant task of recording here his apprecia- tion of the many kindnesses received in the progress of his work. The members of the Commission have, in the nature of the task, been the most constant advisers and counsellors of the writer. Indeed, so valuable and so varied have been the suggestions of- fered by them that the writer feels he has no right to claim the reforms submitted, in his own report, as personal to himself. To each member of the Commission, the writer owes a debt at once personal and official. The other offices of government have been most kind. Judge W. F. Rhea, Judge J. R. Wingfield and Chief Clerk R. T. Wilson of the Corporation Commission, Commissioner Joseph Button and Deputy Commissioner J. N. Brenaman of the Bureau of Insurance, Auditor S. R. Donahoe, Treasurer A. W. Harman and, indeed, all the State officials to whom the writer has been for advice and assistance, have been generous. The writer trusts however, that it may not be improper to add a special word of thanks to Messrs. Isaac Davenport, Jr., of the Insurance Bureau, E. E. Cone of the Corporation Commission and W. R. Parr of the Auditor's Office. These gentlemen, all intimately acquainted with problems of accounting and statistics, have rendered to xlviii Report of Tax Commission. the writer services and kindnesses which have prevented many errors both of fact and of judgment. Finally the writer wishes to acknowledge his obligations to Messrs. W. H. Snead, E. R. Doran and 0. A. Hawkins. These gentlemen, Commissioners of the Revenue for the cities of Lynch- burg, Norfolk and Richmond respectively, have been invaluable advisers. It has been a pleasure to be associated with them and to realize to what able hands the work of assessment is entrusted in these three cities. D. S. F. CHAPTER I. SEPARATION THE THEORY OF SEPARATION. Introduction. During the last decade, the principle of tax separation has repeatedly been advanced as the most useful, simple and practical of all methods of tax equalization. Economists and practical statesmen, fascinated with the theory, have come to regard it, in some States, as little less than a panacea for all financial ills and have carried on a wide propaganda in its behalf. The dissemi- nation of these views, the widespread discussion of separation in the press and the comparative success of the method, where in- troduced, demand that separation be given serious attention at the hands of all advocates of tax reform ; but the loose discussion of the system and the easy assertion of its benefits require that the subject be carefully studied and that it demonstrate to stu- dents of tax reform other advantages than simple novelty. The Theory in Brief. Concisely stated, the theory of tax separation or segregation is that there shall be a single tax on every class of property, and that the whole taxable property of the taxing body must be so divided, separated or segregated that the State may get its revenue from certain classes of property, while the local governments within the State get their revenue from other classes of property. In practice, the State Governments generally confine themselves to the taxation of public service, transmission and insurance com- panies and corporate bodies generally. The local governments, derive their revenue from the taxation of personal property, realty and licenses of a non-corporate character. 2 Report of Tax Commission — ^Appendix. The History of Separation. Separation, thus defined, came not as a remedy but as a result. As the amount of corporate property increased in the States where the system was introduced, it became necessary to strictly regu- late the corporations in order to protect the people and non- corporate business. This, in turn, required the centralization of the regulative power in a compact body. When this was done, and when public service and transmission companies were com- pletely under the supervision of a central power, it was but a step to tax these corporate bodies through the central adminis- trative power regulating them. This step was taken when the new educational and penal system required greater expenditures on the part of Government, and, as it happened, when the railroads were entering on a new era of prosperity. Manifestly no force was more useful for the proper taxation of corporations than was the central regulative commis- sion charged with the supervision of the railroads. The final step in the development of the doctrine was the collapse of the general property tax. As the activities of Government increased and as the States were forced to make new demands upon the tax payers, it came to be generally recognized that the old property tax, inherited from the infancy of this country, was a complete and utter failure. The old machinery would not operate under new conditions; the tax seldom brought more than 30 per cent, of what it was worth. Inevitably, with public service corpora- tions well regulated, easily assessed and prosperous, the result was to put the burden of the State government on these corpora- tions and to authorize the local governments to levy taxes on other property. Separation Tested. This theory was first formulated, though without definite shape, in the State of Pennsylvania, about 1885. The plan has been taken up in New York, in Connecticut, in Massachusetts, and, to a certain extent in practically all of the Eastern States. In New York and in Delaware, separation has been more extensively developed than elsewhere and bids fair ere long to be complete. In the main it must be said that separation where tested has worked well. New York State has prospered, Pennsylvania's Report OF Tax Commission — ^Appendix. 3 finances are on a sound foundation, Delaware has little difficulty in raising the funds necessary for the conduct of its public affairs; other States which have tried partial separation are working towards complete separation. The Advantages of Separation. The supporters of separation see in it a number of advantages upon which some of them dwell with enthusiasm. These advan- tages may be resolved into seven, with corollaries thereto. First, Conformity to Natural Conditions. Separation obviously conforms to the natural division of prop- erty. It gives to the State for purposes of taxation those prop- erties which are State-wide, and leaves to the local governments those properties which are essentially local. A railroad, for instance, belongs to no one locality; its usefulness is proportionate to its extent; and it benefits one community because it puts that community in touch with the outer world. Manifestly, such a corporation is State-wide in character and a proper subject for State-wide taxation. On the other hand, a farm in any section of the State is essentially local. Its owner receives comparatively few benefits from the State as a whole; practically all of his business is transacted in his immediate vicinity; to tax him heavily for State purposes is to tax him for an advantage he does not receive. In this connection, however, it should be pointed out that the separation of corporate from private property for purposes of taxation may readily be carried too far. While this has not generally been the case, the California Tax Commission, in its admirable report, made the mistake of intimating that the in- corporation of any business gave it a general character and made it a fit subject for special attention exclusively by the State. A license to do business in a corporate capacity, said the Commis- sion, is a right given by the State and consequently a right prop- erly taxable by the State. The fallacy of this reasoning is obvious; incorporation is merely business convenience, and is always local and taxable as such except when the incorporation carries with it special or State-wide privileges. Incorporation, per se, is no more a reason for exclusive State taxation than it is a reason for exclusive local taxation. The character of the incorporation determines the nature of the taxation. 4 Report of Tax Commission — Appendix. Second: Property is Assessed Where Best Taxed. The second advantage of separation, in theory, is that it places property where it can best be assessed. A vast corporate property, stretching through many counties cannot properly be assessed as a number of units. Some parts are more valuable than others; a pro rata apportionment of its property in all the counties through which it operates is manifestly unjust; the prop- erty can best be assessed for distribution, or can best be distri- buted, by a central body. Furthermore, it often happens that property of this character can only be assessed by men trained in such work. The average assessor, for instance, will have diffi- culty in determining the value of the rights owned by an express company (franchise value), the cost of a railroad, or the value of. terminal facilities. His ignorance may work injustice to the Government or to the corporation and in any case is liable to produce disastrous results. When, on the other hand, cor- porate property is assessed by trained men, justice and equaliza- tion are more nearly assured. The converse is equally true; if the local assessor obey the law, be intelligent, honest and above the fear of criticism, he is far more competent to assess local property than a distant expert, no matter how familiar the latter may be with the theory of taxation. Third: Reduction of Tax Rates. The third advantage of separation is that it generally works towards a reduction of the tax rate. Separation, though partial in West Virginia has cut the general property tax rate in half, in New York it has abolished the general property tax altogether and has substituted special class taxes which, in the main, are just in their operation. It may, of course, be argued that the reduc- tion in the State tax is compensated for by the increase in the local tax rate, apart from the addition of special class taxes. In the same way it may be argued that the readjustment in State revenue has been solely due to the imposition of increased taxes on public service corpora tiones. Manifestly, with a fixed neces- sary revenue, the more the public service companies pay, the less must the public pay. Here, however, a strict line must be drawn — a line which is often overstepped in the more roseate arguments in behalf of separation. There is a limit to the taxation Report of Tax Commission — ^Appendix. 5 of public service companies, and taxation beyond this limit is reacting injustice. It is doubtless true that in most of the States these corporations are not paying enough taxes in proportion to their ability to pay ; but in any increase of their taxes, they should not be forced to bear a tax out of proportion to the taxes paid to the State, to local government, or to both, by other corporations or individuals of equal ability. It must never be forgotten that taxes beyond this reasonable limit are borne, not by the corpor- ation taxed, but by the private individuals who do business with that corporation. The indirect tax borne by the customer of the public service corporation is always heavier than the special tax levied on the corporation. Fourth: An Adaption of Means to Ends. The fourth advantage of separation is that it is alleged to "adapt the means to the ends," that is to say, it is said to be so operated that the State government, knowing what revenue it has, will apportion its expenses accordingly: or, in an old figure, will cut its garment according to its cloth. Fifth: Local Home Rule. The fifth alleged advantage of separation, as advanced by the friends of the theory, is that it permits "local home rule" in mat- ters of taxation. In a State where separation is in practice, the county or the city owes nothing to the State. It can make its taxes light or heavy, as its own wants require; it can assess those taxes which seem best to it; it can exempt certain property for special reasons; in a word, it is given the right to do as it pleases with the taxable property within its borders. This, in the judg- ment of some, is a clear gain for the American system of govern- ment, and is a return to the people of rights which belong to the people. Sixth: Harmony in Taxation. The sixth advantage of separation and one of the most import- ant is harmony in taxation. Where the system is introduced, there is inevitably an end to the disastrous and demoralizing rivalry in taxation. In States where the old property tax remains, the effects of this rivalry are too well known to require 6 Report of Tax Commission — Appendix. explanation; the counties, in many instances, see which of them can pay the least to the State, while meeting their own expenses of government, and frequently resort to underassessment which is calamitous in the extreme. The effort is not to secure the proper taxation of all property at a fair figure, but to underassess the adjoining county and consequently to bear less of the public burden. Under a system of complete separation, while this rivalry remains, and may, indeed, become more intense between the counties, the State is not a loser. The counties may offer such inducements as they please in the way of low assessments or exemptions; the State collects its own revenue from corporations and from business which can be equitably assessed. Seventh: Administrative Economy. The final general advantage of complete separation is that it works for administrative economy and efficiency. No longer compelled to collect its taxes through a host of local officers, the State can unify its methods of assessment, can enact laws suited to the peculiar conditions of the industries taxed, can make all taxes payable by a single ticket against each corporation, and can in the end materially reduce the expenses of assessment. Dangers of Separation. These advantages, real and pretended, may be enlarged upon at great length. Some of them are genuine; some of them can be attained in no other manner yet devised ; but some of them may open the way to greater evils than those they seek to remedy. Separation has its advantages, to be sure, but it is foolish to overlook the fact that it is by no means a panacea. It has de- fects, serious and fundamental. Two of these are of especial weight and must be discussed here. First: "Local Home Rule" May be Disastrous. The fundamental feature of separation is to leave the local- ities alone. The State takes the position that its own finances only are its concern; the locality can do as it pleases, can make its own tax laws and can enforce them as best it pleases. This inevitably means that the real work of local taxation is placed in the hands of the Board of Supervisors of the county. None Report of Tax Commission— Appendix. 7 denies the ability or the patriotism of the Supervisors. They are men of high character, working honestly for the best in- terests of the locality; but they are busy men, with innumerable duties in addition to those of taxation. They cannot give to the work the attention it deserves. When such a body of men is given almost unlimited power over the control of local finances, confusion will be worse confounded. It would, indeed, be difficult to imagine anything more disastrous than a system of administration which, without limitation or reservation, would permit every county to levy taxes as it saw fit, upon such classes of property as it chose. Then again, the wis- dom of leaving every county to fix its own tax laws may be doubted on principle. Aside from the fact that competition already exists under the law, it is at least open to question whether or not the State should surrender the tax payer into the hands of the county or city for exclusive taxation. While gener- ally speaking the nearer the government is to the citizen the safer the rights of the citizen, it must not be forgotten that the power to tax is the power to destroy and that local option in questions of taxation places in the hands of the local taxing body, the board of supervisors, the power to cripple any industry, or, what amounts to the same thing, the power to give one class of property an advantage over another. The tested wisdom of the Fathers, which, gave us a triple system, the County, the State and the Federal Government, for the protection of the individual is not to be cast aside unthinkingly, even for purposes of taxation. Second, Separation is Inelastic. The second great objection to separation is its inelasticity. If there be one quality necessary to every tax law, after justice itself, that quality is elasticity. The expenses of government cannot be kept at a fixed rate ; the revenue of the Commonwealth is never constant. Unusual expenditures for public work, pub- lic institutions, public disasters, etc., make special demands upon the revenue of any Commonwealth ; financial progress or decline, panics, bad crop years, real estate slumps and the like inevitably reduce the revenue of the State. To meet these changing condi- tions, there must be tax laws which operate as well regulated currency,— -expand when expansion is necessary and contract when contraction is necessary. 8 Report of Tax Commission — ^Appendix. It must be admitted that a general property tax with all its failings is well-nigh ideal in this respect. It brings in much or little revenue according to the demands of the financial situation ; it contracts and it expands; its rate in all States can be increased to a liberal maximum, and even when it is not sufficient, the rate of assessment may be increased. On the other hand, where there is no great demand for revenue it is possible to reduce the rate of assessment or to reduce the tax rate, fitting the revenue to the needs of Government. These essential qualities are lacking under any general plan of separation. The taxable properties from which the State derives its revenue under the prevailing plans of separation are those classes of property which are most dependent upon general finan- cial conditions. For instance, under the system of separation that raises the State's revenue from corporation taxes and from the taxes of income, the effects of financial panics are most disastrous. The gross earnings of corporations decline greatly at such a time, incomes from all sources are reduced as a result, the State's revenue is limited and may not be sufficient to meet the normal demands of Government. On the other hand, in times of great financial prosperity a surplus may be readily ac- cumulated under a system of segregation and the State may suf- fer all those ills which result from a plethoric treasury. It may be argued of course, that it is as easy to adjust the rates of taxes and gross earnings on income as it is to modify the rate on the general property tax, but experience has shown that the revenue from corporations and from income is subject to greater and more unexpected fluctuations than the revenue from the property tax, however assessed. Expedients to Overcome Inelasticity : Appointment by Expen- diture. To meet this great defect of inelasticity, the advocates of separation have devised two expedients, namely, apportionment by expenditure and a graduated inheritance tax. The first of these remedies was originated by a distinguished economist, E. R. A. Seligman and is defended by him with force. Its principle is simple: partial separation is inaugurated, sufficient to meet a large part of the fixed charges of Government, and additional revenue is had by requisition on the counties and cities of the Report of Tax Commission — Appendix. 9 State. If there is sufficient revenue from separation to meet, say, 70 per cent, of the expenses of Government, the counties and cities are called on for the remaining 30 per cent, which is apportioned, not on the total property of the counties and cities, but on their total expenditures. The argument is that when one county's budget is $100,000 and another county's budget is $50,000 the former coutity is in a position to pay twice as much to the State as the latter, and pays not a special State tax on property, but pays a percentage of its revenue in any way it thinks best. It is claimed that the requisitions of the counties may be apportioned in such a manner as to exactly meet the needs of Government over and above the revenue received from corporate property taxed by the State. While this in the main may be true, it may be noted that contingencies may arise under which requisitions on the county in proportion to its total expenditures may be alto- gether unjust. In a new county for instance, where taxes are heavy for public buildings, bridges, roads and schools the tax payers may be called on for an unreasonable per cent, of their total revenue, while in other counties no less rich and prosperous, but where special expenditures are not being made, an indirect State tax secured by requisition is much smaller. To meet this objection it is proposed that the requisition exempt all expendi- tures for public roads and general public improvements ; but even here it is doubtful that complete justice can be had. The only State which has tried this plan is Oregon, and while its Tax Commission thinks the system an excellent one and believes it will work well, it admits that the desirable quality of elasticity is still lacking. In New York, where the plan has been tested to meet special State taxes authorized by law, the system has worked with a reasonable degree of success, though tables have been prepared which show that injustice has resulted in some cases. Second Expedient: Inheritance Tax. The second remedy for the inelasticity of separation is an in- heritance tax which can be adjusted to meet the demands of Government. This tax is generally regarded as well-nigh ideal, especially where it exempts small estates. A man who inherits a large estate can afford to pay a tax on that estate. He has not earned it, he has not generally labored for it, and he can afford 10 Report of Tax Commission — Appendix. to give to the State a reasonable part of that which has been given to him. It is argued that partial separation, with an in- heritance tax to be adjusted from year to year, will bring in the necessary revenue and give a system the elasticity it requires. To this remedy however, there is one objection: where the legislature does not meet annually and where it is impossible to foresee the needs of Government the rate of the inheritance tax can be so adjusted to meet the exact needs of Government. While this defect applies to practically any system it should not be over- looked in applying this remedy, to a system less elastic than any other.* Conclusion. With these obvious advantages, and these no less manifest disadvantages, the theory of separation must appeal to the people of Virginia not so much because it is an ideal system but because it is better than any system now in operation. It is not perfect, and it is certainly inelastic, but in theory, it is preferable to the existing hodge-podge of tax laws which confuse the tax payers and work injustice to more than half of our people. SEPARATION IN VIRGINIA. If the theoretical advantages of separation be admitted, the only question to be raised before recommending the system for Virginia is its practicability. Is there any class or are there any classes of property in Virginia extensive enough to be separ- ated for the use of the Commonwealth? Will these properties when separated yield sufficient revenue for the expenses of Gov- ernment, and will they or can they be so separated as not to injure many counties or cities of the Commonwealth? Necessary Revenues and Taxable Properties. The following table will show the expenses of government dur- ing the last three fiscal years of the State, while the appended summary will show the chief sources of revenue with which the State met these expenses last year. *A very illuminating discussion of the objections to separation will be found in Prof. C. S. Bullock's The Separation of State and Local Revenue," Proceedings of the Fourth Annual Convention, League of Virginia Municipalities. Report of Tax Commission — Appendix. u Total expenditures, fiscal year 1909 $5,536,481.04 Total expenditures, fiscal year 1910 6,099,479.95 Total expenditures, fiscal year 1911 6,530,040.48 Revenue, Fiscal year 1910-51. Banks $ 141,402.91 Capitation 452,422.04 Deeds, etc 219,038.88 Inheritance Tax 32,331.47 Delinquent Lands 45,613.84 Fines 85,040.73 Franchises 134,750.21 Income Tax 129,429.19 Insurance 248,053.23 Insurance Bureau 30,206.35 Licenses 1,216,334.33 Oyster Tax 80,724.48 Personal Property 510,588.62 Penitentiary 125,780.27 Railroads 945,129.28 Express Co's 26,973.45 Registration 64,460.00 Real Estate 1,375,016.89 Steamboat Co's 7,626.45 Sleeping Cars 5,433.58 Telegraph and Tel'ph'ne Co's 51,342.38 Water, Light and Power Co's 44,473.30 Total $5,972,171.88 Miscellaneous 480,569.02 Total Current Receipts. . .$6,452,740.90* This revenue may be divided as follows: Taxes on corporate business, including franchises, charters, public service and transmission com- panies $1,679,851.14 *These figures were only received as this report went to press (November 24, 1911) d consequently could not be used in the computations in other chapters. 12 Report of Tax Commission — ^Appendix. Percentage 26.34 Business Privileges (licenses) $1,216,334.33 Percentage , 18.84 Tax on Private Persons and Property, including fines, etc $2,930,206.14 Percentage 45.41 Miscellaneous $ 606,349.29 Percentage 09.39 It thus appears that with a total revenue during 1911 of $6,452,740.90 private persons and property in Virginia paid directly in real estate and poll taxes 45.41 per cent, of the entire revenue of the Commonwealth; incorporated business paid 26.34 per cent.; licenses netted 18.84 per cent.; and miscellaneous items brought in 9.39 per cent. These figures and proportions must be kept in mind in any attempt to separate taxable properties. The Basis of Separation. As realty and personalty are those classes of taxable property in the assessment of which there are the greatest inequalities, these would naturally be the basis of separation. If separation is to do its best for the State, it should operate to give to the counties and cities the exclusive right of taxing personalty and realty, leaving the rate of valuation to the local assessors, acting under the authority of the local government which alone is affected by the undervaluation or underassessment. In return the State would have the exclusive right of taxing corporations and licenses. On such a basis the State would lose the following, on the col- lectable returns of 1910-11: Revenue from Personal Property Tax $ 510,588.62 Revenue from Realty Tax 1,375,016.89 Total $1,885,605.51 Deductions from this Total. This total, which would revert to the counties and cities, or which, in another sense, would constitute a State deficit, is sub- Report of Tax Commission — Appendix. 13 ject to two deductions, namely, reduced criminal expenses and, secondly, reduced fees to tax officers. Criminal Expenses. If the counties and cities of the Commonwealth are to have the taxes from personal property and real estate, it may naturally be argued that they should bear a part of the expenses of the courts. It has been suggested that the counties and cities should pay the misdemeanor charges, while the Commonwealth should still pay the felony charges. This suggestion is admirable. Broadly speaking, a misdemeanor, though defined by State law, is seldom an offence against the State. The culprit, is most cases, does little more than disturb the peace of mind of his neigh- bors, or, at most, seldom commirs a breach of law which should be dignified as an offence against the peace and dignity of the Commonwealth. In addition, it is a well known fact that the misdemeanor accounts may sometimes be used by unscrupulous men as a means of mulcting the State. It is said that petty of- fences are alleged and are given all the formalities of a court hear- ing, simply and solely for the benefit of the officers who receive fees from such cases. It is obvious that if these were chargeable against the locality, the board of supervisors passing on criminal charges would be in a position to determine the honesty or deceit of charges made upon the county. Every argument that has been advanced on the subject favors the payment of felony charges from the treasury of the Com- monwealth. A felony is truly an offence, not merely against the well being of the citizens where the offence is committed, but against the peace and dignity of the Commonwealth. The strong arm of the State law should be outstretched for the prosecution of the offender wherever found, and the State should spare no expense in punishing the guilty man. During the fiscal year 1910-11 the criminal expenses were as follows : Counties $191,219.72 Cities 137,909.07 Total $329,128.79 14 Report of Tax Commission — ^Appendix. Approximately 47 per cent, of these expenses are for misde- meanor charges. In such a case, the net saving to the State would be $154,690.53. Reduced Fees. The second deduction from the revenue which would be re- turned to the cities and counties, under the proposed system of separation, is in the expenses of Commissioners of the Revenue, Clerks, Treasurers, etc. Only approximate figures can be given until the administrative expenses of any new tax laws have been fully investigated. A reasonable estimate, however, based on present commissions, would be $148,000.00 the year. This includes clerk's fees from the sale of delinquent lands, savings in Commissioners' and Treasurers' fees, estimated at $125,000, and the pro rata cost of the land assessment. Revenue from Real Estate and Personal Property. .$1,885,605.51 Less Criminal Expenses 154,690.53 Less Collection Expenses 148,000.00 Total deducted $ 302,690.53 Total Deduction in State's Revenue $1,582,914.98 The changes made by the land assessment of 1910 which have not yet been felt in the tax returns will make a considerable dif- ference in this total. Estimating delinquents under the new land assessment at 10 per cent, the total will then be as follows: Revenue from Personal Property Tax $ 510,588.62 Revenue from Land Tax $1,502,798.00 Total $2,013,386.62 Less deductions as above 302,690.53 Net Loss to the State $1,710,696.09 Possible Compensations for this Reduction. Naturally, if the State is to yield up a great part of its revenue to the counties, and is thereby to create a deficit of not less than Report of Tax Commission — ^Appendix. 15 $1,710,696.09, it must expect large additional revenue from other sources. The question is, will the revenue returnable to the State under separation be sufficient and leave a safe margin. The first and the largest source of revenue from separation will come from the taxes on public service corporations as assessed by the counties and cities. These aggregate $954,829.18, according to the most reliable figures. To these may be added the taxes at present collected by the localities from other public service corporations. The total will then be as follows: Net Loss to the Commonwealth (as above).. . .$1,710,696.09 Gain from Local Railroad Taxes 954,829.00 Gain from Local Tel'ph'ne and Telegraph Taxes 51,366.00 Gain from Local Steamship Taxes 18,302.00 Gain from Local Insurance Taxes 125,987.00 Gain from Local Bank Taxes 345,812.00 Total Gain from Local Taxes Separated $1,496,296.00 Net Loss to the State $214,400.09 Thus if the State separate all corporation taxes for the use of the State and leave lands and personal property for taxation locally, it will still lose $214,400.09. And to do this the State would have to transfer all local taxes on these concerns at the present local rates, which, in some instances, as will be shown, are at present very high. Separating Licenses. To meet this deficit the State can only proceed by separating some other source of revenue of a general character, now taxed locally. The only class of property so assessed is that of business licenses. Manifestly, however, in doing this, the State should not touch those "policed" licenses which are necessary in many localities, namely, liquor, pawnbrokers and junkdealers licenses. If licenses now assessed locally be added to the above, the balance sheet would be as follows : 16 Report of Tax Commission — ^Appendix. Net loss to the State, as above $1,710,696.09 Net gain from Assessment of Corporation Taxes at present Local Rate 1,496,296.00 Net Gain from Licenses 596,031.00 Net Gain to the State 381,630.81 Thus the State can exempt local lands, improvements and personal property and can gain annually $381,630.81 if the State do the following: First — Prohibit every locality from taxing in any way, all public service, transmission and public utility companies, banks, insurance companies, and all like corporations. Second — Prohibit every locality from imposing any license tax on any business or corporation, other than liquor, dealers, pawnbrokers and junkdealers. Third — Require all localities to pay their misdemeanor criminal expenses and to pay the costs of assessing and collect- ing local taxes. Fourth — Maintain, as State taxes, the present local taxes and licenses on all business, corporations, etc., or levy equivalent taxes. Objections to this System. In the writer's judgment, while this system seems to be feasible and even advantageous to the State it is subject to objections so great and so numerous as to render its adoption inadvisable at this time. The following are the objections to this plan: 1. It Does Not Give the State Stable Revenue. It will be observed that the margin over actual loss by this arrangement is $381,630.81. While this seems large, it must be remembered that the properties on which the State proposes to levy exclusive taxes are those most subject to contraction in times of financial depression. Licenses, in particular, may be expected to decline from 10 per cent, to 25 per cent, in such periods of adversity as that of 1893-97; corporation earnings, which form a Report of Tax Commission — ^Appendix. 17 large part of the proposed revenue, would likewise be subject to great declines in times of depression, with the result that the margin might not only be swept away but an actual deficit might be created. To be sure, the proposed revenue will probably increase, in the main, with the development of the State; but it may decrease and decrease disastrously. 2. This Plan Deprives the Localities of Their Best Revenue. The second objection to this system is that it deprives the localities of that revenue which is most easily assessed and col- lected. Every tax officer know that corporation taxes are the "cream" of all taxes. They are paid the day they are due; there is seldom dispute as to their amount ; the work of assessment and collection is simple. It scarcely seems reasonable to deprive the localities altogether of this revenue, especially as the revenue placed in their hands in its place is difficult to collect, whether by the locality or by the State. 3. This Plan Requires the Continuance of Certain Unreason- able Taxes. As has been pointed out, separation of corporation taxes will require that the State take over the exact taxes, or the exact equivalent of the taxes now locally levied on corporation and other business. While the aggregate of these is not excessive and a system can in time be devised whereby they can be equalized, it is indisputable that some of these local taxes are now unreasonable. As is pointed out in the Chapters on Miscellaneous Public Service Corporations, Insurance and Banking, the local taxes in some towns and cities are most excessive. Were the State to equalize these, it would certainly have to lower them from their present standard in many localities, or else to maintain what is obvious injustice. The process of equalization in this case is an extremely delicate process and will require much time. 4. This Plan Will Work Hardship to Small Towns. The fourth objection to this plan is that it will work injustice to small towns. As is well known, these towns raise much of their revenue from the licenses issued merchants and others. This they will be required to give up and, in return, will receive 18 Report of Tax Commission — ^Appendix. only the present State tax of 35c on the value of their real and personal property. Many of them will lose substantially by this arrangement, and their loss is the people's. 5. The Legality of the Proceeding May be Questioned. The fifth objection to this plan of separation, and indeed, to any plan where local public service corporations are involved, is that the legality of the proceeding may be questioned. Street railway franchises, for instance, are awarded by the cities and often involve valuable consideration. Thus, for example, a street railway company, in securing a franchise, may bind itself to pay to the city a certain percentage of its earnings for a term of years. When, however, the State takes over this property for exclusive taxation, will the company still be liable for the tax? Lawyers of ability declare that the tax can still be collected, since the franchise awarded by the city is always subject to the conditions of general laws imposed by the city's governmental superior, the State; yet it is admitted that delicate questions may be involved. 6. A Number of Counties Will Lose. The last, and in some respects the most serious objection to this plan of separation is that under its provisions a number of counties will be decided losers. The computation of this loss can be made in a moment. The locality, in this case the county, gives to the State for exclusive taxation all corporation property taxed there at the local rate. In return it receives the property and lands now taxed by the State at the State rate. As the property returned by the State to the . localities for exclusive taxation is already taxed locally, the net gain to the county will obviously be only in the amount of the State tax. On the other hand, the locality will lose the revenue at the local rate from all corporate property. The local rate throughout the State will average about 98c; the State rate is 35c. Thus unless a county received from the State property in the ratio of 98:35, compared with what it gives up, it will be a loser. Rockingham county, for instance, will give up corporate property (towns included) to the value of $915,033.00. It will gain $15,453,195.00 in valuation. The gain in the amount of State taxes on the latter item would far more than compensate for what it loses on the former. But Report of Tax Commission — ^Appendix. 19 this is an exceptional case. At least 30 counties of the State, and those the least wealthy and most struggling, will be heavy losers. And, in addition to their actual loss, they will have to pay their misdemeanor criminal charges. General Conclusion. In view of these very serious objections, the writer cannot recommend this plan of separation, nor does he believe that a plan of separation can yet be devised which will meet the needs of the situation and not embarrass a large number of counties and ' towns. It will be possible, of course, to overcome the objection that the State's balance on the exchange is too small by keeping in the treasury the capitation taxes now returned the localities; but this process, while remedying one ill-effect of separation, will aggravate the evil in the less wealthy counties. One final fact should be brought forward in this connection, for upon it the ultimate feasibility of separation depends. As long as undervaluation remains, separation will be impossible. Very few counties would seriously suffer by the separation out- lined above, were their valuation at 100 per cent. The gain from separation would not be the amount of the State tax on the present valuation but a gain on a valuation as much greater as the present assessment is below a fair market valuation. Thus, for example, a county whose assessment is at 50 per cent., whose valuation of private, real and personal property is now $2,000,000 and whose corporate property is assessed at $900,000. with a tax rate of 80c, would lose by the exchange; for it would gain $7,000 from the exemption of its real and personal property by the State while it would lose $7,200 by giving its corporate property to the State. If, however, the assessed value were 100 per cent., the gain in revenue would be $14,000, while the loss would be but $7,200. Uniform valuation at the constitutional rate is a condition precedent to separation and will always so remain. The moment the counties and cities reach this valuation, separa- tion will be an easy matter for the State and profitable for the localities. Until that time it cannot be attempted without loss to many localities. 20 Report of Tax Commission — Appendix. CHAPTER II. PERSONAL PROPERTY. Historical. The State tax on personal property is among the oldest on the statute books of the Commonwealth. Varying in rate and in the method of incidence, it is a survival of the colonial tax-laws, and a lineal descendant of the old English levy. The general tax on personal property in its present form, levied at the same rate as the tax on lands, was incorporated in the Constitution of 1851 (Section 22) and has been recognized ever since in our organic law. The rate of this tax was raised, of course, during the war between the States, but following the renewal of peace it was made fifty cents on the hundred dollars valuation. At this figure it remained until the Legislature of 1881-82, when, following an increase in the valuation of railroad property,* the rate was reduced to 40 cents. f When the present Constitution was drafted, the rate was further reduced to thirty-five cents, at which figure it now stands. Character of This Tax. The tax on personal property is intended as a levy on all classes of private property not in the schedules for the taxation of realty, licenses and incomes. For this purpose, the terms of the statute and of the tax interrogatory issued in accordance with it, aim to enforce the listing of all descriptions of personal property, tangible and intangible, productive and non-productive, useful and ornamental. The law requires the separate listing of horses, etc., cows, sheep, goats, hogs and other domestic ani- mals not classified, of vehicles, firearms, watches, clocks, musical '*The valuation was raised from $9,876,306.34 in 1880 to $26,940,173.75 in 1881. fAct of April 22, 1882, Acts of 1881-82, p. 497. Report of Tax Commission — ^Appendix. 21 instruments, tools, implements, nets, boats and of all other tangi- ble personal property not otherwise classified. The law provides further for the taxation of stocks (not specifically exempted), bonds, other than those of the State and United States, credits, trust funds, fiduciaries, choses in action, the capital of stock companies, the shares of stock of incorporated companies, money in bank or otherwise on deposit, with general provisions for the taxation of money invested and not exempted. The law makes no distinction, for purposes of taxation, between tangible and intangible personal property. Administration of the Law. In its last analysis, and in practical operation, the administra- tion of the tax on personal property is in the hands of the com- missioner of the revenue. He sends out the interrogatories, he examines the returns made by tax-payers, he assesses those who make no returns, he certifies the books to the Auditor of Public Accounis and to the local Treasurer. While the latter, of course, has a general knowledge of the contents of the books and while the former examines them roughly to see that the totals are correct and that the make-up of the property books conforms to the law, it can and doubtless does happen in many instances that the Commissioner of the Revenue is the only officer in a locality who can answer that all important question : Does every tax payer con- tribute his proper part to the expenses of government? Annual Valuation of Personal Property. The appended table will show the increase in the assessed valuation of personal property since 1880.* Year. Valuation of Personalty. 1880 $ 70,391,018 1881 74,426,888 1882 77,681,500 1883 81,789,710 *It should be noted that prior to 1886 the report of the Auditor did not give the total valuation of the two personal property schedules ("B" and "C"), nor the valua- tion of the two combined. It has been necessary, therefore, to capitalize the tax in order to reach the total. 22 Report of Tax Commission — ^Appendix. 1884 88,572,220 1885 84,821,067 1886 83,152,971 1887 81,573,963 1888 83,244,863 1889 86,384,099 1890 90,110,467 1891 96,610,480 1892 95,868,081 1893 93,838,414 1894 86,590,188 1895 83,132,476 1896 94,341,046 1897 99,198,824 1898 100,046,014 1899 102,886,723 1900 107,279,401 1901 115,323,192 1902 112,959,468 1903 117,724,415 1904 122,673,713 1905 126,067,247 1906 137,763,464 1907 152,887,971 1908 160,081,727 1909 167,114,423 1910 178,936,735 It will be noted from this table that the valuation of personal property in twenty-two of the thirty years considered has shown an increase over the previous year, and that in only eight years has there been a decrease in the valuation as compared with the pre- ceding year. In each case, it should be added, there have been general business declines or special slumps in the stock market. Report of Tax Commission — Appendix. 23 corresponding to decrease in valuation.* There has been an in- crease of $108,545,717 in the valuation of personal property in the State in 30 years, or an average annual increase of $3,618,190. Revenue from Tax on Personal Property. The revenue derived by the State from the tax on personal property since 1880 is shown in the following table: Year. Personal Prop.\ 1880 $351,955.09 1881 375,602.02 1882 310,667.06 1883 327,158.84 1884 354,288.88 1885 339,244.27 1886 336,365.60 1887 327,233.25 1888 330,908.38 1889 344,012.12 1890 361,643.38 1891 386,964.23 1892 384,011.03 1893 375,962.50 1894 347,116.28 1895 333,095.66 1896 377,856.36 1897 410,858.28 1898 400,886.98 1899 410,963.36 *Thus the panic of 1884, which depressed aU values was reflected in the declined assessed valuations of 1885, 1886 and 1887. The valuation reached the lowest point in the last named year, in accordance with the general trend of the market. Pre- cisely the same conditions are met with in 1891-95, incident to the panic of 1893 . The lowest price level was not reached until 1897, but the stock market had recovered earUer, and began an upward movement in 1895-96. The decUne in 1901-02 was doubtless due to the heavy losses incurred in Virginia by owners of certain Southern securities and to the general uncertainty as to taxation which followed the meeting of the Constitutional Convention. The panic of October, 1907, was followed by so prompt a recovery that the slump in securities did not affect the general upward movement of values. For information regarding these panics and their effect on the value of intangible personality, see Sprague: "History of the Crises under the National Banking System. (National Monetary Commission, Senate Doc. No. 538, 61st Congress, 2nd session.) See also Juglar: Brief History of Panics in the United States (N. Y., 1893.) 24 Report of Tax Commission — ^Appendix. 1900 429,796.24 1901 469,401.52 1902 :. . 452,130.66 1903 413,446.73 1904 430,657.16 1905 442,626.99 1906 483,328.58 1907 536,001.52 1908 560,880.75 1909 585,596.23 1910 626,918.27 It will thus appear that the revenue from this tax follows, of necessity, the variation in the assessed value of the personal property and, in addition, has been marked by two decided slumps in 1882 and 1903. These, it is needless to say, were due to the decrease in the rate of the tax.* Undervaluation of Personal Property. While the increase in the valuation of personal property has been great on its face, this does not of necessity mean that the present valuation or assessment of personal property is either just, adequate or equitable. The question, in brief, is not how much personal property has increased in valuation, but how far this increase has kept pace with the general increase in the taxable wealth of the State. The standard must be comparative not absolute. In making this comparison, however, and estimating from it the true value of tangible personalty, the investigator at once faces grave difficulties. There are no accurate figures on the subject; there are few standards by which valuations can be judged; one must estimate the extent of undervaluation from the assessment of a few classes only. The best and surest standards available are the relative and comparative ratio of real and personal prop- erty, the percentage of assessed to true value in the known classes, and specific instances of palpable undervaluation. These will now be considered in order. *These figures are for the assessed and not the collected revenue from personal property. Owing to our faulty methods of administration, the State does not at present collect but 80.5 per cent of the assessed amount of taxes on personal property. Report of Tax Commission — Appendix. 25 1. Comparative Valuation of Real and Personal Property. Since 1880 the percentage of valuation that personal property bears to real estate has varied from 25.6 per cent, to 44.6 per cent as follows: Percentage Personal Property Year. Valuation to Real Estate Valuation. 1880 28.0 1881 32.1 1882.... 33.4 1883 34.6 1884 36.8 1885 33.0 1886 32.2 1887 31.8 1888 31.9 1889 33.3 1890 33.0 1891 32.7 1892.... 31.8 1893 ,. 30.6 1894 27.9 1895 , 26.5 1896 31.0 1897 32.4 1898 32.3 1899 33.0 1900 33.8 1901 35.6 1902 . 34.4 1903 34.9 1904 35.6 1905 34.2 1906 36.3 1907 39.3 1908 41.3 1909 42.3 1910 44.6 26 Report of Tax Commission — ^Appendix. In other words, during a period of thirty years the valuation of personal property has averaged 35.02 per cent, of the valuation of real property (exclusive of public service corporations in either case). As compared with other States of approximately the same diversity of agricultural and commercial interests, this showing is below the average. This will be manifest from the following table, based on the most recent reports on file in the State: State. Valuation Personal Property. Valuation Real Property. Per Cent. Personal to Real. Arkansas $100,399,315 150,977,137 238,844,439 18,076,038 422,280,860 433,207,831 474,061,660 152,364,055 303,881,030 770,516,086 $199,331,562 223,694,790 365,493,769 38,829,180 1,110,301,659 654,194,122 1,538,868,377 334,245,015 995,905,074 1,619,462,263 50.3% 67.5% 65.3% 46.5% 38.0% 66.2% 30.5% 45.5% 30.5% 47.7% Albama Georgia .... Idaho Indiana Illinois Kansas Louisiana Missouri Ohio Average for 10 States . 48.7% This is about the average for the United States and measured by it, Virginia is 13 per cent, below the standard. Either our people have less personal property in proportion to their real property than have the people of other States, or else their prop- erty is not assessed as is similar property in other States. One is loath to accept the former of these explanations. 2. The Assessed Value of Personal Property Compared with the True Value of This Property. An even better indication as to the nature of the assessment of personal property is to be found in a comparison of the assessed *It should be stated the arrangement of statistics in the census of 1880 does not conform to that in use since that time. In consequence, the figures for the true value of personal property in 1880 are reached by allowing the various classes of property listed then the same percentage to the known total valuation as the known class- valuations of 1890 bear to the total valuation of 1890. This method of computa- tion is believed to be reasonably correct. If it errs in any way, the figures of the census valuation are too low. Report of Tax Commission — ^Appendix. 27 value with the estimated true value of the same property reported by special agents of the United States Census. The comparison is as follows: Year. Census Valitation. Com'mers' Valuation. Percentage. 1880 . $168,390,000 209,847,256 304,583,410 361,114,240 $ 70,391,018 90,110,467 107,279,401 122,673,713 41.7% 1890 42.8% 1900 35.2% 1904 33.9% While it is not claimed that the census figures are absolutely correct, it is believed that they are approximately so. On such a basis, the valuation placed by the Commissioners seems ridiculous when compared with the estimated true valuation. Indeed no comment is necessary where the assessed valuation of all personal property in 1904 was less by about 45 million dollars than the true valuation of 1880. It is a sorry showing, indeed, when the assessed valuation of property in 1910 is only $10,000,000 more than the true or census valuation of the same property in the Commonwealth 30 years ago, at a time when the State had barely begun to recover from the frightful property losses of the war. To carry the comparison between the true and the assessed valuation of personal property further, an examination of cer- tain special classes has been made. According to the reports of the Commissioners of the Revenue, there were in Virginia, on February 1, 1910, the following animals, subject to taxation: Class. No. Horses, Mules, Asses, etc 372,150 Cattle 617,213 Sheep 387,265 Hogs 436,409 Goats 5,094 There is no way of ascertaining the real number of these animals during the year 1910; but figures are at hand, compiled by the Census Bureau on the basis of examinations made 10 years ago. 28 Report of Tax Commission — ^Appendix. These, in every instance, show a larger number of stock animals reported ten years ago than were listed in 1910 for taxation. These figures and the percentage which the present listed animals bear to animals located by the Census in 1900 are as follows: Amnud. Census 1900. Commissioners 1910. Percentage. Horses, etc 377,813 853,903 695,614 999,272 6,315 373,150 677,213 387,265 436,409 5,094 985. Cattle 793. Sheep 656. Hogs 436. Goats 806. Total Value Census, 1904 53,776,806 Commers., 1910 34,728,537 645. No one will contend for a moment that there are less domestic animals in the State to-day than there were in 1900; and even allowing for the difference in the seasonal dates at which the census was taken and the assessment made, to declare we have in 1910 only 43.6 per cent, as many hogs as were listed in 1900 is ridiculous. In the same way, an examination of the average valuations of certain classes of personal property will show a dis- tressing undervaluation. The following abstract will show these valuations. Valuation of Certain Classes of Personal Property. Class. Average of Aggregate. Average of Averages. Horses, etc $59.36 2.98 14.82 2.15 3.28 19.75 8.49 2.18 51.99 $60.20 3.00 Cattle 15.56 Goats 2.02 3.37 Vehicles 24 63 Watches 8.38 2.89 Musical Instruments 49.67 Report of Tax Commission — ^Appendix. 29 3. Some Glaring Instances of Undervaluation of Personal Prop- erty. It has of course been impossible to examine even a small per- centage of the personal property assessments and compare them with the known possessions of individual tax-payers. In some instances this has been attempted, with results which convince one that the assessment of tangible personal property is often more farcical and ridiculous than can be imagined from any survey of totals or averages. The following are a few cases in point: A detailed examination of the property books of Franklin County, for instance , discloses some glaring examples of under- valuation. The writer found in this county numerous horses whose assessed valuation was $20.00; wagons valued at $5.00; some horses valued as low as $10.00; cattle valued at $5.00, and the like. One firm of contractors returned and was assessed with 10 wagons at $5.50 each. In this county one assessment was noted of a man, evidently a farmer, whose total personal property was valued at $58.50, of which sum household effects were valued at $7.00. This property included two horses. In Grayson county undervaluations appear on the books which can hardly be described in words: Horses are frequently assessed at $5.00; the average of cattle is but little more. One tax- payer reported 12 head of cattle and was allowed to list them at a total valuation of $20.00. In this county 36 tax- payers, listed on one sheet of the Commissioner's books, are said to have a total of $96.00 of household furniture and total personal property amounting to but $700.00, tax $2.45. One may doubt if this tax covers 50 per cent, of the cost of assessing the property. In Mathew county, horses are also found, assessed at five and ten dollars, farmer's implements at one dollar and wagons, carriages, etc., as low as five dollars. Inequality and Undervaluation. It matters little whether all property is assessed at 50 per cent, of its true value and taxed at 35 cents or assessed at 100 per cent, and taxed at 17 cents. Hence it follows that if undervaluation were the only defect of our property assessment, the situation inight be dismissed as satisfactory. Such, however, is not the case. There is a worse defect and one more widespread, and 30 Report of Tax Commission — ^Appendix. that is inequality. Glaring as is our system of undervaluation, it is a trifle compared with the vicious, noxious and demoralizing inequality which appears in every item of Schedule B. and C. Equality is the fundamental principle of justice and this equality should appear in matters of taxation as well as of law. If we insist that the citizen of one county should have the same trial as the citizen of another county, we should demand that both pay their taxes by the same standard and in the same proportions. As the matter stands to-day, the force of the comparison is lost and inequalities of taxation pass unchallenged which, if they ex- isted in our usual legal proceedings, would foment a revolution. The Comparative Ratio of Realty to Personalty in Counties and Cities. As prima facie evidence of this inequality, a comparison of the ratio of realty to personalty in the several counties and cities of the Commonwealth is submitted. Broadly speaking, the people of one county have personal property which is as valuable in proportion to their lands as the people of another county. The two go together; as lands increase, personal property is multiplied. Exceptions exist, of course, as in the case of counties whose lands are largely mineral — Buchanan, for instance — but these exceptions are readily seen. Moreover, it is demonstrable that in 90 per cent, of the counties and cities where the assessed value of lands is low, the assessed value of personal property is also low. For these reasons, we can find no justification for the amazing inequality of proportionate values appearing in the following table : Counties Aocomac 38.6 Brunswick 32.4 Albemarle 55.9 Buchanan 23.0 Alexandria 07.7 Buckingham 54.6 Alleghany 44.6 Campbell .-.36.1 Amelia 42.5 CaroUne 34.2 Amherst 31.6 Carroll 69.2 Appomattox 36. 1 Charles City 41.9 Augusta 38.1 Charlotte 39.0 Chesterfield 22.1 Bath 45.1 Clarke 37.3 Bedford 41.5 Craig 49.5 Bland 42.3 Culpeper 51.4 Botetourt 49.6 Cumberland 38.5 Report of Tax Commission — Appendix. 31 Dickenson 60. Dinwiddie 36. 5 Elizabeth City 42. 1 Essex 34.9 Fairfax 69.0 Fauquier 46. 8 Floyd 48.0 Fluvanna 37.9 Franklin 45.5 Frederick 32.2 Giles Gloucester 45.7 Goochland 30. 9 Grayson 28.4 Greene 42. 5 Greenville 38.8 HaUfax 56.2 Hanover 36. 2 Henrico 39.2 Henry 40. 4 Highland 30.1 Isle of Wight 46.4 James City 27.0 King George 42.7 King and Queen 52. 1 King William 67.6 Lancaster 51 . 3 Lee 86.3 Loudoun 55. Louisa 32. Lunenburg 79. 5 Madison 42.3 Mathews 21 . 5 Mecklenburg 59.3 Middlesex 37.3 Montgomery 55. 3 Nansemond 40. 9 Nelson 116.42 New Kent 40.6 Norfolk 25.7 Northampton 43. 6 Northumberland 54. 9 Nottoway 39.3 Orange 45.5 Page 38.1 Patrick 31.8 Pittsylvania 34. 8 Powhatan 29.6 Prince Edward 31 . 4 Prince George 35. 8 Princess Anne 23.7 Prince William 38.3 Pulaski 38.7 Rappahannock 44. 6 Richmond 47. 5 Roanoke 33. 7 Rockbridge 46.7 Rockingham 32.7 Russell 62.9 Scott 69.5 Shenandoah 43 . 4 Smith 40.5 Southampton 70. 1 Spottsylvania 47^5 Stafford ". 40.4 Surry 32.2 Sussex 32.2 Tazewell 59.4 Warren. . , 12.3 Warwick 17.3 Washington 36. 1 Westmoreland 32. 3 Wise Wythe 108.72 York 39.3 32 Report of Tax Commission — Appendix. Cities Alexandria 25. 8 Richmond 35. 7 Bristol 14.3 Radford 42.6 Buena Vista 39. 5 Roanoke 17. 5 Charlottesville 26. 1 Staunton 50. 3 Clifton Forge 14.8 Williamsburg 27.3 Danville 63.0 Winchester ' 61.4 Fredericksburg 26.7 hynchbuTg 49. 7 Newport News 82. 7 Averages of Averages: Norfolk 21.9 Counties. 44.9 Petersburg 41.2 Cities 32.9 Portsmouth 14.6 State 42.9 It will appear from this table that the average ratio of person- alty to realty for the counties of the State (average of county averages) is 44.9 per cent., while the average for the cities is 32.9 per cent, and the average for the State (average of averages) is 42.9 per cent. Fifty-eight counties and fifteen cities fall below this average for the State; sixty- two counties fall below the average of the counties and ten cities fall below the average for the cities. Within the counties, the ratio of personalty to realty varies from 12.3 per cent, in Warren County to 230 per cent, in Buch- anan; or omitting the counties largely mineral, from 12.3 per cent, in Warren to 116.42 per cent, in Nelson.* Leaving Nelson out of the calculation, the county ratio varies from 12.3 per cent, to 79.5 per cent., the latter figures being for Lunenburg county. This of itself bespeaks inequalities that are most deplorable. Still more striking as an evidence of existing inequalities is the appended table showing the average valuations of certain classes of tangible personal property in the counties and cities of the Commonwealth. This shows variations in assessed values which need no comment. *The large ratio of personal property to realty in Nelson is due in a measure, to the large holdings of one citizen, whose assessed property is 53 per cent, of thi total of the county. Report of Tax Commission — Appendix. 33 ^^ & o M H d > a S n Q « t< iz; p b ^ a CO n . H p M e3 ''I E^ P I p o g M d ° ^ g s ^; >; c |-< ^ 1^ a^ Pi 1 « I S ^ ^ I; S ^ S g § g o « o « " (Li b z J ° •< cc g m a <" ° 3 o " 2 CC M >d H B 3 ^ S ^ o ^ H g S ■=! S ?«" I o S is? S § a s g ° to O ^ IS S H »OCOC<)(NC<1000COTt<030CCu:iOO^i-HWCOC^ ■'i^oOtNC^O'^OOi-lOi-HOiOOOt-H^tNOOO ^-tC0l>C-t-H05000'^'^CDI>(NCOCOlO(NOOCD05C00i-l00l> 001-»»O05»O:DO5O»Oa50505»O00t^i-H»OO_ 0>i-IC»l>05i-llNi-l(NOSCIOOO'*COi-IOOlOTt<0 i-HC^IIMC^^i-Ht-HC^CvIt-I T-tiH.-li-li-lT-( r-(T-( COCOOC^T-(u:)C^i-lO«t*OOOOs»OOOir3c005CO CD05Mt~(M(N00"!(lOt>>-l(MCD C<>KI-*MCOCO(M'*Tl >0 "O CO (N lO IM •«ooo^(Noor~to •C0»r3O-^»-l»0OC0C0 • MiN'-ieocoiocqi-ico lOCOOCDi-tONlCt-HlOOOlOr-tO^C^HUSt^Oa) CO(MCDC10T)ltD^CCC35-*OS-*(3iO-<*OaiOt-t^ C^»CI>(NCO'^CO'^(MCOTH'CCTj-a5000»oQOT-(oo":)T*Ht-H0503»oio o 53 ft So:S ^ S III P c3 oS ill _cs E?3 ^ 34 Report of Tax Commission — ^Appendix. (NM-*>ffltOeCDl>O00lOQ0OCD05l>C0C000C0»OO OiOOt^CDO^-lOS'<^03*00-i-iC^'^'^OlI> O lO O F^ CD CD ■«** o t> ^ 1— 1 i-H -OOt>0<:Di-OSI>05l>COOOW30CO»-t»OGOXU3CO NCOCOCDt^M'CDCOcOOSOSOcDNlOCOb-O'-H'^GOOOO ■s^pn^A CDcDCOCv:)OOOcD"<#I>»OOOCOOOOCO'-HOOGOWCOU3i-l T}HcD05000i-lOCCOOOcDOCOOSOSCCCD050cOCflTj1 CD'^O'^t^lOCDONO'-^OT-t GO -^ 0StJ<'<:H'«4<'*01CDcD C*IC^T-W3I>OOcDt>CDcDr^CO'rH r-lt»Oa5COWOI>Tti-IOO»Oi-li-H cD'^WC<^C0l-l" ■ • .-1 ■* OJ • CO .H CO (N • • ■ • • • m • M CO • Cil • • (M -H rt • • N CO CO •deaqg >00-IC0COC-i-lNl>C^OOOOiOOOCOI>.iOcOiOC<»OiTHOOi-( •E5I0010 0-*0500lOCDO'*'OCOO«ll>-OOt-lOO>OCO>0(N"5t~'*lCO lOi-Hi— (T-tT-1i-HCDi-Hi-HT-iC<|W3i-Hi— lT-(»-H»-HT-t(NlOf-HCOCOi-H •S9qo:jB^ ■^OOC^COWt^OSCOt^ON^POTHO>CDCOT-lci5>Ot*a)i-lO •S9pTq8j\^ ■^OC0-^00»-tlO0Si-HI>Oi-i-HOOO»OOC^COO5 tO««l'-l'*CONCOC0'-l>'5CO(NN(MC0(M«C0 lO 00 05 g o (M CO i-H 1-1 (M • CO CO cq ■ (N •* . • 1-H lO N CO I— I I— I IN CO •dsaqg iOaJCiOTjHl>.t>i-iOOOs(NiOU5COOiOIVOOTjHiC(>Tt*COiO CO'*COC003i-llCCOTtrJHCOOOi-lCOOSTt005COi-iT-iCD05i-HCiOTt<£JlOCDTtH-<:^Cv»rH CO-'^i-HCO'OOOOOSCOi-lTHrhCOOOCOCO-rHr- B3 o o o g-^S o i^ §* bC ro bC e r1 ''^ 3 -^ J2 b ^ S S o S a oa 2 -Ti -3 T3 .a i ;s :S- -^, 2 a a B 2 as ■s o ii> *^ o g o 73 a a 36 Report of Tax Commission — Appendix. 00 n> ■rt( T*( m o no m 1^ (M 05 on (^ h- lO t^ ■* to (M ira o T-4 CO s^^narani^s 00^.-lOOOC<3-*OOlO«miO>CDtD05>00>-*>00'Ot-Ost>COt^'-IM50lOC»INC»500CO«!(rqoO— iTf< 5D-*C<)i-IC<300tO«l«)CO-*COC<310CO-*IM(NCI3-*U5C-l'-IM>Oi0001>lOONCOO(rOro05M(NOO ■sj[ooio ■*OOC<30t^lNa3C01>05COOOT)H-l(N 00t>-HTt-*00(NM(N>-l(NC0>-l-*-*OS ■saqo'j'BjW rtWC<3.-ltDTtlO(NlOC»300M:i>OC"*-*O!O-*«l Ot~-*l(N«0t0TtCDiOCX)CDt>0>tt>>0C0M-*tD00i0>0t0 tH 1-H t^t^C^NOSCOOOU^-^lOCOlOC^iOi-t-^NlOOOCDNOSOOiC ■sapnjOA^ T-HCOCOOOOOO"3CX)i-<00»Ca)OlOTjH'^OSOOOiOOOCO»-Hi-H lO"5'^OC»OTjH»O0S»C00 ■sSoH OOtDOiOCTiO0i0)'OI>T-l>O00l0«0-*iO(N COMIN(NroMCO-*Ct>oor)-lT-l ■ ■ • MCNNi-lC^llMIN ININ'-i .-HO^-l»Ot>i-tC<|-^C(N051>OCX3i-l03COOOTlH •dgaqs COCCTl(,-ilMMWMlN-*(N-*(MlN-*CSIi-lM0O(NrtCOoocDait-c»oicooi>'*03-*'*mii^ ■*CO-*000"3"5t-(NO(M-*>ntDCOiO-*CO-*-*iMcOT»l.-l OOtOOTtlc6005McDt>>OCDrHO>MCO-*00(N t^-^OSC^OSCOi-tcDt^i-IOOlOOOlCllOOOCOCOr-lcOCOCOCO ■o%3 'sasiojj T-l(N(Ni-l^a>>O-(NO-*r-l(30iO.-lO>U5(Nl>-*Cn(N00-*-*i «0"0>'3-*'OCDI>000OtO-*m5D'*lOOu:)>OCO O P 5 "S »- « s ^, 1 J 1 O O > i 1 1 1 "1 1 1 PL p- c 1 11 .2 (1 c c o; a a p: ' p: A C c p: 1 c PC 1 c p: (5 1 c i s 1 c c •1 i Report of Tax Commission — Appendix. 37 CD O N CO IN ■* lO o m Otoino3cot>->oNm 05^o>oortHmiNtO"*iM Tt<(MioOOt~i-lOt~tOO - 00 ■^ lO to "3 fj O O CO i-l o " «i,( 1-w -CT* w "^T" "•' '^r 'ii.' "ii.^ "^r vii^ • 00 CO ^^ CD ^^ '^ O3CO-^CO0000l>OiO0O5CO OOOt^CDCDCO 1-1 •S3I0010 Ni-i'*'00C0'^ C0IM'-l-*COI^ '(MIVINtJIMco ■saqoij'Bj^ IMQ0(MTHOC0"5OtD 00I>C0O)C^C0CTi>OU5 COCOOOOOUtlWT-loOcO ■*COOOOO>OCROOCOCO'*CO 0005CO-*OT)HOSt^(NiO C^l— I tHtHt— (1— iTHfH tH O ■* 03 N 1-H i-H •s3ionjay\^ •^■^t^TtHCaOSlOT-Hl-f-^TjHt^COt^CO-^OlO COCOOOCOCOOOOOSi-Hi-HOSCOOt^cOt^lOCl (N05iOi-iot^m«>cocoo5a5(N050r~co-* OOCO(N>OU3COCO^»^-OCOtDCOTt^OOOOCq^l3 'sSojj CO^IMCOMC^NIMCO :?: • 00 • 00 (N CO IN ■ 1> CS U3 ■* ■ CO ■ CO • <0 CO CO CO ■S^BOQ CO 00 • 1-1 ■ T-H OS lO S2 CO IN ■ 1-1 (N IN IN o o o o •d98qg eqiNCt--*C-iai"3(Ni-iO'*T)i'*05iNeocoi-< COrCOOCOCOt^O'-HTXOOOi-IOOOSOOOOCO Ni-l— IP1(N>-IIN(NIN-IINNINC a o o o 2 S =3 T3 n 1= ° n M cj I- CO C» o3 03 l i^l S •^ rt O OS Ps ^ W^3 q S ■8 afta&ftfti=l^^i^^ ftp, OI>CDOSCO(NCOb-OSCOriHi-IOO OOi-^'tN'-HCOt^T-lOOOOCOiOi-lO o o I' 13 S o d o a O S»3S,3^^wSmS^^O 1— ( th o TO cq TO SI V .£2 (2, ?3 W O MOW 3 Report of Tax Commission — ^Appendix. 39 It is to be remembered, of course, in reviewing this table, that the character and quality of live stock varies considerably in different parts of the State and that the readiness with which live stock can be sent to market plays a large part in determining its market value. It must likewise be borne in mind that the average valuation and the consequent ratio to the State average depend in a measure on the extent to which the property in question is listed for taxation. Thus, for instance, the high average valuation of clocks in Norfolk is due to the fact that only the more valuable time pieces are listed for taxation at all, and the abnormal valuation on musical instruments in Charlotte County is to be attributed to the fact that only pianos are listed. But making due allowance for these conditions, the fact remains that the farmer in Loudoun is paying four times as much taxes on his horses and five times as much on his cattle as the farmer in Grayson ; the man who raises hogs for market in Henrico pays six times as much in taxes as the man in Grayson and pays 14 times as much to the State for his vehicle as a citizen of Grayson, while a resident of Elizabeth City County pays 15 times as much taxes on his watch as a resident of Carroll. A system of taxation which permits such inequalities as these is condemned already. As further instancing the inequalities existing between the various counties and cities of the State regarding personal property, a table has been prepared and is appended hereto, showing the per capita valuation of personal property in the counties and cities of the State. 40 Report of Tax Commission — ^Appendix. Per Capita Valuation of Personalty. Counties. A. Accomac Albemarle Alexandria Alleghany Amelia Amherst Appomattox Augusta B. Bath Bedford Bland Botetourt Brunswick Buchanan Buckingham C. Campbell Carohne Carroll Charles City Charlotte Chesterfield Clarke Craig Culpeper Cumberland D. Dickenson Dinwiddle E.— F. Essex Fairfax Fauquier Floyd Fluvanna Value of Per Capita Population. Personal Property. (1910) Valuation. 36,650 2,006,005 54.73 29,871 2,981,943 99.82 10,231 311,597 30.45 14,173 1,326,307 93.67 8,720 480,599 55.11 18,932 670,835 35.43 8,904 421.400 47.32 32,445 4,023,384 124.00 6,638 588,279 89.97 29,549 1,776,829 60.09 5,154 261,796 48.85 17,727 1,306,197 73.62 19,244 1,184,649 61.55 12,334 391,566 31.74 15,204 867,318 56.38 23,043 1,368,656 69.39 16,596 754,422 45.45 21,116 497,605 23.56 5,253 332,000 63.20 15,785 1,008,578 63.89 21,299 1,197,733 56.23 7,468 927,608 124.21 4,711 218,214 59.69 13,472 1,607,125 111.85 9,195 419,829 45.65 9,199 349,659 38.01 15,442 757,955 49.08 9,105 441,704 47.41 20,636 1,624,673 79.11 22,626 3,446,201 152.98 14,092 435,971 30.93 8,323 211,516 35.02 Report of Tax Commission — Appendix. 41 Counties. Population. Valu^ of Personal Property. 1910 Per Capita Valuation. Franklin Frederick G. Giles 26,480 12,787 11,623 12,477 9,237 19,856 6,937 11,890 40,044 17,200 23,437 18,459 5,317 14,929 3,624 9,576 6,378 8,547 9,752 23,840 21,167 16,578 12,780 10,055 8,922 28,956 8,852 17,268 19,878 812,469 1,066,638 584,637 669,560 386,765 315,650 290,567 622,989 2,720,443 1,183,469 4,817,264 744,226 779,113 1,259,500 224,107 496,172 268,476 746,494 543,706 1,191,492 4,562,331 627,983 829,423 748,551 196,882 1,562,711 425,935 1,252,478 1,699,778 30.68 83.41 50.30 Gloucester 53.66 Goochland 41.87 15.89 41.88 Greensville H.— I.— J. Halifax 52.39 67.93 Hanover Henrico Henry Highland . 68.80 205.54 40.31 146.53 Isle of Wight 84.36 James Citv 61.83 K. ICinff sad. Oueen 51.81 Kinff Georee 42.09 87.33 L. Lancaster 55.75 Lee 49.97 Loudoun 215.53 Louisa 37.88 LuTipnburff 264.90 M. Madison 74.44 22.06 IVIefiklpnburff 53.96 Middlesex 48.11 72.53 N.— 0. Nansemond 85.50 42 Report of Tax Commission — Appendix. Counties. Nelson New Kent Norfolk Northampton Northumberland Nottoway Orange P.-Q. Page Patrick Pittsylvania Powhatan Prince Edward Prince George Prince William Princess Anne Pulaski R. Rappahaimock Richmond Roanoke Rockbridge Rockingham Russell S. Scott Shenandoah Smyth Southampton Spotsylvania Stafford Surry Sussex T.— U.— V. Tazewell Population. 16,821 4,682 52,744 16,744 10,777 13,462 13,485 14,147 17,195 50,709 6,099 14,266 7,848 12,026 11,526 11,246 8,044 7,415 19,623 21,171 34,903 23,474 23,814 20,942 20,326 26,302 9,935 8,070 9,715 13,664 24,946 Valvs of Personal Property. 1910 1,963,220 353,130 4,270,464 1,082,670 840,315 897,548 1,234,883 Per Capita Valuation. 116.71 54.06 80.96 64.93 77.07 66.57 91.56 752,822 53.21 413,755 24.06 2,065,949 40.74 304,914 49.99 792,786 55.57 627,977 80.01 1,062,939 88.38 688,797 59.76 1,059,817 61.45 679,626 84.48 361,582 48.76 1,746,837 89.01 1,890,527 89.29 3,812,922 109.24 975,672 51.56 1,041,488 43.73 1,817,447 86.78 964,318 47.44 2,438,410 92.70 656,640 66.09 365,118 45.24 537,670 55.34 785,033 57.45 1,537,550 61. B3 Report of Tax Commission — Appendix. 43 Counties. Warren Warwick Washington. .. Westmoreland . Wise Wythe York. Cities. Alexandria. . . . Bristol Buena Vista . . . Charlottesville . Clifton Forge . . Danville Fredericksburg . Lynchburg .... Nevvport News . Norfolk Petersbin-g Portsmouth Radford Kichmond Roanoke Staimton Williamsburg. . , Winchester. . . . W. Population. 8,589 6,041 32,830 9,313 24,162 20,372 7,757 15,329 6,247 3,245 6,765 5,748 19,020 5,874 29,494 20,205 67,452 24,127 33,190 4,202 127,628 34,874 10,604 2,714 5,864 Valu£ of Personal Property. 1910 178,252 293,360 1,262,874 454,763 896,888 3,027,278 323,278 1,317,209 330,754 249,945 692,220 230,832 5,026,678 645,200 8,173,960 752,500 9,635,480 4,047,235 1,290,255 528,015 27,978,445 2,510,641 1,955,040 155,496 1,427,520 Per Capiia Valuation. 20.75 48.56 38.46 48.83 26.25 148.62 41.67 85.92 52.94 77.02 102.32 40.15 264.27 109.83 277. 13 37.24 142.84 167.74 38.87 125.65 219.21 71.99 184.37 57.29 243.43 County Average. City Average ... State Average . 65.81 .127.67 . 75.63 This table is not conclusive evidence in itself. None denies that there are marked differences in the natural and agricultural wealth of the various parts of the State and consequent differ- ences in the amount of personal property owned there. Yet this 44 Report of Tax Commission — ^Appendix. difference is certainly not sufficient to justify the per capita valuation of personal property in Loudoun at $215.53, while*the per capita valuation of Grayson County is $15.89; nor should it permit such undervaluations in per capita values in the cities as between $37.24 in Newport News and $264.27 in Danville. The State average per capita in the counties is $65.81, but there are 37 counties which fall $15.00 or more below this average. The per capita average in the cities is $127.67, but 5 of the 18 cities show an average less than 50 per cent, of this amount. Other Instances of Undervaluation and Inequality. A perusal of the personal property table in the Auditor's report and of the books on which this table is based will reveal inequali- ties almost as great as these and will disclose omissions and un- dervaluations which are most alarming. Some of these have been common property for years, as for instance the small number of watches, etc., reported in certain cities, but all of these may be summed up in the table of averages printed above. These in- equaliteis, omissions and undervaluations appear in every section of Schedule B. and present a situation which is deplorable beyond words. To dismiss these in a word, it is not too much to say that the assessment of tangible personal property in the Common- wealth is utterly absurd. The law is so little enforced that its maladministration brings the whole tax laws into disrepute. Better no tax on tangible personal property than a tax that works such rank injustice and permits such gross inequalities. The Situation in Other States. In this connection there is some consolation in the thought that the evils which pervade our personal property tax system are common in a measure, to all taxes on personal property and are no worse in Virginia than in other States where no scientific efforts at tax reform have been made. Thus, for instance, the Massachusetts Commissioners of 1875, a very conservative body, declared in their report referring to personal property: "The most vigilant of assessors cannot find it all, and there are not wanting those in every community, willing to invoke the name of their Creator to the truth of a statement which is a falsehood and a fraud. There are not wanting officers who shut their eyes to the facts they have sworn to observe, in the supposed intents Report of Tax Commission — ^Appendix. 45 of the locality of which they are residents, and help possessors of wealth to act the lie they daie not utter." This, it must be remembered, was in a day when the extent of intangible personalty was small in comparison with what it is to-day. The same burden has been sung by every subsequent Commission. The Missouri Commission of 1903 (p. 198) writes to the same effect: "The chances to evade taxation (of personal property) are great and the chances of detection small. The very general classification of the kind of personal property made in our stat- ute, including the omnibus clause for 'all property not above enumerated', affords every opportunity for concealment, eva- sion and undervaluation and renders it extremely difficult for the assessor or the County Board of Equalization to form any definite idea as to the real amount of property or the correctness of the valuation." The California Commissioner's report of 1906 reveals condi- tions somewhat similar to those in Virginia (pp. 55-56.) "The Constitution requires that all property shall be taxed in proportion to its value. This is not done, and is in fact an im- possibility. The greatest inequality' in the operation of our revenue system arises from the fact that personal propeity es- capes taxation almost entirely. At the present time, including money and solvent credits, personal property constitutes only 18 per cent, of the entire tax roll. In 1860 presonal property con- stituted 46 per cent, of the entire tax roll, in 1870 it was 39 per cent., in 1880 26 per cent. The total amount of personal property assessed in 1897 was less by $67,711,000 or 38 per cent., than the amount assessed in 1872; in fact the assessment of personal property made in 1872, $220,000,000, was the highest on record until 1903. Meanwhile the entire roll had increased over chree- fold. In 1880 the assessed value of personal property was $174,000,000, and in 1894 $282,000,000, while the total assess- ment roll increased in the same period from $666,000,000 to very nearly $1,600,000,000. "Omitting the item of money and solvent credits, and the valua- tion of railroad property, which is made by the State Board of Equalization, we find that at the present time only between 10 per cent, and 15 per cent, of the entire tax roll is made up of personal property found by the assessors. It is utterly incon- ceivable that the assessment in this respect reflects the actual conditions. During the period since 1880 the numbers of acres of land assessed has increased over 6 per cent., and although there is no necessary connection between the number of acres in culti- vation and the amount of personal property in the State, yet it is not conceivable that a people who own more than half again as 46 Report of Tax Commission — Appendix. much land as they did in 1880 own only about 35 per cent, more personal property. The amount of personal property must stand in some relation to the number of people. It is certainly natural to suppose that the 1,625,000 people now in the State would own at least twice as much personal property as the 860,000 people who lived here in 1880, probably as much more as we are wealthier than of yore, yet, according to the assessment roll, the 800,000 people who have come into the State since 1880 have brought with them per capita only one third as much personal property as the 860,000 had who were here in 1880. In 1880 the per capita assessment of personal property was $201 .00. In 1890 it was only $139.00; in 1896, $122.00; and at the present time barely $150.00. During the same time the per capita assessment of real estate increased from $523.00 to about $840.00 per capita. Such glar- ing absurdities are revealed by a study of the mere totals of the assessment rolls. "The reasons for this are found in the nature of the different classes of property which escape. They are for the most part things which it is easy to conceal." The same Commission, writing in 1910, after four years of earnest effort had to make this confession: "The valuation of property in different localities is very unequal and as long as there is a heavy State tax to be apportioned on the "basisof assessed valuations it will continue to be unequal. . . . Prob- ably 90 per cent, of the voters in this great community [Los Angeles and San Bernardino Counties] do not know that they are plundering their fellow citizens in other communities in this manner and would rather repudiate it if they could. But the old syscem not only permits and rewards it, but practically forces it on the assessors. The State board said in their report of 1908: 'The strife between counties to keep their assessments down to the lowest notch on account of the State tax is just as much a feature to-day as it has been at any period in the State's history.'" (p. 38). In the same strain, the Ohio Commission of 1906 wrote as follows : "Of all the consequences of the general property tax the most deplorable is that which produces an ever increasing burden upon real property and an ever diminishing share of personal property in the support of that government which gives an equal protec- tion to both. "The general property tax was adopted in Ohio in 1846, and was written into the Constitution of 1851 in the language of Sec. 2 of Article XII., to which attention has already been called. . Ever since its adoption the grand tax duplicate of the State has shown Report of Tax Commission — Appendix. 47 more and more clearly, the inequality of contribution between real and personal property. In 1852 the grand duplicate of all prop- erty, real and personal in the State, was $507,581,000; in 1907, it was $2,280,563,198. In 1852, the total value of all real estate was $354,937,000. In 1907 it was $1,544,391,318. In 1852 the total value of all personal property in the State was $152,644- 000; in 1907 it was $736,171,880. In other words, the first year after adoption of the present constitution, the tax value of all real estate in Ohio was 2 1-3 times that of all personal property, while at the present day, after fifty-five years of development in railroads, telegraph, telephone, electric light and other modern utilities, as well as industrial enterprises of every kind, with the consequent enormous growth in the issues of stocks and bonds, the tax value of all real estate in Ohio is still 2 1-10 times that of all personal property. And this is true notwithstanding the fact that corporations generally in this State are required to return as personal property all real estate used in the operation of their business." (p. 18). H. M. Carver of the Louisiana Tax Commission, thus sum- marises the property tax in his State and elsewhere : "All opinions and all reports tell with variation only of detail and verbiage the same sickening story, the impossibility of fairly reaching personal property, and especially intangible personalty; the gross inequality; the discrimination in favor of the sinning and against the honest, especially against the weak and helpless ; the fraud and trickery and even perjury resorted to in evasion of the law ; the hindrance of industrial development ; in short the utter breakdown of the general property tax system everywhere. This is not the experience of Louisiana alone; it is the universal experience of the civilized world." (Third West Va. Report, 10.) Reviewing the situation, the Minnesota Commission, in its first report (1908, p. 30) has this co say: "The criticism against the general property tax has been directed almost wholly toward the personal property side of the tax. Commission after Commission, author after author, and ex- pert after expert have fulminated against this tax upon personal property. The assessment of personal property is a matter of the greatest difficulty, not only in determining the values, but in locating the property. In most instances the assessor is com- pelled to ask the value of stocks of goods, to use an average value for determining the assessment against live stock, and, when it comes to the existence of intangibly property, to depend entirely upon the word of the owner." The New York State Board of Tax Commissioners, in their report for 1907 testify to the same effect: 48 Report of Tax Commission — ^Appendix. "Our observation and experience teach us that it has become impracticable and is impossible to equitably tax personal property on the same basis as real estate, and such is the conclusion reached by nearly all students of taxation" (quoted in report of a Com- mittee on the Causes and Failure of the General Property Tax, Fourth Int. Tax Conference, (p. 10). The leading tax experts of the country support to the fullest the conclusions of State authorities as based on the actual ex- perience of the American States. Thus the Committee of the Association of the Bar of New York, in a report dated March 1903 has this to say: "It is a fact that every person paying a personal tax is robbed by being required to pay more than his share. The deputies are required to swear that the annual record contains the names of persons taxable and the amount of their taxable personal property when the deputies know, and everyone ought to know, that the oath is unfounded, absurd and untrue. The roll cannot, from the nature of the case, contain anything but guesses, which in many cases are purposely made too high to force an examination of the persons or corporations assessed. "Of the small number of people who pay personal property taxes in this city (New York) , it is safe to say that the larger part of those who pay any considerable amount are trustees, executors and widows and orphans. Such unjust taxation would not be tolerated if it were not easily avoided by the active and compe- tent, and applied only where the great numbers of those affected are persons of no influence in the business and political world." (pp. 5-6). To the same effect writes Lawson Purdy, former secretary of the New York Tax Reform Association, and now President of the New York City Board of Tax Commissioners : "The taxation of personal property in the United States is a survival of ancient methods which other countries have outgrown ; it has become more and more unequal and unjust as our country increases in population and wealth." (Taxation of Personal Property, p. 5). Professor E. R. A. Seligman of Columbia University (General Property Tax, p. 52) declares that the general property tax as actually administered, is beyond all perad venture, the worst tax known to the civilized world; Leroy Beaulieu, the French econonriist, (The Science of Finances,) insists that "Modern taxation has seldom invented a more stupid instrument; and Professor Charles J. Bullock adds his testimony in equally string- ent terms. Report of Tax Commission — Appendix. 49 This list of references might be indefinitely enlarged to include the unanimous views of practically every Tax Commission and every tax expert of the Country that the taxation of personal property, in theory, in practice and in daily administration is a failure. Enough has been said, however, to emphasise our prin- cipal point, namely, that the experience of this State, in the fail- ure of this tax, accords with that of practically every American Commonwealth. The reasons for this deplorable condition of affairs and the nature of the remedies to be applied will be considered in connection with the other classes of personal prop- erty, those listed in Schedule C. INTANGIBLE PERSONAL PROPERTY. The general personal property interrogatory of the State re- quires the listing of all intangible as well as all tangible personalty. In this class are included all notes, bonds and other evidences of debt, held by individuals, by fiduciaries, and by courts, all money loaned and "things invested" in other States, all capital invested and not otherwise taxed, all shares of stock of incorporated com- panies, the value of all capital of joint stock companies and all moneys on deposit. With the exception of the provision for the taxation of the shares of incorporated companies, added to the in- terrogatory in 1900, these specified classes of personal property have been listed for many years. Valuation and Revenue of Intangible Personal Property. Owing'^to changes in the form of the Auditor's report, it is not easy to fix the value of intangible personal property during the last 30 years, but the following figures show the value of this property since 1880. 1880 $31,124,554 1881 34,067,116 1882 35,553,820 1883 37,022,140 1884 39,857,497 1885 38,164,980 50 Report of Tax Commission — ^Appendix. 1886 37,841,300* 1887 38,476,076 1888 38,198,851 1889 41,554,009 1890 45,430,220 1891 : 50,269,910 1892 47,787,375 1893 46,494,649 1894 42,548,465 1895 41,567,923 1896 53,076,233 1897 59,271,735 1898 57,922,734 1899 60,193,399 1900 61,057,879 1901 63,487,762 1902 63,532,632 1903 65,686,564 1904 67,488,057 1905 66,978,886 1906 72,110,616 1907 82,591,508 1908 83,184,629 1909 87,570,421 1910 ' .. 93,607,498 It thus appears that since 1880 the value of intangible personal property has increased from $31,124,554 to $93,607,498, a gain of $62,472,944 or 200.7 per cent, of the total valuation in 1880. As will be seen from the following table, this increase compares very favorably with the increases in the other chief classes of taxable property during the same period. *The Auditor's raports from 1880 to 1886, inclusive, do not give the valuation of intangible personal property, and, from 1884, to 1886, inclusive, do not separate the revenue derived from tangible and intangible personalty. The figures here used for 1880-1884 are reached by capitalizing the tax. From 1884 to 1886. inclusive, the figures are reached by capitalizing the tax according to the percentage of intangible to tangible personalty in 1883. Report of Tax Commission — Appendix. 51 Class. Valu£ in 1880 Value in 1910 Percentage Increase. Intangible personalty 31,124,554 39,281,826 234,272,951 9,876,306 93,607,498 85,329,237 400,889,237 105,011,799* 200.7 Tangible personalty 117.2 Real Estate 71.1 Railroads (canals excluded) 963.2 Thus, where the valuation of tangible personalty has increased 117.2 per cent., and where realty values showed an assessed in- crease of only 71.1 percent., intangible personalty has increased in assessed value 200.7 per cent. On its face this shows a very commendable increase and would, prima facie, indicate that our system for the assessment of this property has yielded compara- tively good results. This view would appear to be borne out by the following table, which shows the proportionate revenue derived from tangible and intangible personalty and the percentage each of these bears to the total value of personal property. *The valuation of railroad property for 1910 does not include electric street and interurban railroads. The valuation for 1880 includes this class of property, but as this property in 1880 was of trifling valus 39,150 and as the great bulk of elec- trical company property (now assessed at 7,064,134) has been craated since that time, it has besn omitted here to make the comparison of the same properties more exact. 52 Report of Tax Commission — ^Appendix. JO antiaAay; raojj annaAay; 3S'B(jn80jaj; 05tDm(N05.-i;D>OoooiOTHailOa50lM(N'-('-i>0(N>0>0 oooooooooooooooooooooooo JO arraaAay; I'B^ox 0% -g raojj annaAay; aSB^naoiag lOCDCDOOa)^M>-lOO>-IO'-ii-l-*00>00>-l05lOCDNlO l>tOOO.-lCO.-it^lvCTit~CO00CDi0CDlOl0C0(MCOo6l>^t^ •Q appaqog CDi-HOiOOiOOSiOCOCOiOrHa5asC.COC00005i-tCO l>-iOO(Ni-Ht-THCD(NCOCOCOa)t^CDCOCDlOOOi-lOCt^C0Ci0l>CDlCO00cDlCiCDTt-'*OOr^COi-t(MCOlvt^C^cOOOOOOi-(THOt^ OOOOi-tlOOI^COINi-HCOOit^Oi-HCOCOlOb-CDNC^COIVM COCO-^-^lO-^-^-^Tt^iOiOiOCOcDCOcDcDCD^Ot^OOOOOOOi •g apipaqog t*C-OOiOCOCOCCOSO'^C^GOT^OOC^I> 001-lOTf^^^OcOt^t^iO00O(NC0i0T^0000cDCC000DOOCCOOOOOCOT-HTtHThl>COCOi-llOcDI>iOCOC^t^I>-^ai OS'>*C000TtH00'^-^CDCOC^C-*iNt^c»5m OC005CDOOQOT-tOOi^-^Ni-t(N005CDT-li-ITj-i'*-*t~(NTi(-*t>-^t> C0*C0O'^C0t^C005'-H'«^CD t^-4<00i-Ht-lc0M0iC0'^0:'^00t>.(Nu:i(Nt^CDO0000i-IC0 0000C<3r-lcD0000l0.-ITO.-IO00(NMOlt~OOI>-*O'-iai .-lC<300CO>OC»5COM-*OlO(NI>>0(NI>INtDI^tOOt~00 ooooGooo5a>C50oa)0505000T-iT-iT-tc<)05co'^coi:Di> u'Ea^ l~ooaiO'-i(Niro-*iocDt^Q0050T-i(McOTtiir5cDt^cioa>o OOOOOOOlOOlOOOSOJOOOOOOOOOOOOOi-l oOQOooooooxoooooOGOWcoooosmosa^osoaoiOiOsasos Report of Tax Commission — ^Appendix. 53 Thus during 30 years, intangible personalty has varied only from 45.8 per cent, to 59.7 per cent, of the total valuation of personal property ; and the revenue from this property has varied from 4.98 per cent, of the total revenue to 4.57 per cent. These variations are no more than are to be expected from a class of property so subject to fluctuations in value, while the steady increase in the total revenue has corresponded, in some small measure at least, to the general increase in corporate values. The question, however, is not settled with this array of figures. The Assembly is called upon to decide not whether there has been an increase in the amount of this property, nor whether this increase has exceeded that of other classes of property, but whether intangible personalty is listed in accordance with its real value. Individual Items of Schedule C. As a first essential to the answer of this question, it has been necessary to examine in detail the valuation of various classes of intangible personalty included in Schedule C. for a term of years. In this way alone can be determined where the increases have come, what property, if any, has been overburdened, and what property is escaping taxation. This is shown in the fol- lowing tables : 54 Report of Tax Commission — ^Appendix. ■* CD no IN ^ CO i-H.r^ CO IN IN I-H in ira lO I-H -ctl I-H CO I-H O I-H CO I-H I-H ^ (N CO IN in CO IN o I-H I-H IN I-H r~ CD lO rt o o ° o o o o o O O o O o o o o o o O O o O o o ^ OJ IN 03 00 I-H in n-l CO ■* CO no n OS o r^ lO CO t~- 00 t~ t- l> c» IN lO IN o »o CO IN CO lO CO CO IN CO OS ictl IN •S'>II9UHS8Anj O lO CO O Oi t^ lO IN T-H CD lO ■* 00 t- o -* 1^ 00 l> OJ 00 00 I-H I-H t^ in I-H IN in CO in 00 CO O lO on no 1-1 I-H lO i-H I-H 00 CO »i'e%Q ■Bjpcg: o .« CO IN CO fM r~ r^ l^ iH CO (33 Ol lO o CO r^ 1^ S =2 1> Tt< o ■* CO CO CO o CD t^ 00 1^5 00 O 00 03 I-H w lO 1— I en I-H I-H I-H (N I-H ^ (N ■* CO I-H I-H I-H lO I-H Ol t^ CO >o l>- n IN ■* ^ n CO m I-H o lo IC no lO CO r^ CO CO lO ^ ■93B;naoj9j cq rt ta 00 00 •* m r- CO ■* I-H -* CO 1^ Ol lO IN CO -* on OJ N lO TlH CO in CD t^ in 'O r^ r^ CO CO •^ I-H -IN CO 1-H r^ m o CO o o O o o o O o o o o ° 1-H I-H I-H r-t o I-H o I-H T-H I-H CO o t~ CO o n IN IN ro IN in m (N -*l on lO o OJ I-H CO =° &: •SSI OS T-l IN in t^ IT. lO ra m no r- 00 IN t^ CO -^ o I-H I-H -U'BdmOQ 3[00?g 00 1-1 1> f~ CO ■* o a^ IN T)< CM o l> l> O IC5 00 IN lij I-H CO t- (N (N on ■* CD to I-H ■* ^ lO CO ■* CO CO IN 1^ I-H IN Tf I-H CO lO ■:; J^ ^mof iB^id'BQ lO ,-1 CD (N 03 IN I-H lO I-H 05 IN CO IN IN 05 IN lO o ^ lO CD 00 00 I-H CO •* IN ^ IN I-H to I-H g 00 CO 00 OJ C3S lO 00 I^ 1— t T-H IN M CO IN CO CO CO CO CO ■* no t^ 00 <~> r^ ■* CO CD 00 I-H OS o 9* I-H r^ r^ o CO 00 05 h- rM I-l -*l TtH (^ t^ o •gS'B^uaojaj^ CO o lO t^ in no -!l< no IN lO IN m in I-H IN OS CO no CO 0(1 "S n: 00 ^ 00 r-l O o h~ no m in ro I-H I-H CO lO rH CO IN I-H o 00 rH (N ^ IN IN IN 1-H I-H I-H I-H I-H I-H I-H I-H I-H I-H I-H I-H I-H ^ o O I-H O 00 T-H ■* t^ O IN '*< ni IN 00 00 no IN lO o o OJ t~ !N lO 00 t^ CO 00 CO CO s CO "ii r^ ic rrs CO no no I-H o t^ O IM lO 02 lO lO 03 Tfl I-H CD CO o CO o ^ 00 I> lO CD OJ OJ IN IC I-H mid^o IN Oi 1-H I-H CD 1^ t^ o ^ ^ 1-1 CO ^p CO o in CO lO OS CO I-H CO CO >C3 a> lo ro ^^ IN CO on IN no CO r~ ^ lO t^ IN I-H ^ o CO 00 CO a> o O CD IN 00 00 Oi o t^ CO OS CD w 00 IN crj CD IN 1> 00 1^ Oi o m no no no no t^ CO CO 00 OS r^ no no w r^ 00 r^ lO IN 99 I-H I-H (C 0)> 00 00 lO O CO t- CO 00 00 lO o IN lO CO 00 IN IN I-H 00 in 00 I-H I-H t^ app8t[0g arn'BA OJ CO 1* IN IN •^ IN CO CO in no cri IN IN lO 1^ CO I-H in CO ■* >o CD TtH p^jo^ aS'B'^uaoKj CO CO CO CD CO CO CO CO CD tH CO -cH Tt< -d* CO CO CO •ctf CO CO CO CO •s9U'Eionpi} uBq; giaq^o iCq ppq Tf 00 CO 00 ■* 1-1 r-i -tl in CO lO --H 1-1 in CO CO OJ o lO CO 00 CO <-l Ci CO CO I-H o CO m in o in m Oi I-H rTs fN 'Jt* ^ o IN 00 OS '!>q9p JO S90U9P I-H Tt< 00 IN IN 00 O) CD IN CD 1-H 00 -cti ■* o 00 <3S I-H IXJ IN lO o t~ I-H 1^ CO r^ IT) I-H 1-1 lO CO ^ (M rrs o ^ o lO IN o I-H CO -TA9 jaq^o pn'B 00 •* CO CO I-H CO r- t^ CO r^ 1^ m ro lO f- no h- CO OS CO IN I^ 00 I-H lO 03 O: I-H lO I-H lO i> CD 00 I> t- 00 l> OS 00 s8'}oa 'spuoq CD >0 CO 00' I-H o no T^ CO 'tl IN CO LO lO IN i-H ^ r^ CO CO no cs rt (N IN IN IN IN CO CO nj IN IN rq IN IN IN IN IN rvl c^l nj IN (N IN IN TI'B JO ani^A ^ t^ 00 a> o ^ on CO ^ in CO t^ no ra CM ro -cfl lO CO 1^ on OJ O •^■69^ 00 00 00 OJ Ol rn OJ m m m 1-15 n> O O 1-1 o o o O O I-H 00 00 00 00 00 1-H I-H 00 1-H 00 iH iH 00 I-H 00 I-H 00 I-H 00 I-H 00 I-H OS OS iH rH OS I-H OS I-H OS I-H OS I-H ^ OJ I-H iH OS OS I-H I-H Report of Tax Commission— Appendix. 55 ■xsax G000000^05C0050305010i0505OOOOOOOOOO^ .N.lO «© •aS'B^^naojaj (NO05C005-^CO000505CDt^Ot^C000r-(»0i-(C0i-(00O0.-imi-(05rtl>0THOCT)C0(N>-li£iO-*l0C0O •93'B!ni90jaj (Nr-<(NMrti(N(N(N>-lOI>^OOCOIMTtOOlC^tOiOCO OOOOOOOOOOOOOOOOOOOOOOOO ■noigoy ui sasoqo ocDo05DO(NMOoorMgiOrtoo^oMr!f;:£2SSSS£^ •aSB^naojaj rH0003t-THffi¥oO-HQOC01>cClTHgOCO^NCOJ-.T-;jDOO OOOOOOOOO(NC0INC<)'-H'-t'-H{NC^t~o>cocooou5rH(Ncoa5iN3gt--io^ M S C^ C^ ^ M S N (N M 00 T|H_ N t> l> CO_ 1-1^ IN IN N ■* IN 00 CO rt" ^" rt" rn" .-T rt ^'' ^" w" lO 'di" o" ^" ^ to" 5" 00" 00 2 2 21 ^ T-llNT-I^T-lT-li-lT-lrHt-lr-llN'-l^»-l 56 Report of Tax Commission — ^Appendix. J3 u a e a 3 in s o CI J2 u J3 ^ tn C n Ul 3 f ) S 8 u 2 ID -M ^ n rt •o c c -M ? 1-1 o a n fl) t« I-, . e o ^1 e I I K? "e "s fc^ fc. "§ . ^ 00 1-1 IN o o> in o! T-iinNNooNt-io eoQoooO'-o OCOPOt^lNOOTfTH lO(N"5t~MOOOO (N IN -H O t> 1> ■* w) o ■* OJ IM t~ O CO 00a200(NOS(N>-lO5 OlOO— lT}<(NO(MO 0.-IOOOOOO -*Ot(HCOC000>-iiO COir3l>-OJtO>01>CD OOOOOOOOOCNOO iM(NooiMioiraaii^ 00010>0(NOOCD CD iC ,-(" rH --I 33 O tn (-( ^ t^ J^ » -g > Q § M o o p 3 S n g, ^ g, a - -S .-s g .-a §^ i £ pqohoSoSm s .9 I o o o 03 Report of Tax Commission — ^Appendix. 57 From this it appears that the burden of the tax on intangible personalty has shifted greatly during the last twenty-four years. All the material increases have come from five of the seven classes included in schedule C; one class' has remained practically un- changed and two classes have shown a marked decrease. The most notable increase have been in the taxes levied on fiduciary funds and choses in action. Following the passage of the act of 1896 taxing these, the assessed value of this class rose in a single year from $1,276,013 to $14,397,644; and at one time amounted to 27.12 per cent, of the total assessed intangible personalty. In the same way, the taxation of choses in action, by the same method, brought the value of this property from $659,018 in 1898 to $4,090,449 in 1902 and to $7,320,636 in 1910. The in- crease in the comparative revenue from the taxation of stock companies' capital and from the tax on the shares of incorporated companies has also been marked. But this increase in these classes has been accompanied by a very marked decrease in the comparative revenue from the taxes on capital invested and from the taxes on stocks and bonds. Thus in 1887, capital invested in business amounted to 18.6 per cent, of the assessed value of all intangible personalty; in 1910 it amounted to but 13.10 per cent., a decrease of 5. 5 per cent. Despite legal enactments somewhat affecting this subject, we are still confronted here with a manifest break-down in our law. All the other classes of property existed before, to be sure, and the tremendous increase in the revenue from fiduciaries would natur- ally lower the percentage of revenue from other classes in the same schedule; but this will not altogether account for the facts that the percentage has so fallen and that the actual increase has amounted to but $5,073,122. The bare fact that the reported in- vested capital in 1909 was less by $1,525,543 than in 1887 con- firms this view. This decrease, however, is not as great as that noted in con- nection with the taxation of stocks and bonds. Reverting to the abstract above, it will appear that in 1887, stocks and bonds to the value of $26,882,864 were listed for taxation, while in 1910 the like property was listed only to the valuation of $32,503,598, an increase of but $5,620,734 in twenty-three years. During the same time, the percentage of stocks and bonds to the total in- tangible personalty of the State has decreased from 69.8 per cent. 58 Report of Tax Commission — ^Appendix. to 34.7 per cent, or 25.1 per cent, of the total valuation. Of course, the exemption of the stock of companies assessed with a franchise tax under the new Constitution and the like exemption of the stock of Virginia railroads, accounts for the failure of this revenue to keep pace with the general revenue of the Common- wealth ; but this of itself will not account for so trifling a gain in an era of such widespread prosperity. The farcical character of these returns will be perhaps even more manifest on a detailed examination of each class in question. Stocks, Bonds, Mortgages. It is impossible to secure an adequate or even approximate statement of the real value of this property. It is often sold privately, much of it is purchased in other States, all of it can easily be concealed. While the writer does not, therefore, hazard an estimate of the real amount of this property which is escaping taxation, it is safe to say that the percentage that ever reaches the tax books is small. Virginia's population is rich, compared with its condition twenty years ago; for one citizen who had invested funds, then there are dozen now. Moreover, as even the most casual student of economic conditions will admit, there are millions upon millions invested in mortgages alone in the State. Yet only $32,500,000 of all property of this class reaches the books. Capital Invested in Business. It would indeed be a poor advertisement for Virginia were credence given the statement that private capital invested in business in Virginia amounted to but $12,265,172.* Yet this is the assessment figure. How far it falls short of the real value of this property cannot be even approximately estimated, and any statement as to the amount of untaxed capital would be guess- work. It need only be noted that the most proficient and skill- full Commissioners of the Revenue declare that their greatest difficulty, after the assessment of stocks and bonds, is to secure anything like an adequate return of invested capital. As an instance of how much capital invested is escaping taxation, it might be noted that a new Commissioner of the Revenue in one of our large cities increased the valuation of invested capital from *Commissioner of Labor reports $68,270,283 in manufacturing alone in 1909. Report of Tax Commission — Appendix. 59 $620,400 to $2,440,480 in a single year. As this Commissioner, E: J. Doran, of Norfolk, upon taking office, met with conditions which are common in many cities, it is safe to say that the same methods employed elsewhere should yield the same results and, incidentally, disclose the same omission of capital from the books. Regarding the amount of invested capital that escapes taxation and the methods to be pursued in getting it, one of the best Com- missioners of the Revenue in the State has written us his views : "It is impossible for me to approximate the value of invested capital which escapes taxation, but from the Auditor's report which I have just scanned (showing the values taxed for incor- porated companies and individuals to be about $23,000,000) I would say more than one-half, possibly two-thirds. In assess- ing capital invested I usually (in the case of corporations) get the amount of stock issued plus the surplus (if any) and ascer- tain what amount has been invested in real estate, (ground build- ing and machinery) as shown by their books, the balance of the capital not so invested should be assessed as personal property. The same method would apply to individuals as well. The weak point in the assessment of manufacturing plants which are em- braced in the subject discussed is, that the real estate of this class of property is nearly always assessed at less than one-half of what is actually put in it. For instance, take a plant that has $500,000 capital. The books of the Company may show (and properly so) that $400,000 is invested in real estate, including machinery (which is realty) leaving only $100,000 for working capital, while the assessment of the realty is only put at $50,000." Extra State Investments. The taxation of extra State investments, as required by law, is purely perfunctory. Only a million and a half dollars are returned from this tax, where it is reasonable to suppose that property of this class mounts high into the millions. Naturally one is unable make an estimate of this property, and where one cannot cite definite figures, one is unwilling to hazard siirmise ; but it may be remarked that a single capitalist of this State is said to have invested capital in another State amounting to ap- proximately fifty per cent, of the total assessed value of this class; while another citizen, a legal resident of Virginia, is known to have out-of- State investments exceeding the total listed for taxation in the Commonwealth. 60 Report of Tax Commission — ^Appendix. Capital of Joint Stock Companies. While the legal requirements for the registration of domestic corporations do not permit the taxation of the shares of stock of such corporations when held by individuals, the law authorizes the taxation of the capital of such companies. The increase in the value of capital thus returned for taxation during recent years is gratifying, and, in comparison with other intangible personalty, is satisfactory; but, viewed absolutely, it is not pro- portionate to the real value of the property. How far short of the real value the amount returned for taxation ($10,777,827) is, must be problematical ; yet Commissioners of the Revenue report that they have the greatest difficulty in securing anything like an adequate return. The stock issued by these companies, and the stock outstanding, according to many corporations, have little connection with the capital invested; while the assessment of machinery with the real estate is given as another reason for the low reported capital invested. One of the largest manufacturing companies in Virginia, we are advised, is today listing its capital invested at not fifty per cent, of its probable value, and cannot, under existing statutes, be forced to make a larger return. These matters will be more fully discussed in another connection, but they are cited here as the practical basis for the deliberate judg- ment that despite the efforts of the Commissioners, much of this class is escaping taxation. Shares of Stock of Incorporated Companies. The distinction made in recent years between joint stock and incorporated companies has left the 'shares of the latter subject to taxation. During the ten years this tax has been in operation, the value of the shares has risen to $7,045,789, or 7.52 per cent, of the total value of assessed property of Schedule C. While this seems a considerable increase, it must be obvious that here again much taxable property is escaping its legal burden. It is well-nigh impossible to locate the shares of stock; it is equally difficult to tax them unless accidental publicity or the honesty of a taxpayer brings them to the attention of the Commissioner. Fiduciaries and Choses in Action. These two classes of intangible property are located and taxed through the Examiners of Records, established by act of 1896, Report of Tax Commission — ^Appendix. 61 with the subsequent amendments. Waiving for the time all discussion as to the wisdom and policy of this tax, it must be freely admitted that the machinery established by this tax has effectually located practically all this property. Investigation has not disclosed any conditions which lead one to believe that this law is failing in its purpose to reach every dollar of property in the hands of the courts. It will be observed that the value of fiduciary funds is not as great today as it was, for instance, in 1907. This, however, indicates not a decreased vigilance on the part of the Examiners, but a very simple con- dition: The old and delinquent fiduciary accounts have been exhausted, and those which are now examined are current. It is obvious, in the same way, that choses in action vary not directly with increased or decreased prosperity, but with the amount of fluctuating litigation. It might be well to notice, in this connection, that almost 25 per cent, of the total intangible wealth of the State, according to the property books, is either in trust or in litigation. It is submitted that this is, of itself, a satisfactory index to the vio- lation of the law requiring the listing of all intangible personalty. Money On Deposit. The last item of Schedule C is Money on Deposit, which was listed in 1910 to the value of $7,320,636. While this increase in the amount of money returned for taxation shows a compara- tive awakening of the public conscience, the pittance returned is a sad commentary on existing conditions. On January 31, 1910, the Comptroller of the Currency made a call on National Banks, and the State Corporation Commission made a call on State Banks. The consolidated report of the two shows the following money on deposit: Value Individual Deposits. National Banks $68,628,655.62 State Banks 49,150,093.26 Total Deposits with Banks $117,778,748.^ 62 Report of Tax Commission — ^Appendix. From this it appears that one day after this call — and a day when deposits increase rather than decrease — men who had had $117,778,748.88 in bank reported their deposits as $7,320,636. The assessed value of bank deposits is thus 6.21 per cent, of the real value. Even allowing that 50 per cent, of these deposits represent corporation and trust funds, not taxable, and capital otherwise taxed, it will be observed that but $12 of every $100 in bank is ever listed for taxation. Summary of Undervaluation of Schedule C. To summarize, the only items of Schedule C which are taxed at their full value, are fiduciary funds and choses in action. All other items of this schedule, whether showing a proportionate decrease or increase during the last twenty-five years, show that much taxable property is escaping its legal burden. How ex- tensive this is, cannot in the nature of things be ascertained ; but it is, perhaps, a sufficient commentary to observe in conclusion that the actual bank deposits of the State in January 31, 1910, were 125.82 per cent, of the total assessed value of all intangible personal property. In other words, the real value of one taxable item is more than the assessed value of all taxable items of this class. Finally, in reply to our inquiries, Commissioners of Revenue express widely varying opinions as to the percentage of taxable intangible personal property that is listed. Forty Commissioners declared themselves unable to form an opinion, but only ten commissioners, all in small communities, expressed their belief that all this property was listed, and only seventeen believed that "about all" was taxed. The following shows the views of 150 Commissioners. Number who regard this much intangible personalty Percentage. reported in their districts. 20 2 25...., 1 40 1 50 7 60 2 66 22 Report of Tax Commission — Appendix. 63 50-75 1 70 ■. 1 75 20 80-90 16 95 5 100 10 "Large" 10 "Very Large" 3 "About All" 17 "Very Small" 6 "Small" 2 "Doubtful" 40 Personal statements made by Commissioners in our larger cities — men whose work has been admirable — indicate their be- lief that under the most favorable circumstances and best con- ditions, only about 75 per cent, of intangible personalty, of all classes, is reported. All agree that stocks and bonds are repre- sented on our books by as small a percentage of their real value as any other class except bank deposits. Inequalities in the Taxation of Intangible Personalty. As in the case of tangible personalty, the inequalities in the taxation of intangible personal property are worse than the omis- sion and undervaluation of much of this property. Indeed nowhere in the tax code will there be found more gross and glaring inequalities than here. These inequalities are of four kinds. First — Inequalities between the owners of tangible and intangible personalty. Second — Inequahties between the owners of intangible personalty and realty. Third — Inequalities between the owners of various classes of intangible personalty. Fourth — Inequahties between the owners of intangible personalty in various sections of the State. 64 Report of Tax Commission — Appendix. 1. Inequalities Between Tangible and Intangible Personalty. The inequality between tangible and intangible personal proper- ty is too obvious to need an explanation. It operates in both directions, to the burdening of either class according to circum- stances. For instance, taking into account the fact that much of the intangible wealth of the State escapes taxation, it may happen that tangible personal property bears an unjust burden. A cooking stove, for example, is a necessity of life in the home of the average citizen, but its possession adds little to his wealth and nothing to his income. He cannot find a market for it, yet he is forced to pay taxes on it. If he do so, and the owner of interest-bearing intangible property take advantage of his many opportunities to escape taxation, the former citizen is bear- ing an unjust burden. To carry the comparison a bit further: A man with a small capital forms a company, purchases machinery and issues a bond for the repayment of the money borrowed. The machinery will offer a means of livelihood to a number of citizens ; it depreciates rapidly; its sales value or wrecking value is practically nil. Yet this personal property, assessed with the real estate or separately, must pay taxes. At the same time there is a strong probability, under existing laws, that the bond — ^which does not depreciate and is the real and valuable consideration — may escape taxation. On the other hand, intangible personalty in many instances may be taxed unduly in proportion to tangible personalty. Granted a man who regards his oath to his interrogatory, what is is the result? He pays thirty-five cents on each hundred dollars of the market value of his property, and local taxes on the same basis. Another citizen may own a stock of goods on which he makes a large profit, or he may have an automobile which adds decidedly to his comfort, but is strictly a luxury of the non-pro- ductive type. This man will pay not on the real estate of his property, not on its interest-earning power, but on some amount fixed arbitrarily by him or by the Commissioner at a low per- centage of the real value. The former Commissioner of the Revenue for the city of Richmond, Mr. O. A. Hawkins, unques- tionably one of the most valuable officers of the Commonwealth, construes the terms of the interrogatory, the "fair cash valua- tion," as about fifty per cent of the original cost price in the case Report of Tax Commission — ^Appendix. 65 of tangible personalty. Yet he must assess stocks and bonds at their full market value as of February 1. As a result non- producing tangible personalty is overtaxed and producing tangible is undertaxed in comparison with intangible personalty. Mani- festly, if personal property is to be taxed by the State our laws stand in need of some revision to restore the equality between these classes — to exempt non-producing personal property, or, at least, to lighten its burden, to make productive personalty pay its proper burden, and to adjust the tax on intangible per- sonalty to these. Inequalities Between Intangible Personalty and Real Estate. Between the taxation of intangible personalty and real estate inequalities operate in precisely the same manner as between tangible and intangible personal property. As appears from the chapter on the taxation of land the total real estate of the Com- monwealth is taxed at approximately 53 per cent, of its real value. Hence, where a large percentage of intangible personal property is escaping taxation, real estate in comparison with the total bulk of intangible personalty is bearing an undue pro- portion of the public burden. The man whose lands can always be located and taxed and who is required to pay taxes at an as- sessed valuation of sixty per cent of the real value of this property necessarily pays more to the State than the owner of stocks and bonds of equal value who defrauds the State by a false return or who escapes taxation altogether. On the other hand, the owner of stocks and bonds or other intangible personal property who honestly lists his holdings for taxation pays more in proportion than does the owner of real estate of equal value. The former does not have the advantage of undervaluation of his property. He must pay on the market value of every dollar of his holdings. The owner of real estate, however, is nowhere taxed at more than 85 per cent, of the real value of his holdings and, taking the State as a whole, pays on only 53 per cent, of the price his property would bring on the open market. The honest owner of stocks and bonds therefore is forced to pay almost twice the taxes paid by the owner of real estate. We submit that this state of affairs discourages the coming of honest capitalists to Virginia and thereby deprives the State of much more taxable property that 66 Report of Tax Commission — ^Appendix. it might gain under a more equitable and generous system of taxation. 3. Inequalities Between Various Classes of Intangible Per- sonality. Still more striking is the inequality which exists, under pre- sent conditions, in the taxation of the various classes of intangible personal property. As has already been pointed out, fiduciary funds and choses in action are assessed and taxed at their full market value. Where the Examiner of Records performs his duty, and he has every incentive to do so, it is impossible for any property of these classes to escape taxation. Moreover, the taxes so levied are on the full market value of the property with- out deduction or offset of any kind or description. This places the beneficiary of trust funds or the owner of property in litigation at a most distinct disadvantage in compari- son with the owner of stocks and bonds held in fee. The former is at the mercy of the law, the latter has the law at his mercy, for the State has no other guarantee that he will fulfil his obliga- - tion than confidence — often misplaced — in his honesty. Fiduci- ary funds cannot escape any taxes; stocks and bonds often, and to an alarming extent, escape all taxation. Fiduciary funds are frequently held by persons of very limited resources and often by widows and orphans whose sole property is in the hands of the court. To require these persons to pay on the full value of their property and to permit the con- tinuance of a system which allows the wealthier and more cun- ning to escape taxation is an outrage against equality and com- mon justice. A case in point was cited by a Commissioner of Revenue in one of our large Virginia cities. A widow re- ceived $3,000 from the estate of her husband, which was placed in the hands of trustees for the benefit of her children. Careful management secured a gross return of $180 a year. This was the sole revenue of this woman and her children, not one of whom is in a position to earn a livelihood. The local tax rate on this prop- erty was $1.40, which with the State levy made the taxes of this woman amount to $52.50 or 29 per cent, of her total revenue. The writer questions if there are any persons in the State, other than those in similar distressing circumstances, who, on a total property of $3,000, pay 29 per cent, of their revenue to the sup- Report of Tax Commission — Appendix. 67 port of government. This is confiscation, and confiscation di- rected against those who should be protected and not punished. No more outrageous instances of inequality and injustice can be cited in any tax law among civilized people since the days of the Old Regime in France. If the Assembly does nothing more in tax reform, it should at least alleviate the burden of these persons who now bear so great a part of the public charges, while others more able to pay escape so lightly. Inequalities of the same characte--, but of less extent, ex^'st between the holders of stocks and bonds of Virginia railroads. It will be remembered that under the Constitution a payment of a 1 per cent, franchise tax by railroads operating in Virginia exempts from taxation the shares of stock held by individual owners. This exemption does not apply to the bonds of the same corpora- tion and does not affect the local taxation of the latter. It may very properly be argued that the 1 percent, gross paid by the rail- roads to the State amounts to more than could be recovered by the State from private holders of this stock were it not so taxed, yet this places the owners of bonds at a decided disadvantage. For instance the 4 per cent, bonds of a Virginia railroad, selling at par, with a market value of $100 must pay 35c to the State and from $1.25 to $1.80 to the city. This will reduce the investment value of the bond from 4 per cent, to $1.85 @ $2.40. The stock of the same company bought at $70, and yielding 3 per cent, pays nothing to the State directly and nothing to the locality. This makes the revenue from the investment net 4.40 per cent, on the cost price of the stock. It is useless to argue that the greater stability of the bond mvestment makes it as desirable as the stock when the law makes the return from the two so unequal. Other instances of this might be cited indefinitely, but all find the same end; an inequality that must handicap the financial progress and stability of our bond market while encouraging the fraudulent hiding of taxable property. Inequalities Between Various Sections of the State. The inequalities in the taxation of intangible personalty appear finally in the revenue derived from this class of property in the various cities and counties of the Commonwealth. This appears fully upon an examination of the per capita valuation of intangible personalty of the various classes in the cities of the State. This table may be abstracted as follows : 68 Report of Tax Commission — ^Appendix. Eh H O P-, < O fa o H 02 1-1 O a p=< o I? o p o o o iz; § CD 1-1 ■aSBJ9Ay ■Ji.'m'BOtyi ■Ji^yfloo'j •noi!>'Bni'B^ 3 m 3 w S jS a. •O " 00 o> _ U30t~C<50tOO'0 ,-lO>-!'^OINOO tHOOOOOOO Oi ^ t^ 00 ^ 00lO(M{NOOO>-l INOQOO^OO oooooooo & ^1e 5 -s a i 2 ^ O ^ fS ^ (H pj Pj m •* CO 00 ■* IN T-H o o CO o o MOOOOOOO O iO »o t^ CO tP i-f JO aS'BJJAy 00 O CO •* U3 CO 02 02 CO ^ >0 IN CO O d IN ■* IN IN 05 CD t- 113 S W S J§ t^ t> 05 ■* -sH IN t> tH CD CD 00 OS th i> CO t^ ro •* CO 1-1 O CO IN .-1 lO IN O "-I O ^ l> U5 CO .-1 05 l> CD CO 05 00 05 CO-* -^IN^ ■1>.INO'-'CO t— I rH rH lO t— 1 H^ k4 h4 k4 ij d- d h^ i-i iJ h^ i4 L.69 L.ll L. 4 (N 1-3 T-i CO O t^ t^ CO oa m t~ OS i> i-i CO o ■*oo(N^-co05^~cOTt^lO>'30o■*>ocD'*co i-lcDt^(NT-l05»^INCOCOcDT-l'^C005Ttl»005 COi-l00«*(00>OINCOCOI>i-<_>O00O5t^00lOai ■*.-i rNooiNco2I'*-'>-oo=o ^ tH (N CO "^ 1-1 03 o> .— 1 on CO OS t- Tt< o CD 00 CO CO CO lO IN (N ■* T*i IN CO OS •o t~ 00 o CO IN OS o 1—1 CO IN on 1-f r^ 1—1 o (-) lO ■ OS a tH IN rH CO o •* CO 1—1 CO CO 1> 00 OS o ta 1^ CO CO lO lO CO in 00 1^ o ^ r^ IN 1-1 •* 1-1 00 1-1 1—1 CO iH IN »H O !>.-<# O tH O O CO lO O CO O . ■^OlOcDiOOlOCDt^OSCOOCOlOOOlOO) cqco i>(;DOiCi-HTtiTH-^owcoTt<(NC lO OS CO o CO Ttl 1* nn 11-1 m OS XD o U5 lO o rj OS CO o 00 00 o OS 1-1 IN a "ii CO IN OS CO ^ 1—1 CD OS CO 00 ■^ CO CO 1-1 1-1 cc^^ooooco OOOO-^COQOOOOU^C^i-Ht^lOTtH-^tNOOt^ gioot^OThcoa>(NTtHcDc<)'-iaiTt.oco OStNrHt^cOCOCOcOOClfNtNT-llOOOOO C^ ^fS ■3 S a ^ oi o3 M O OS o . OS 'III S S I o S § ^ ^ -g ^ -g 3 o >. 3 O g .& O cs ■3 ■+3 I e o 3 o CI .«:> >> . '^^ o 3 O (D 'S'S 1^ s 3 O B C3 OS T3 OS o 3 1 . ^ " ■^a os_fe> .Qos «0 miff Cm g 3 0) . .2-"'s S .3 CO S a r° S 3 .& a t.1 3- Report of Tax Commission — Appendix. 99 As the cities to-day by their taxes, over and above the amount paid to them by the State, support the government of the State, this plan, admirable as it is in theory and simple as it is in opera- tion, is manifestly unjust and inapplicable. The State cannot afford, even for such a great benefit as the removal of the personal property tax, to place so extensive a burden on the cities of the Commonwealth . Accordingly, forced to abandon this plan, an alternative was sought which would be more equitable, though it might lack some desirable features. Such a plan is the following : First, remit to the localities all taxes on personal property, as at present assessed; second, require the counties to pay their misdemeanor criminal expenses; third, keep in the treasury of the Commonwealth the amount of all capitation taxes hereto- fore paid the counties and return the cities the full amount of capitation taxes paid by them; fourth, take over the banks and insurance companies for exclusive taxation by the State. Under this plan the balance sheet would be as follows : Remit to the localities all taxes on personal prop- erty, being, at present, 80.5 per cent, of the assessed value of personal property in the State $510,417.03 Return to the cities the full amount of capitation taxes paid by them $ 51,984.57 Total loss to the State $562,401.60 Gain to the State on bank taxes under plan "A" ($1.25 without deduction) $353,539.04 Gain to the State on insurance taxes under plan "X" (low fire rate) $ 75,272.24 Saving to the State on criminal expenses, being 47 per cent, of the amount paid to counties $ 95,787.13 Saving to the State on capitation taxes not re- turned the counties $110,856.50 Total new Revenue in effect $635,454.91 Net gain to the State with bank tax "A", and insurance tax "X" $73,053.31 The following gains would result from the adoption of the al- ternative bank and insurance taxes suggested: 100 Report of Tax Commission — ^Appendix. Bank Tax "B"; Insurance Tax "X". Net loss as above $562,401.60 Gain to State on bank taxes under plan "B" ($1.25 with 10 per cent, deduction) $304,660.56 Gain to State on insurance taxes under plan "X" . .$ 75,272.24 Saving on criminal expenses and capitation taxes as above $206,643.63 Net new Revenue in effect $586,576.43 Net gain to the State $ 24,174.83 Bank Tax "B"; Insurance Tax "X". Net loss as above $562,401.60 Gain to State on bank taxes under plan "B" ($1.25 with 10 per cent, deduction) $304,560.56 Gain to State on insurance taxes under plan "Y" (high fire rate) $106,948.49 Saving on criminal expenses and capitation taxes as above $206,643.63 Net new Revenue in effect $618,252.68 Net gain to the State $ 55,851.08 Bank Tax "A"; Insurance Tax "Y". Net loss as above $562,401.60 Net gain to State on bank taxes under plan "A" ($1.25 without deduction) $353,539.04 Gain to State on insurance taxes under plan "Y" (high fire rate) $106,948.49 Saving on criminal expenses and capitation taxes as above $206,643.63 New new Revenue in effect $667,131.16 Net gain to State $104,729.56 Report of Tax Commission — ^Appendix. 101 Bank Tax "C"; Insurance Tax "X". Net loss as above $562,401.60 Gain to State on bank taxes under plan "C" ($1.40 ■with 10 per cent, deduction) $357,449.32 Gain to State on insurance taxes under plan "X" (low fire rate) $ 75,272.24 Saving on criminal expenses and capitation taxes as above $206,643.63 Net new Revenue in effect $639,365.19 Net gain to State $ 76,963.59 Bank Tax "C"; Insurance Tax "Y". Net loss as above $562,401.60 Gain to State on bank taxes under plan "C" ($1.40 with 10 per cent, deduction) $357,449.32 Gain to State on insurance taxes under plan "Y" (high rate) $106,948.49 Saving on criminal expenses and capitation taxes as above $206,643.63 Net Revenue in effect $671,041.44 Net gain to State $108,639.84 This plan of reform with Bank Tax "A" and Insurance Tax "B" has certain advantages which may be enumerated. First — ^The State would be completely rid of inequality which seems inherent to the property tax. With no State tax on per- sonal property of any sort, there could be no inequality between counties or between various classes of personal property in matters of taxation. Second — The counties and cities would receive a source of revenue which they could tax in the manner and at the rate most acceptable to them. If the rate of one county were higher than that of another, the matter would concern citizens of that county and no others. Inequality could only result from great expendi- ture or greater economy. Third — The counties and cities would have a taxable property which, through local administration and economic necessity, they 102 Report of Tax Commission — ^Appendix. could assess and collect much more closely than at the present the State is able to do. They could very materially reduce the present percentage of delinquency. Fourth — ^The " counties would be able to regulate more thoroughly than the State can the misdemeanor criminal charges, and would be able to prevent the needless summoning of wit- nesses and both reduce litigation and lessen the general tax burden of the people. It is self evident that criminal expenses allowed and approved by a county board and paid from county funds will be lower than when approved by a busy judge and allowed by a distanct Auditor. Fifth — ^The tax burden of 60 per cent, of the banking capital of the State would be lightened (see report on bank taxation) and the banks of no part of the State would be given an advantage over those of another in matters of taxation. All would be placed on a footing of equitable competion. Sixth — ^The insurance companies operating in Virginia would be given precisely the same advantages, with the privilege of transacting their business wherever they please without restric- tion. Seventh — In place of the present property tax, so difficult of collection under the present system, the State would receive a revenue which would be sufficient to recompense it for its losses and to allow a reasonable margin for fluctuations inherent to the new property taxed exclusively by the State. Eighth — ^The State could hope to save in time, at least $30,000 in reduced charges of collecting the Revenue. Ninth — In addition to the benefits accruing to the State, seventy-eight of the counties and four of the cities would show positive gain in revenue under this plan. These range from a few dollars to more than $11,000 and, in the counties, amount to an aggregate net gain of $120,733.53. With this new revenue these counties might either lower their present tax rate, remove altogether the tax on personal property or else undertake public improvements which would add to the taxable wealth of the State, and to the comfort of our people. Objections to this Plan. But there are objections to this plan so great as, in the writer's judgment, to render it of doubtful wisdom. These are, first, Report of Tax Commission — Appendix. 103 that the plan places a new burden on the cities which are at pres- ent bearing so large a part of the expense of government; second, that this plan establishes inequality among the cities and coun- ties of the State in the administration of justice and the levying of capitation taxes; third, that there is doubt as to the legality of the plan; fourth, that the public schools in the country might be the losers despite the gain to the counties from the property tax removed. Loss to the Cities. As the appended table will show, only four of the cities of the Commonwealth are gainers by this plan, with the effect on one city as yet unknown, while every other city in the State loses. Those which suffer the most are Richmond losing $34,786.29*, and Norfolk, losing $21,985.45. *This estimate for the city of Richmond based upon returns made by the Special Accountant of the city and upon estimates furnished by the insurance companies whose stock is taxed locally. Our plan contemplates the taxation of the latter, as heretofore, and this makes a variation from the figures returned by the city officials. 104 Report of Tax Commission — Appendix. JO ureQ CO CT> O 00 "5 to 05 t^ -^ 1-H CO -^ CO t^ ■* 05 >!(< 05 en c "5 lO i-H m (N IN 1-1 1-1 00 r- (N CO o ■* t^ 00 "jh ■* m o (N w M in CO IN CD IN 00 IN CO t^ O O! IN IN 00 1-1 CD •* 00 t^ ,-1 O i-H "O rt (N rt (M (N l> T— I Kj Hj O iJ 1-4 d O CO 1-1 lO to ^ IN h5 1-4 1-4 d h4 Tj< I> IN i-H iJi h4 h4 d 1-4 ■sijoj nreo 8 s g s O o o o o o o g s g 8 g 8 8 o o o CO 00 CO rH CD t^ s 1— 1 Til CO IN CO tH 00 CO i rH i s t^ CO 00 CO "5 ^ 1— 1 I-H 1-H IN T— t I— 1 CO 1— 1 ■* CO 00 IN -H 1 i i 1* CO •ggOrj I'B^OX O ^ lO O 00 i-H O CQ IN 00 >0 CO 00 CO ■* 00 l> i-H 00 lO CO CO 1-H CO t~ •* 1-H O O 1* -*< 03 1ct^ tH 00 lO 03 00 O 05 rH 00 Tjl CO U5 lO rH 00 05 00 lO 05 ■0 O IN 02 "* CD >0 O CO 00 lO CO CO H O a ID a H o S ^ fe M|z; Id ^ 3 "^ 3 M^ • -71 g o t3 e rS-c 3jd;=|cj s^ >:,^o-5 o'«-S osP-J o ffl -p fl ,a ■« g « =? .^ -f^ Report of Tax Commission — ^Appendix. 105 Whatever may be the advantage of this plan, it is unfair to place this loss upon the principal contributors to the treasury .of the State while presenting the counties with $120,000.00. The loss to be sure is less than that under the plan first rejected, but any loss at this time, in the case of most cities, is unjust. They are already bearing their full burden. The Assembly will not wish to make them do more. So far as the gains to the counties are concerned, these go where they properly belong. Loudoun, Fauquier, Augusta, Rocking- ham, Norfolk and Henrico will receive between them $45,522.23 of the $120,000.00 gained by the counties. If this seems large it must be remembered that in these counties, valuations of per- sonal property have been very high for many years and their people have been bearing much more than their part of the public burden. They are certainly entitled to any benefits that will accrue from a readjustment of our tax laws. Other Objections. The second objection, that inequalities would be established where others are removed, is not, in our judgment a valid one. It would not be justice to require the cities to pay their criminal charges where they would be forced to give up so much from the taxes on banks and insurance companies, and they would at least be entitled to the returned capitation taxes, and to any other offsets the State could give them, to recompense them for what they would lose. In the same way it would be but common equity to require the counties to give up something in the way of capitation taxes, where they would receive such large sums from personal property. Again, this plan is liable to objection on the ground that it may be unconstitutional to make so great a difference between the counties and cities as that contemplated in taking no capita- tion taxes from the cities and taking all from the counties. While the power of separation allowed the General Assembly by the provisions of the Constitution, effective after 1913, may be ample to guarantee the validity of the suggested law, the writer would hesitate to propose any measure where such a question might arise with disastrous consequences. The fourth objection to this plan is one that may not appear at first sight: the rural free schools in some localities might be the 106 Report of Tax Commission — Appendix. losers by this arrangement. It is true that almost all the counties would gain, in effect a very substantial sum through the exemp- tion of personal property from State taxation. But it must be remembered that there would not be a dollar of revenue paid by the State to the locality on this account; taxes Would be lower on personal property; that would be all. And the counties, in readjusting themselves to changed conditions, would very prob- ably equalize this reduction and apply it both to the property and the land tax. The capitation taxes, which must now be devoted to schools, would be kept in the State treasury. A special levy would have to made to be make up the deficit. In such a case, it is not impossible that in counties where taxes have long been heavy, the schools might not be properly provided for. This to be sure, is a local question, but it is one affecting a vital work over which the State has assumed a large measure of control. Viewing these objections as a whole, they are undoubtedly of great weight. While the Assembly can, of course, carry this plan into effect, it is not considered safe by the writer. Indeed, it is subject to even greater objections than the plan of complete separation outlined in the chapter on that subject. Other Plans of Partial Separation. It is possible to draft various other plans of partial separation, based upon the removal of the personal property tax, a readjust- ment of criminal expenses and the imposition of a part of the bur- den of the schools on the locality, but all of these plans are subject to the same general objections as those laid down above and all will work more or less injustice to the cities. Investigation of these discloses no proper basis on which partial separation can safely be advised. Alternative Plan — Amendment of the Present Law. Forced to abandon partial separation, the writer has studied the present tax laws in the belief that by suitable amendments it will be possible to introduce a satisfactory plan of assessment. It must be prefaced, before proceeding to the specific recom- mendations, that it is useless for the State to proceed upon the principle that the more stringent the law the more effective the administration. The present law is stringent enough, where Report of Tax Commission — Appendix. 107 enforced, if, indeed, it be not too stringent, and the present law- has failed. The Assembly should make its appeal to tax-payers on an entirely different basis, one of reasonable consideration and common honesty. We should not attempt to enact laws which will make men liars. We should draft legislation which will appeal to the honesty of the average citizen and to that sense of common equity which is in the heart of every man. Stringent administration is a failure, for where men feel that they are being unjustly burdened, they do not hesitate to avoid the tax; generous and just administration may be most successful. With this end in view, investigation has suggested the following plan of reform: 1. The establishment of a central administrative Commission, on the basis outlined above. 2. The adoption of standard regulations by the Commission, under the general plan of administrative control. 3. The removal of Commissioners of Revenue by the Com- mission for good cause shown. 4. The adoption of the "Maryland plan" for the taxation of stocks and bonds. 5. The exemption by law or by constitutional amendment of the following properties: a. Fiduciary estates of $1,000 and less when held by widows, orphans or dependent parents. b. Household effects to the value of $100. c. The bonds of one locality by all other localities. 6. Enforcement of the law making the personal swearing of every tax-payer obligatory upon the Commissioner. 7. Making any class of property held by an individual subject to levy for delinquent taxes on any other class of property. 8. The mailing of tax bills. 9. Giving Commissioners of the Revenue power to modify or amend, upon due notice given, any interrogatory they may believe to be faulty, allowing the tax-payer proper appeal. It will be necessary to review these recommendations briefly in order that their purport may be fully understood. 108 Report of Tax Commission — ^Appendix. The Tax Commission. These recommendations do not need further explanation. These, indeed, are the absolute essentials, the all important recom- mendations regarding the personal property tax. Unless they are enacted unto law, the Assembly cannot hope to lift the people of Virginia from that slough of tax despond into which they have fallen. We must have a central body, empowered to draft gen- eral regulations for the average valuation of personal property, or for a per capita valuation, empowered likewise to supervise the collection and assessment of taxes and to remove Commis- sioners of the Revenue who do not enforce the law and fortified by statute to make every county bear its proper part of the public burden. Indeed, the average or per capita local valuation of personal prop- erty that will be made by the Tax Commission is sufficient in itself to correct those evils of inequality and undervaluations which the State must despair of correcting in any other manner while the law remains unchanged. The practical operation of this principle will be seen on a moment's reflection: The Com-, mission in question is to be composed of men familiar in a general way with values in all parts of the State and assisted by a paid Commissioner whose duty it shall be, under the proposed law, to secure information regarding taxable values in the State. The Commission will observe that cattle and horses in Grayson county, for instance, are valued much below the general average of the State and it will be able to ascertain, with the machinery provided, how the real value of these horses and cattle compares with the value of the same property in other counties. With this infor- mation the Commission will be empowered to direct the Com- missioners of the Revenue in Grayson County and counties of like richness and equal property, to assess horses and cattle at such an average figure, under penalty of forfeiting their office. In this way, and without any room for gross inequality, it will be possible to apportion the taxes on personal property in such a manner that every county's condition can be given proper con- sideration and its average rate of valuation, or its per capita valuation, be apportioned accordingly. Unless all estimates are erroneous and the experience of other States no guide, by this plan the State can soon reduce the tax rate, while the burden of Repqrt of Tax Commission — Appendix. 109 taxation, more justly distributed, becomes less onerous. The sections of the proposed law bearing on this subject are a modifi- cation of the Michigan and Kansas laws, with certain features taken from the laws of other States. The Adoption of the Maryland Plan. The writer has already mentioned the gross inequalities which exist in our present law, whereby intangible personal property, and particularly stocks and bonds, may be made to bear a very unjust burden of taxation. Assessed and taxed at their full value, where located or returned at all, they are subject to no offset, undervaluation, discount or deduction of any sort. As a result gross 4 per cent, investments are reduced to 2.40 per cent, in Roanoke and to about 2 per cent, in Alexandria, with most of the other cities between these extremes. It is needless to say that the man who returns stocks and bonds under these conditions either does so because he is a man of unusual piety or because the Commissioner of the Revenue is a man of unusual skill in tracing his holdings. And it was further stated that but for the oath to which he must swear, no man could be blamed for failing to return stocks and bonds under these conditions. This inequality, common to so many of our tax laws, has been given much thought in recent years. About 1890 Pennsylvania adopted a plan regulating the amount of tax on certain securities by the interest they bore, and this plan, drafted into the Maryland law through the efforts of Judge Oscar Leser of Baltimore, has come to be known as the Maryland Plan. The section in ques- tion reads as follows: "Sec. 210. All bonds, certificates of indebtedness or evidence of debt in whatever form made or issued by any public or private corporation incorporated by this State or any other State, Terri- tory, District or foreign country, or issued by any State (except the State of Maryland) , Territory, District or foreign country not exempt from taxation by the laws of this State and owned by residents of Maryland, shall be subject to valuation and assess- ment to the owner thereof in the county or city in which such owners may respectively reside, and they shall be assessed at their actual value in the market and such upon which no interest shall be actually paid shall not be valued at all, and lipon such valua- 110 Report of Tax Commission — Appendix. tion the regular rate of taxation for State purposes shall be paid, and there shall also be paid on such valuation thirty cents (and ■ no more) on each one hundred dollars for county, city, and muni- cipal taxation in such county or city of the State in which the owner may reside." In other words, where the Maryland tax rate is, say 22 cents, the tax on bonds and stocks cannot amount to more than 52 cents, or about one half of one per cent, of the principal. The owner of a taxable bond valued at $100, therefore, would have to pay from his $4.00 of interest a tax of 52 cents. State and local tax included. It will be argued at first sight that this will put tangible per- sonal property and lands at a disadvantage, in comparison with stocks and bonds and will, therefore, lead to as gross inequality in a new direction as now exists in another. This objection, how- ever, is entirely superficial. What constitutes the real value of a property, and what determines its sale's value? Unquestion- ably its earning capacity. A stock of goods in a desert place, or a fortune in an abandoned wilderness, has no value because it has no earning power. Transfer these to the markets of the world and at once they become valuable, but valuable only in propor- tion to their earning power. The constant fluctuations of the money market are primarily due, as everyone knows, to the chang- ing values given stocks and bonds by the dividends paid or to be paid upon them. A security therefore is valuable not always in proportion to its face value, but inevitably in proportion to its earning capacity. Instead of giving securities and advantage over other invested capital of personal property this plan will restore them to their proper taxable place — their earning capacity. The fruits of the Maryland plan are the best evidences of its economic soundness and practical worth. When the plan was first announced and when the statute was first put upon the books, the owners of stocks and bonds in Maryland showed them- selves willing to meet the State half way. Feeling that the new law was eminently fair, they were willing to list their stocks and bonds, just as a few years before, feeling that the tax was emin- ently unfair, they were willing to conceal them. At the same time, the assessors exerted themselves to the utmost. The Report of Tax Commission — Appendix. Ill following table will show how the valuation of these properties in the city of Baltimore increased from 1896 to 1910: 1896 $ 6,000,000 1897 58,703,795 1898 60,699,686 1899 61,890,764 1900 65,7.89,903 1901 68,879,484 1902 89,880,484 1903 94,336,562 1904 85,971,333 1905 104,221,227 1906 120,423,814 1907 150,947,733 1908 146,688,857 1910 160,000,000 It may not be inapropos to remark in this connection that efficient administration is as necessary to the proper enforcement of the Maryland plan as it is to any other, for there are always some men to whom justice will make no appeal. An instance of this is recorded in our own State. The Maryland plan has been in effect in Norfolk for some years. The plan adopted there reduced the tax on stocks and bonds to 80 cents where it had previously been $1.35. Yet there was an actual decHne in the revenue from this source for a few years and there was no marked increase until a new and vigilant Commissioner came into office. It will be observed that the Maryland plan fixes a flat rate on all stocks and bonds, regardless of their rate of interest. This would make the tax on a 3 per cent, bond as high as on a 6 per cent, stock, or, in other words, would tax the earning capacity of the former twice as much as the latter. Judge Leser, the author of the law, very properly advises that the plan be so modified as to apportion the amount of tax to the amount of the interest paid by the stock or bond in question. Thus it will be observed that the section submitted on this point would adjust the tax as follows: 112 Report of Tax Commission — ^Appendix. Rate of Interest ^WOMWi of Tax. on Security. State. Local. Tota 3 % 35 30 65 3H% 35 35 70 4 % 35 40 75 4H% 35 45 80 5 % 35 50 85 5H% 35 55 90 6 % 35 60 95 In other words, the plan is for a tax of 10 cents for every addi- tional dollar of interest. Judging from the experience of Maryland, we believe that this tax, maintained by a strict and careful administration, would bring to the tax books thousands of dollars of securities which now escape taxation and would, in this way greatly increase the revenue from this source. Specific Exemptions. Our existing law is almost void of exemptions, owing to the more or less prohibitive character of the constitutional provisions on the subject. Were our tax laws better, or had they been better when the Constitution was adopted, the strict nature of the law would have been justified, tor exemptions are always dangerous. As the matter stands, however, the failure of our law to make any exemptions or to allow any offsets has led to gross injustice in the taxation of certain classes of property, especially fiduciaries and choses in action. So glaring is the in- justice of these that we feel steps should be taken, and, if neces- sary the Constitution be amended,, to permit exemptions which will restore some semblance of justice. Mindful of the danger of making exemptions too general, but equally anxious to right the wrongs of existing laws which ap- parently cannot be righted otherwise, the writer would recom- mend the following exemptions, the reasons for which will be discussed. {a.) Fiduciary estates and choses in action to the amount of $1,000 when held by widows, orphans or dependent parents. This certainly needs no defence. The case cited in the text, where Report of Tax Commission — ^Appendix. 113 a widowed mother of children paid 29 per cent, of her petty income to the State and city should of itself be sufficient to justify this exemption. Where there are thousands of such cases through the State, and where those who can least afford to bear the burden are bearing the heaviest load, there can cer- tainly be no reason for not allowing this exemption. In practical operation, the exemption of this property to the amount named will act as a reduction of the tax late from its present exhorbitant figures. Thus, the exemption of $1,000 to the widowed owner of $3,000 would mean a reduction of $3.50 in State taxes alone, or, in the city in question, a reduction from the present tax rate of $17.50. If the Maryland plan be adopted, this exemption and the reduced rate on the property would make the woman's tax bill on $3,000 of 6 per cent, stock amount to $19.00 — a sum ample enough, in any conscience, for such a per- son to pay. (6.) Household effects to the value of $100. Attention has already been called to the fact that the present personal property tax is levied against household goods and like properties which cannot, in any way, be described as productive. The tax so levied in the case of small property owners, is not a tax upon comfort, but a tax upon necessity. To require the head of a working family to pay on the simple necessities ot life which he is able to accumulate through years of labor is certainly neither just in theory nor wise in policy. For this reason we believe that the exemption to householders of personal property amounting to $100 will be a reasonable concession to these persons without serious loss to the Commonwealth. The tax on $100 amounts to 35 cents, a negligible consideration so far as it affects the revenue of the State. It will be argued of course, that this exemption and the others which are recommended strike at a fundamental principle, that of equality between tax-payers. We are told by a certain school of archaic economists that all property, no matter what its nature or amount, should pay the same tax rate, and that the laboring man must pay proportionately on his household furni- ture to the millionaire on his banking house. This theory has long been discredited. Taxation should be based solely upon the earning capacity of the property owned, that is to say, upon the 114 Report of Tax Commission — ^Appendix. ability of the owner to pay. No other theory will stand the test of time or the close scrutiny of an enlightened democratic age. It may likewise be argued, of course, that to ex:empt $100 of household effects, will be practically to exempt all household effects, since the average assessment on household property will not exceed $100. This is unquestionably true. But granting it, does it follow that the State wants to tax this property, even if, by exempting it, the Commonwealth strike practically the whole mass from the books? Furthermore, it is well to point out that as such an exemption could only come by Constitutional Amendment, it will not be effective until the assessment of per- sonal property has been equalized and those who now list only $100 where they have much more, will be compelled to list their excess. It seems not unreasonable to suppose that the property added through equalization will be greater than that stricken from the books by exemption.* (c.) The exemption of the bonds of Virginia municipalities and counties from taxation by any other municipality or county. Under existing statutes, we practically limit our own bond market, raise our interest charges, and depreciate the value of our own public investments. We authorize the cities to contract public obligations for improvements of one sort or another, believing that these confer benefits for which the next generation should pay in part; and we encourage the counties in every way possible to bond themselves, according to their prosperity, for the building of permanent highways. Yet we authorize one county to tax the road bonds of another county, and we permit one city to tax the bonds of another. In other words, while encouraging them to spend money for needed improvements as far as their resources will permit, the State law operates to damage the market for these bonds and to make the localities pay a higher rate of interest than they otherwise would pay. *In this connection, some reference should be made to the exemption of bank deposits on open account. These deposits seldom represent more than "money in transit," or money taxed either at the source or in the product. Few men who report a substantial balance in bank on February 1st have that sum void of lien or of maturing obligations; few who have much money in bank fail to dodge the tax by one of the several discreditable methods now in use. It is to be regretted that the bank deposits tax must stand; but to exempt that which is properly exempt, money in transit, would be to open the door for the exemption of savings accounts. If "open deposits" were exempt, all deposits would be "open" on February 1. Report of Tax Commission — ^Appendix. 115 If law be enacted tcr exempt from taxation in any locality the bonds of another locality, where the taxing locality exempts its own bonds, the following advantages will result. First — ^We will have a much more extended market for the sale of Virginia securities and will, therefore, make their sale at par much less difficult than it is at present. Under present conditions the bonds of a city or county must either be sold there or else in another State where their ownership cannot be traced by the taxing authorities, but where they will not bring the par value. Under this plan our own capitalists would gladly buy all Virginia securities. Second — By creating new markets among our own people, we will awake a new and much needed interest in the conduct of local financial affairs. When our bonds are sold in other States, our people are apt to take comparatively little interest in the public debts of our various cities and seem often to care nothing whether the sinking fund is provided for or is neglected. With our local debts held in Virginia, there would be a healthy sentiment in behalf of economical and scientific administration which could not but react favorably upon our citizenship. Third — The exemption of these bonds from local taxation would work in time to a reduction in the rate of interest which our cities will have to pay for the money they borrow. The wider the field of purchase, the near the rate of interest approaches to the true economic rate; and, with all Virginia a market for local bonds, free from taxation by any other locality, the cities and counties could hope either to dispose of a high-interest issue above par or else to sell lower interest bonds at par. This principle, it is need- less to point out, has been at the basis of the bond system of the United States and accounts in large measure for the success of our government in selling 3 per cent, bonds at par.f The Practice of Other States. Virginia is one of the few States of the Union which has not put into effect some or all of the exemptions outlmed above. Practically every Commonwealth has found it is both justice and policy to exempt from the operation of the general revenue laws individuals of small property rights and those classes of property fFederal bonds of a lower rate are almost all sold to banks who make them the basis of issue. 116 ^ Report of Tax Commission — ^Appendix. the ownership of which is non-productive. Aside from the ex- emptions of some States of beds, wearing apparel, articles of personal adornment, provisions, food tools, farming implements, wagons, sewing machines, looms, musical instruments, family portraits, domestic animals, sheep, swine, oxen, hogs, cows, poultry, beef, bank deposits and watches, twenty-three States and territories exempt personal property or lands, and more especially household effects to a certain amount. The following will show the nature of these exemptions : Alabama, household furniture, $100. Colorado, household furniture, $200. Connecticut, household furniture, $500, cash $100. Delaware, $100 cash, all household furniture except plate. District of Columbia, household furniture, $1,000. Hawaii, real or personal property, $100. Iowa, household furniture, $300. Kansas, personal property, $200. Kentucky, household furniture, $250. Louisiana, household furniture, $500. Massachusetts, household furniture, $1,000. Maine, household furniture, $200. Michigan, personal property, $200 when employed in business, household furniture $500. Minnesota, personal property, $100. North Carolina, household furniture $25. North Dakota, personal property, $10. Ohio, personal property, $100. Oregon, personal property, $300. Tennessee, personal property, $1,000. Texas, household furniture, $250. Vermont, household furniture, $500. Washington, land improvements, ($500) personal property, $300. Wisconsin, household furniture, $200. Wyoming, household furniture, $200. Personal Oath by Every Tax-payer. In reviewing the existing defects of the law, reference was rrade to the report by Commissioners of the Revenue that in many in- stances they did not personally administer the oath to tax-payers Report of Tax Commission — ^Appendix. 117 who returned their interrogatories. Investigation has shown that this is a widespread evil — more widespread, in fact, than the formal statements of the Commissioners would indicate. This is to be attributed in large measure, as has already been stated, to the careless manner in which the oath is administered or to the receipt of returned interrogatories through the mails where there is no opportunity of applying the oath in person. Unfortunately there are some men who, in telling a lie, are perfectly willing to swear to it; and it is indisputable that there are certain communities in the State where faithful observance of the interrogatory through long terms of years has made the applica- tion of the oath unnecessary. Yet, in the main the law would be more faithfully administered if every Commissioner were com- pelled to obey the law, require him, under penalty, to administer the oath when listing property with all possible formality. Better results would also be achieved if interrogatories returned through the mails were sworn before a Notary Public or Justice of the Peace and duly certified to that effect. This is now the custom in most of the progressive States and it should certainly not be neglected in Virginia. The Amendment of the Law to Provide that any Class of Prop- erty Held by an Individual is Subject to a Lien for Taxes due on any of the other Class of Property, Except Polls. Complaint is widespread that the law regarding the collection of delinquent taxes does not operate equitably between real and personal property, and that the former is often sold for taxes, while the latter, returned delinquent, is seldom redeemed. Complaint has also been made that the failure of the statute to provide for levying on real estate, where personal property is delinquent, annually loses much revenue to the State. It is believed that any property owned by a citizen should be subject to sale for the benefit of the Commonwealth on account of any taxes, other than poll taxes, due the citizen, regardless of their character. The Mailing of Tax Bills at the Expense of the Collecting Officer to all Persons Whose Accounts Amount to $2.50 Exclusive of Poll Taxes. One of the most frequent complaints made by citizens against our tax laws is that a tax-payer never knows when he should pay 118 Report of Tax Commission — Appendix. or for what he is paying. Citizens declare that they never remem- ber when their taxes are due, or how much their taxes are and consequently are often returned delinquent merely because the proper date for making the return, and the amount thereof, are forgotten. This complaint is well founded. The date when taxes may be paid, when they are due, when the penalty is added and the like are naturally confusing, and, it must be admitted, are not always called to the attention of tax-payers by Treasurers who received added fees for all taxes collected after the due date. To remedy this evil, a plan has been tried in West Virginia which commends itself very, strongly. This is to require the Treasurer to mail to every tax-payer, before the date his taxes become delinquent, a specific statement as to the amount of his taxes and when they must be paid. This is, in effect, a bill, which tax-payers much prefer to allowing their taxes to become delinquent. The plan has worked well in West Virginia and is said to have materially reduced the total delinquent taxes. The same plan should be adopted generally, in this State and the plan of the City Treasurer of Norfolk should be approved. He sends out bills to all tax-payers whose accounts amount to $2.50 or more, exclusive of poll taxes. The officer in question has found that accounts below this sum hardly warrant the outlay for post- age and mailing, but that larger bills are more promptly returned by this system. Giving Commissioners of the Revenue Power to Modify or to Amend, Upon Due Notice Given, Any Interrogatory They May Believe to be Faulty, Allowing the Tax-payer Proper Appeal. As the law stands at present, the Commissioner has no legal right to modify or amend an interrogatory sent him. He must either reject it, or accept it, or report the tax-payer to the Grand Jury. Such compromises as he may make with the tax-payer are purely extra-legal. Manifestly this power of amending interrogatories should be given the Commissioners if the best results are to be achieved. If this be not done except upon five days' notice to the tax-payer, and if the latter be given the right of appeal, the legitimate interests of none are endangered. On the contrary, the arms of the Commissioners are greatly streng- thened. Report of Tax Commission — Appendix. 119 In addition to "these reforms, investigation has shown some errors of administration in the form and make-up of our various reports and interrogatory blanks. These, however, can be corrected more readily by a central tax administrative body than by statute, .and hence, need not be detailed here. Like many other aspects of our tax administration, these should be left to the discretion of the proposed Tax Commissioner, subject to the approval of the Tax Commission. Summary of Recommendations. To summarise the recommendations regarding the taxation of personal property, the writer believes the best possible remedy for existing evils at this time will be, first, the establishment of a central administrative tax authority, to supervise the whole work of tax administration. Along with this should go, second, the adopting of the Maryland plan for the taxation of securities. Third, the removal of Commissioners of the Revenue for good cause shown. Fourth, the exemption by law of fiduciaries under $1,000, of household effects to the value of $100 and of the bonds of Virginia localities. Fifth, Enforcement of the law requiring personal swearing of tax returns. Sixth, Statute making any class of property subject to lien for taxes delinquent on any other class of property. Seventh, the mailing of tax bills. Eighth, Giving Commissioners of the Revenue power to modify or to amend, upon due notice given, any interrogatory they may believe to be faulty, allowing the tax-payer proper appeal. 120 Report of Tax Commission — ^Appendix. CHAPTER III. TAXATION OF LANDS AND IMPROVEMENTS. Historical Introduction. The land tax is one of the oldest on our statute books and one which has suffered comparatively little modification since colonial days. A flat tax on land, regardless of its location or value, was succeeded by a system of graded taxation, under which the General Assembly had authority to order a general reassessment of land whenever it deemed proper, without constitutional limita- tions. In a codification of the assessment laws in 1840-41 the system was materially changed, and, in particular, law was enacted by which lands changing hands in a given year were assessed for the next year on the basis of the sale's value. During the war between the States, the land tax was raised along with other taxes, but no affective means was introduced to secure the assessment of land at an uniform figure; nor did the Convention of 1867 make material change in the method of assess- ment. With the adoption of the new Constitution, assessors of land were specifically provided for in the organic law and reassess- ments were ordered for the year 1905 and every fifth year there- after. At not time has there been any system for equalizing assess- ments or for insuring a bona fide assessment of land at its fair market value. Constitutional and legal provisions there have been on these subjects; but effective machinery has always been lacking. Methods of Taxation. In accordance with the provisions of the Constitution of 1902 and of the consequent modifications in the law, lands are assessed once in five years by land assessors appointed by the circuit courts. Report of Tax Commission — Appendix. 121 The law provides that ere they complete work, the assessors shall meet in conference and discuss their work and shall receive in- structions regarding their duties from the court. The assessment made is under several heads — lands, lands per acre, buildings, land and buildings per acre, town lots, town lots and buildings. Standing timber is also assessed by the land assessor and machin- ery is assessed with the building in which located. Elaborate machinery for the correction of erroneous assessment and for appeal by aggrieved tax-payers is provided, and provision is made for the assessment of building improvements, between general assessments. On the land and buildings so assessed, taxes are levied at 35c on the hundred dollars valuation. Local taxes are levied on the basis of the same assessment and no exemp- tions, beyond those granted by the State are allowed the locality.* Valuation of Lands. Under this system, the valuation of lands in the Commonwealth has shown a steady increase, marked with a few periods of depres- sion. The following table will show this increase since 1880 and the table printed in Chapter IL will show the increase in the valuation of personal prdperty during the same period of years. f Year. Valuation of Land Improvements and town lots and buildings. 1880 $251,242,502 1881 231,409,200 1882 232,386,357 1883 236,368,227 1884 240,237,560 1885 256,924,730 1886 257,607,930 1887 257,468,760 1888 260,609,930 1889 269,278,931 1890 272,312,274 1891 295,188,229 *The single exception being that a city may allow a lower rate of taxation to an- nexed territory for a term of years. tSee also note, Chapter II, regarding the declines in land values durmg periods of depression. 122 Report of Tax Commission — Appendix. 1892 $300,717,366 1893 306,200,638 1894 310,201,514 1895 313,182,340 1896 304,204,590 1897 306,036,001 1898 308,761,367 1899 311,385,460 1900 316,563,279 1901.. 323,738,088 1902 .' 327,514,991 1903 336,627,978 1904 343,790,316 1905 368,281,369 1906 378,977,069 1907 388,568,249 1908 ; 387,159,236 1909 394,424,056 1910 400,889,237 1910 (reassessment) 475,672,320 Revenue from Land Tax. The following table will show the increase in revenue from the tax on lands and improvements since 1880. From 1880 to 1882, inclusive the rate was 50c; from 1882 to 1902, 40c, since that date it has been 35c. The figures cited are for assessed revenue and not for collected revenue. Year. Assessed Revenue from Lands and Improvements. 1880 , $1,256,212.51 1881 1,157,046.68 1882 929,545.43 1883 945,472.91 1884 960,942.24 1885 1,027,698.56 1886 1,029,936.44 1887 1,037,950.53 1888 1,049,920.61 1889 1,064,776.55 Report of Tax Commission — ^Appendix. 123 1890 $1,088,329.05 1891 1,179,337.80 1892 1,206,511.61 1893 1,223,419.40 1894 1,243,394.40 1895 1,252,510.38 1896 1,215,788.49 1897 ■....1,223,817.16 1898 1,234,284.85 1899 1,241,861.47 1900 1,265,850.60 1901 1,294,143.86 1902 1,310,284.96 1903 1,178,852.24 1904 1,203,657.76 1905 1,231,779.79 1906 1,354,699.32 1907 1,395,022.14 1908 1,449,120.12 1909 1,444,739.54 The Theory of the Land Tax. The taxation of land rests upon one of two theories, according to the economic views of the taxing authorities. One is that the land is private property, held by title for valuable consideration ; and that as this property represents value it should be taxed accordingly. As a corollary it is argued that the value of the land is proportionate to the revenue derivable from it and that the amount of the tax should be adjusted accordingly. The other school of economists, following the lead of Henry George, argue that the land is the wealth of the whole people and that no man is entitled to land except in proportion to the use to which he will put it. The value of the property of the whole people depends upon the use to which it is put and the tax payable to the people "Is proportionate to the benefits derived by the individual from the use of the land. This theory is generally applied in its ap- plication to town lots and to the taxation of so-called unearned increment. If a man purchase a lot in a suburb, say the advocates of this theory, what gives value to that land? If it be used for agricultural purposes, its value is proportionate to the yield; but 124 Report of Tax Commission — ^Appendix. this is always small. The man buys the land in the expectation that the growth of the city will make his lot desirable for human occupation. In other words, the movement of the locality to the land will give it value. The man does nothing to the land; adds not one dollar's improvements. He merely waits. The community moves to him, surrounds him and makes his property useful and desirous. In other words, all the added value of the land is due to the movement of the community and to the conse- quent use of the land. The man should pay to the community they say, in proportion. In the same manner it is argued that farm lands, distant from market and yielding only a living to the tenant, lands which would otherwise not be employed, should not be taxed beyond a nominal amount. Each of these theories has its ardent advocates and much can be said in favor of either. It is not necessary, however, to do more in this connection than to emphasize the truth upon which all agree — that lands are proper subjects of taxation and that the taxation should be graded, either according to the income-pro- ducing value of the property or according to its comparative utility to the owner. The Virginia Land Tax System, If, then, a land tax be a proper tax, the question arises whether or not that tax, as now operative in Virginia, is a just and fair tax. Investigation has shown that the law imposing this tax needs certain very important amendments, the nature and pur- pose of which can best be explained by a statement of the defects of the present system. Defects of the Virginia System. I. Gross Inequality Exists. The first and greatest defect of the present land tax is that it permits gross inequality. This inequality takes two principal forms — inequality among different counties and cities of the State and inequality among citizens of the same community. Inequality among counties and cities is so palpable on every hand that it scarcely needs example or proof. Lands are assessed at from 5 per cent, to 100 per cent, of their actual present value Report of Tax Commission — Appendix. 125 on the market, with the result that some citizens are paying twenty times as much taxes on property of a given value as are citizens of another locality. A fair comparison of these inequalities will be manifest from an examination of the assessed value of land in the counties of the State. It is not reasonable, of course, to presume that the aver- age per acre value of land in all the counties should be the same. The fertility, the percentage of waste land, the proximity to market and the other factors giving value to land vary tremend- ously in different parts of the Commonwealth. These conditions however, will not explain the inequalities apparent from the following table, based on the reassessment of 1910. TABLE SHOWING THE PER ACRE VALUATION OF BARE LANDS IN THE COUNTIES OF VIRGINIA.* County. Value of Land. Valtation par Acre Bare Land. Accomac .... Albemarle . . . Alexandria. . Alleghany . . . AmeUa Amherst .... Appomattox . Augusta. . . . Bath Bedford Bland Botetourt. . . Brunswick. . . Buchanan ... Buckingham . Campbell . Caroline. . Carroll. . . A. B. 2,693,156 2,858,800 2,430,532 466,526 756,039 1,118,271 717,559 6,099,879 850,574 2,440,040 506,673 1,647,964 2,646,389 1,034,710 2,366,567 1,522,445 525,195 10.37 6.33 160.38 1.47 3.38 3.79 3.47 10.73 1.29 5.12 2.78. 5.75 7.46 2.90 7.28 4.51 1.68 *The term, "bare land" as used here and in tax discussion generally means un- improved land or land without buildings. 126 Report of Tax Commission — ^Appendix. County. Value of Land. Valvation per Acre Bare Land. Charles City . Charlotte . . . . Chesterfield. . Clarke Craig Ciilpeper Cumberland . . D. Dickenson . Dinwiddle . E.— P. Elizabeth City . Essex Fairfax Fauquier Floyd Fluvannah .... Franklin Frederick G. Giles Gloucester . Goochland . Grayson . . . Greene. . . . Greensville . H. Halifax. . Hanover . Henrico. . Henry. . . Highland . I.— J. Isle of Wight. James City . . . K. King George . . . . King and Queen . 591,354 1,700,752 2,744,780 1,602,491 446,520 1,705,843 718,699 5.19 5.66 9.58 14.45 3.43 7.20 3.77 1,440,037 4.43 457,743 16.13 880,319 5.51 3,161,309 12.22 4,522,808 11.22 746,480 3.14 503,059 2.87 1,335,470 2.99 2,288,843 8.27 683,379 3.92 844,446 6.32 854,435 4.97 762,228 2.81 537,640 5.54 876,020 4.74 2,568,510 5.08 2,024,760 7.00 5,706,343 37.08 891,765 3.85 2,370,875 8.01 1,349,804 7.10 633,392 6.70 419,874 3.77 658,462 3.33 Report of Tax Commission — Appendix. 127 County. Value of Land. Valuation per Acre Bare Land. King William . L. Lancaster. . Lee Loudoun . . . Louisa Lunenburg. M. Madison Mathews Mecklenburg . Middlesex Montgomery . N. Nansemond Nelson New Kent Norfolk Northampton. . . Northumberland . Nottoway O. Orange . P.-Q. Page Patrick Pittsylvania . . . . Powhatan Prince Edward . Prince George . . Princess Anne . . Prince William . Pulaski R. Rappaharmock . Richmond Roanoke Rockbridge . . . . 642,117 1,581,191 1,112,975 5.87 1,011,653 2.51 2,946,747 4.63 623,957 4.00 871,544 3.96 1,254,845 7.03 1,716,430 10 J 42 1,313,292 5.93 1,359,517 9.64 1,181,687 7.01 465,520 3.97 2,605,490 13.00 2,183,974 6.02 3.82 544,735 6.70 1,126,235 4.89 4,775,143 14.77 1,036,391 3.28 711,534 2.64 1,197,077 5.44 479,672 9.31 1,297,002 3.12 593,003 7.40 1,313,037 5.60 1,408,048 5.46 1,025,019 3.62 466,171 3.49 7,057,093 30.82 980,475 8.37 761,492 6.29 931,108 4.77 7.36 128 Report of Tax Commission — Appendix. County. Value of Land. Valuation per Acre Bare Land. 6,708,789 11.99 1,324,032 5.49 1,177,146 3.96 2,364,256 6.70 1,616,339 6.05 1,701,121 4.58 951,353 3.79 586,645 3.50 930,983 5.88 1,513,770 4.98 1,603,243 5.99 821,275 6.02 952,488 24.38 2,497,201 6.61 699,275 4.98 129,713 4.20 1,725,815 6.65 532,401 8.28 Rockingham . Russell S. Scott Shenandoah. . Smyth Southampton . Spottsylvania. Stafford Surry Sussex Tazewell W. Warren Warwick Washington . . . Westmoreland . Wise Wythe York This table suggests many points of camparison. For study it may be arranged as follows: CLASSIFICATION OF COUNTIES ACCORDING TO PER ACRE VALUATION OF LANDS, 1910. Lands assessed at less than one dollar per acre : None. Lands between $1 and $2, Alleghany, Bath, Carroll. (3). Between $2 and $3, Bland, Buckingham, Fluvanna, Grayson, Lunenburg, Patrick, (6). Between $3 and $4, Amelia, Amherst, Appomattox, Craig, Cumberland, Floyd, Giles, Henry, King George, King and Queen, King William, Louisa, Mecklenburg, Nelson, New Kent, Prince Edward, Richmond, Scott, Spott- sylvania, Stafford, (29). Between $4 and $5, Caroline, Dinwiddle, Goochland, Greensville, Lee, Nottoway, Pittsylvania, Powhatan, Southampton, Sussex, Westmoreland, Wise, (12). Report of Tax Commission — ^Appendix. 129 Between $5 and $6, Bedford, Botetourt, Charles City, Char- lotte, Essex, Greene, Halifax, Madison, Montgomery, Nanse-nond, Page, Prince William, Russell, Surry, Taze- well, (15). Between $6 and $7, Albemarle, Campbell, Culpeper, Glouces- ter, James City, Lancaster, Northumberland, Rockbridge, Shenandoah, Smyth, Warren, Washington, Wythe, (13). Between $7 and $8, Brunswick, Hanover, Isle of Wight, Mid- dlesex, Orange, Prince George, Rappahannock, (7). Between $8 and $9, Frederick, Highland, Northampton, York, (4). Between $9 and $10, Chesterfield, Mathews, Pulaski, (3). Between $10 and $11, Accomac, Augusta, Princess Anne, (3). Between $11 and $12, Fauquier and Rockingham, (2). Between $12 and $13, Fairfax. Between $13 and $14, Clarke, Roanoke, (2). Between $14 and $15, Loudoun, (1). Between $15 and $16, none. Between $16 and $17, Elizabeth City, (1). Between $17 and $24, none. Between $24 and $25, Warwick, (1). Between $25 and $30, none. Between $30 and $31, Norfolk, (1). Between $31 and $37, none. Between $37 and $38, Henrico, (1). Between $38 and $160, Alexandria, (1). State Average, 23,788,045 acres; $151,239,679 valuation; average $6.35 ; average of local averages, $8.26. It will be observed at the outset that the counties of Warwick, Norfolk, Henrico and Alexandria show a per acre valuation out of all proportion to the rest of the State. This, of course, is due to the proximity of the cities of Newport News, Norfolk and Ports- mouth, Richmond and Alexandria to the counties na ned in order. These counties, therefore, may very properly be excluded from the comparison of inequalities in the counties where city valuation plays little part. But even here the question arises, why is there no like high valuation in those counties adjoining the other great cities of the Commonwealth, Roanoke, Lynchburg, Petersburg and Danville and thriving, bustling cities, whose growth and 130 Report of Tax Commission — ^Appendix. development is only a question of ti ne. Why do not the counties of Roanoke, Campbell, Dinwiddle and Pittsylvania show a like high valuation? It is thus apparent at the very outset that the counties adjacent to the cities and showing the highest valuation are overassessed when compared with like counties adjoining other cities. This comparison apart, the table of bare land values shows a distressing inequality. There is, for instance, much land in Alleghany and Bath which is generally denominated as "mountain land," and which is of very little value; yet the same conditions apply to the county next in order, namely. Highland. By what process of reasoning, then, can a valuation of $1.29 the acre in Bath and $1.47 in Alleghany, be justified when lands in High- land are assessed $8.01, with mineral lands not included in either case. Bedford and Franklin are very much alike; both have a considerable mountain acreage, both have about the same per- centage of valley land along the Staunton River. Yet lands in Bedford are assessed at $5.12 the acre, while lands in Franklin are assessed at $2 .99 the acre. Henry and Patrick are always men- tioned in the same breath, but Henry county land ($3.85) is assessed at 50 per cent, more than Patrick county land, ($2.51). Charlotte and Prince Edward are very similar, yet bare land in Charlotte averages an assessment of 40 per cent, more than like land in Prince Edward. Lunenburg and Nottoway adjoin, and if there is any difference in the land, the difference is in favor of Lunenburg, yet the assessment in the former is more than 50 per cent, greater the acre than in the latter. King and Queen is as fertile as Essex, yet its lands are assessed at $3.33 the acre, while Essex land is assessed $5.51. Greensville and Brunswick are very similar, but the farmer in the latter can have the satis- faction of knowing that he is paying 50 per cent, more State taxes on his lands than is his neighbor across the county line. Prince William is not much more fertile than its neighbor Stafford, yet the assessment is 40 per cent, higher the acre. Wythe and Pu- laski are adjoining counties in the Southwest with similar soil and land; but Wythe farmer pays on an average of $6.65 the acre, Pulaski farmers on $9.64. Northumberland land owners pay taxes on lands assessed at $1.31 the acre more than lands in Westmoreland; Westmoreland pays on an assessment of $1.21 more than King George. Report of Tax Commission— Appendix. 131 Hanover lands, similar in the main, to lands in Caroline, are assessed at $7.00, while those in Caroline are assessed at 14.51. Isle of Wight lands are assessed at almost 50 per cent, more the acre than are lands in Southampton. Prince George lands are $2.05 the acre more than Sussex lands. Goochland lands are assessed at $4.97; Fluvanna lands, at least as good, are assessed at $2.87, or but little more than half as much. Essex lands are $5.51; King and Queen adjoining, pays on only $3.33 the acre. Mathews land is almost $2 higher than like land in Middlesex. This comparison might be carried on indefinitely. The conclusion is the same; our land tax is operating to make citizens of some localities help bear the burden ot citizens in other localities. In an effort to trace this inequality down to farm valuations, a member of our Commission, with one of the land assessors of Charlotte county, made a detailed investigation of lands on the line between the two counties of Charlotte and Prince Edward. The results of this study showed inequalities that were almost unbelievable. In the case of an estate crossing the county-line, but held in two lots, unimproved land in Charlotte, with scanty timber, was assessed about 40 per cent, higher than the lands across the line, although the latter included $4,000 of standing timber and substantial buildings. When land average $5. the acre on Charlotte line, like land immediately adjoining was never assessed at more than $3.50. Naturally such obvious inequality discredited the Commonwealth. Inequality as to Improvements. Champions of the present iniquitous system sometimes defend the system by saying that though lands are underassessed and unequitably assessed, the valuation of "lands and buildings" will show substantial valuation and equality. There is not real jus- tice in the comparison of lands .and buildings per acre. The valuation of buildings depends not upon the acreage but upon den- sity of population, and there can be no sense in comparing the valuation of lands and buildings per acre in Henrico county, where the population is dense, with the valuation of lands and buildings per acre in Hanover county, where the population is comparatively scant. As this comparison, however, is frequently made we append a valuation of lands and buildings per acre in the several 132 Report of Tax Commission — ^Appendix. counties of the State. This will show, in the writer's judgment, that where lands are unequitably assessed bad conditions are rendered worse by a similar inequality in the assessment of build- ings on lands. VALUATION OF LANDS AND BUILDINGS PER ACRE REASSESSMENT OP 1910. County. Land and Buildings Per Acre. A. Accomac $ 17. 55 Albemarle 11.70 Alexandria 249.01 Alleghany 4. 56 Amelia 5.05 Amherst 6.32 Appomattox 4. 89 Augusta 16. 88 B. Bath 1.97 Bedford 7.22 Bland 3.27 Botetourt 8.17 Bnmswick 9. 11 Buchanan .... Buckingham 4. 32 C. Campbell 10. 99 Caroline 6. 06 Carroll 2. 16 Charles City 6.97 Charlotte 8.60 Chesterfield 14.34 Clarke 20. 13 Craig 4.00 Culpeper 10.08 Cumberland 5. 59 D. Dickenson .... Dinwiddie ^ 6. 14 E.— P. Elizabeth City 23.92 Essex 7. 36 Report of Tax Commission — ^Appendix. 133 Fairfax j 19. 30 Fauquier 16 22 Floyd 3.63 Fluvanna 4. 23 Franklin 3 68 Frederick 11 . 50 G.— H. Giles 5. 20 Gloucester 10.95 Goochland 7. 27 Grayson 3. 26 Greene 6. 76 Greensville 5.99 Halifax 6. 84 Hanover 10.00 Henrico 52. 07 Henry 4. 79 Highland 8. 51 I.— J. Isle of Wight 11.20 James City 8. 76 K.— L.— M. King George 5. 66 King and Queen 4.82 King William 5.20 Lancaster 13.02 Lee 5 . 57 Loudoun 22.62 Louisa 5. 66 Lunenburg 3.48 Madison 7.84 Mathews 17.69 Mecklenburg 4. 58 Middlesex 12.72 Montgomery 7. 56 N.— O.— P. Nansemond 9. 32 Nelson 5.78 New Kent 4.57 Norfolk 38.88 Northampton 16. 85 Northumberland 12. 64 Nottoway 6.46 Orange 10.97 134 Report of Tax Commission — ^Appendix. Page. $ 9.29 Patrick 3.05 Pittsylvania 8. 85 Powhatan 6.61 Prince Edward 6. 25 Prince George 9. 68 Princess Anne 13. 50 Prince William , 9.66 Pulaski 11.71 Q.— R.— S. Rappahannock 8. 59 Richmond 6.48 Roanoke 18.79 Rockbridge 8.43 Rockingham 16. 06 Russell 6. 18 Scott 4.58 Shenandoah 9.71 Smyth 7.30 Southampton 7. 48 Spotsylvania 5. 36 Stafford 5.22 Surry 8.41 Sussex 6. 70 T.— U.— V. Tazewell 6.87 W.— X.— Y. Warren 8.82 Warwick 281. 71 Washington 7. 88 Westmoreland 7. 28 Wise 8.70 Wythe 8.73 York 11.25 To drive home this comparison of the inequality in the assess- ment of lands, a comparison is made on the proper basis — that of population. In the rural sections of the Commonwealth, our people live in the main, on a fairly uniform scale. There are some counties where there is a large percentage of poor people and negroes, whose humble abodes will reduce the per capita average; but even with due allowance for this, the appended table discloses conditions which bespeak the grossest inequality. Report of Tax Commission — Appendix. 135 PER CAPITA VALUATION OP BUILDINGS IN THE COMMONWEALTH REASSESSMENT OP 1910. Per capita valuation of County. Buildings on land (town lot build- ings excluded.) A. Accomac 50. 80 Albemarle 80. 96 Alexandria 155. 61 Alleghany 68,73 Amelia 42. 79 Amherst 39.31 Appomattox 32.99 Augusta 107.63 B. Bath 68.94 Bedford 33.80 Bland 13.25 Botetourt 40.06 Brunswick 30. 35 Buchanan Buckingham 33 . 12 C— D. Campbell 52.29 Caroline 31.32 CarroU 72. 17 Charles City 38.37 Charlotte 55.92 Chesterfield 64.71 Clarke 84.38 Craig : 15.90 Culpeper 50. 54 Cumberland 37. 88 Dickenson Dinwiddle 35.97 E.— P. Elizabeth City " Essex 32.47 Fairfax 88.89 Fauquier 89 . 51 Floyd 8.36 Fluvanna 28 . 58 Franklin 11-62 Frederick 69.92 136 Report of Tax Commission — ^Appendix. G. Giles Gloucester 49.54 Goochland 42.60 Grayson 6. 20 Greene 17.02 Greensville 19.46 H. Halifax 22.22 Hanover 50. 48 Henrico 98. 36 Henry 11.75 HigWand 28.35 I.— J. Isle of Wight 52.29 James City 53.55 K.— L. King and Queen 21 . 48 King George 45.94 King William 27. 16 Lancaster 52.57 Lee ; 65.31 Loudoun 119.74 Louisa. 45. 59 Lunenburg 17. 72 M.— N. Madison 52. 25 Matthews 48. 35 Mecklenburg 20.92 Middlesex 48. 17 Montgomery 26.55 Nansemond 50. 15 Nelson 36. 24 New Kent 30.79 Norfolk 35.00 Northampton 59. 55 Northumberland 71 . 38 Nottoway 24.61 O.— P. Orange 57. 57 Page 45. 94 Patrick 12.85 Pittsylvania 52. 95 Report of Tax Commission — ^Appendix. 137 Powhatan 64. 21 Prince Edward 35.23 Prince George 60. 10 Prince William 68. 75 Princess Anne 43.98 Pulaski 24. 72 Q.— R. Rappahannock 33. 12 Richmond 39. 73 Roanoke 57. 63 Rockbridge 41 . 20 Rockingham 65. 11 Russell 7. 10 S.— T. Scott 7.66 Shenandoah 50. 81 Smyth 16.42 Southampton.*. 40.91 Spottsylvania 39. 59 Stafford 31.65 Surry 41.09 Sussex 38. 19 Tazewell 9. 41 W. Warren 44. 36 Warwick 28.05 Washington 14. 59 Westmoreland 24. 50 Wise Wythe 26. 52 York 26.93 This table needs no comment. Where in purely rural com- munities, unaftected by suburban residence, the valuation varies so widely as between $6.20 in Grayson and $119.74 in Loudoun, it is useless to declare that inequality in the assessment of build- ings is gross and glaring. Inequality Between Cities. A like comparison among cities must manifestly rest on a different basis from that among counties. Acreage is compara- 138 Report of Tax Commission — Appendix. tively a minor matter; per capita valuation is not a true guide; even the aggregate valuation is deceptive. A residence on Frank- lin Road in Roanoke, in Ghent in Norfolk, or on Monument Avenue in Richmond may cost the same amount to build; but the price of land on these streets varies according to the old law of supply and demand, which naturally is governed only by the conditions of the local real estate market. The only true com- parison is that of the ratio ot assessed valuation to real market value in the town or city in question — a subject which is properly discussed under the head Undervaluation. The body of criticism is therefore deferred to that point, but the general conclusion should be mentioned here — namely, that inequality among cities is by no means as great as among counties. The citizens of one city, for instance, contribute nothing to the citizens of another city, compared with what the citizen of Brunswick or the citizen of Highland contributes respectively to the citizen of Greensville or Bath. Inequality Between Cities and Counties. In estimating the inequality in the operation of the land tax between counties and cities, a basis of comparison is not easy. Just as neither the per acre valuation, the valuation of buildings per capita or the aggregate valuation is fair for a comparison between cities, so none of these holds for a comparison between city and county. The proper basis for comparison here, as in the preceding section, is between the percentage of assessed to real valuation. And this subject is properly discussed under the heading "Undervaluation." Let the writer, however, lay down one fundamental in this connection : that county is which property is assessed at 60 per cent, of its valuation is under no obligation to the city in which property is assessed at the same percentage of value. Each pays on the same basis. It readily happens, of course, that a very small increase in the per cent, of assessed valuation in the city over the valuation in the county, will, by the very volume of the tax paid, make a very substantial increase in the excess sum paid by the city, over and above its share; but where the percentage of assessed value is the same there can be no just claim of inequality. Report of Tax Commission — Appendix. 139 Inequality Between Citizens of the Same Taxing District. Investigation has shown that grave inequality exists between the land tax paid by the citizens of the same taxing district. It often happens that a land assessor, intending to do his full duty may place on one man a burden out of proportion to that placed on his neighbor. In such a case, of course, the former citizen has recourse to the courts; but it may as well be admitted that abso- lute equality of valuation, within the county, is a matter of im- possibility. When, however, for any reason, this inequality be- comes marked, the injustice is even greater than that existing where two counties are inequitably assessed. In the latter case the difference in their taxes is comparatively small since the only difference is in their State tax. Within the county, however, an unequal assessment strikes the overassessed citizen with peculiar hardship, since it effects not only his State tax but the much larger and more onerous local tax. The writer has found districts where the assessment made by one assessor was out of proportion to that made by another assessor in the adjoining district of the same county; and has likewise found evidence of apparent inequality among citizens of the same district. In some instances, this latter inequality was due to mistakes of judgment, but in other cases, as will be later explained, there was apparent evidence of partiality. Reports received by us would indicate, for instance, that lands in Tanner's Creek District of Norfolk County were assessed much higher than lands in other districts; other reports from Smyth county make it appear that the assessment in St. Clair district is higher than elsewhere in the county and an examination of individual assessments, compared with the sale's value, have made it obvious that there are few counties in the State where the assess- ment bears the same uniform ratio to the sale's value throughout the county. Second Defect: Varying Undervaluation. The second great defect of the present land tax in the Com- monwealth is that under it has developed marked and varying undervaluation in the assessment of property. The constitution requires (section 169) that land be assessed at "its fair market value," which must be defined to mean the price at 140 Report of Tax Commission — ^Appendix. which the property would sell under normal conditions. The "normal conditions" of sale are proper advertising, a stable market and competitive bidding, without compulsion to sell. The Assembly from time to time has taken to "prescribe" the method by which the fair market value of property is to be "ascertained"; and on its face there would seem to be no reason why this clause of the constitution should be habitually and con- sistently violated. Yet the fact remains that in no local taxing authority in the State is the letter and spirit of the law enforced. Occasional lots of real property may be found which are assessed at their "fair market value," but these are the exceptions. In the main, land is assessed at any other rate than that made compulsory by the constitution. The ill effects of the undervaluations which will presently be outlined lie in the very obvious fact that they constitute inequal- ities of the most obnoxious and insidious sort. Were the law violated by common consent and were lands assessed uniformly at 50 per cent, of their fair market value, there would be little cause of complaint; no one would lose anything in the actual amount of taxes paid and none would contribute an undue part to the expenses of government. But where there is varying undervaluation, inequality is inevitable, glaring, outrageous. In the same way, just in proportion as the percentage of undervalua- tion varies in different parts of the State, the extent of inequality increases. When undervaluation ceases, inequality ends within the class taxed. Extent of Undervaluation. To ascertain the extent of undervaluation has been one of the chief objects of inquiry. Such an investigation is obviously necessary before any readjustment of the tax laws and revenue can be intelligently undertaken. In the course of the work, four sets of estimates of undervalua- tion have been compiled, first, reports by the clerks of courts regarding the ratio of assessed to market value in their counties; second, reports by the land assessors as to the rate of their assess- ment of 1910, third, reports by a select list of private citizens, who communicated their evidence in confidence; fourth, reports by county officers, who likewise gave us confidential information. Report of Tax Commission — Appendix. 141 The figures furnished by the clerks are based on actual transfers recorded in their offices, with only that property included in the transfer of which the actual value consideration is stipulated. These estimates which are manifestly the most reliable, are here appended, with bracketed estimates based on other returns, where, for any reason, the reports of the clerks were unsatisfac- tory. In advance, however, it must be said that these figures are averages only. In every locality special lots of property will be found the. assessment of which is entirely out of proportion to. the county averages; and, in like manner, counties will be fou,nd in which large sales of poor or improved land during the year have respectively lowered or raised the true county average. It will be a matter of years before the exact extent of under- valuation can be absolutely ascertained. RATIO OF ASSESSED TO "FAIR MARKET VALUE" OF LANDS AND IMPROVEMENTS, 1910: BASED ON REPORTS OF COUNTY CLERKS, SUPPLEMENTED BY SPECIAL REPORTS. Percentage of real value p^ shown in assessment. Accomac 25 @ 30 Albemarle 33 Alleghany 65 (40 @ 60) Alexandria 33 @ 50 Amelia 37 Amherst 43 Appomattox (50 @ 60) Augusta 33 B. Bath 40 @ 50 Bedford (65 @ 70) Bland 20 Botetourt 50 or less Buchanan 40 Buckingham (40) Brunswick 55 @ 80 C. Campbell 48 Caroline 60 ® 80 Carroll 20 Charlotte 75 ® 80 142 Report of Tax Commission — ^Appendix. Charles City 60 Chesterfield 60 Clarke 33 @ 40 Craig 40 Culpeper 40 Cumberland 33 D. Dickenson 25 Dinwiddie 33 E. Essex (65> Elizabeth City 40 F. Fauquier 75 Fairfax 36.7 Floyd 18 (25) Fluvanna 35 Franklin 40 Frederick (30) G. Giles 30 Gloucester 40 Goochland . 75 (60) Grayson 20 Greene 57 Greensville 50 @ 60 H. Halifax 65 Hanover (65) Henrico (75) Henry (50) Highland 50 (60) I.— J. Isle of Wight 45 James City 40 K. King George 35 King William 75 (65) King and Queen 60 L. Lancaster 50 Lee 25 Report of Tax Commission — Appendix. 143 Louisa (60) Loudoun 66 % Lunenburg (55) M. Madison 30 @ 40 Mathews ' 43 Mecklenburg (33 @ 40) Montgomery 25 Middlesex (70) N— 0. Nansemond 60 Nelson 65 New Kent 25 @ 40 Norfolk 50 @ 85 Northampton 25 Northumberland 50 plus Nottoway 45 Orange 40 P. Page 33K Patrick (40) Pittsylvania 45 Powhatan (45) Prince Edward 66% Prince George (75) Prince William 38 Princess Anne 50 Pulaski 3334 R. Rappahannock 40 Roanoke 37 Rockbridge 40 Rockingham 42 Richmond 40 Russell 331/g S. Scott (50) Shenandoah 35 Smyth 25 Spottsylvania 33}^ @ 40 Southampton 65 Stafford 33M Surry • 66% Sussex 75 (60) 144 Report of Tax Commission — ^Appendix. T.— U.— V. Tazewell 30 W. Warren 33 Warwick 50 Washington (40) Westmoreland (40) Wise 40 Wythe 36 York 42 Alexandria (65 @ 70) Bristol 40 @ 60 Buena Vista 70 @ 75 Charlottesville 60 Clifton Forge 65 Danville 75 @ 80 Fredericksburg 40 Lynchburg 70 Newport News 77 Norfolk (66^ @ 70) Petersburg 75 Portsmouth (66M @ 70) Richmond (70 @ 75) Radford (70) Roanoke (50 @ 55) Staunton 60 Williamsburg 65 Winchester 50 @ 55 Undervaluation in the Counties. At the outset it will be observed that special and local condi- tions have in many counties affected the apparent rate of assess- ment so that this rate will not accord with the inequitable assess- ment noted in connection with bare land valuation. These con- ditions must be made the subject of special investigation by the proposed Tax Commissioner, who must try to solve the riddle of how a county with a low per acre valuation is still able to show a higher percentage of valuation than a county of like fertility with a higher per acre valuation but a lower assessment. This paradox, however, is more apparent than real, and neither the force of the table just cited nor the point of the comparison is Report of Tax Commission — Appendix. 145 impaired thereby. Granting that the minimum valuation, that of Floyd county, is due to the sale of much "poor" land during the last year, the fact still remains that the valuation in the counties varies approximately from 20 per cent, of the real value to more than 75 per cent. The Grayson assessment, along with that of Floyd, Carroll, Dickenson and Lee, is the lowest in the State and will not exceed 25 per cent. The highest county assessment is probably that of Fauquier, which is easily 75 per cent. To make the force of this comparison the more apparent, let us sup- pose the case of two citizens between these counties, one residing in Grayson and the other in Fauquier, both holding real property to the true value of $5,000. The Grayson citizen's property is assessed at $1,000 and his State taxes thereon amount to $3.50. The Fauquier property is assessed at at least $3,750 and his taxes are $17.12 — almost four times as much as the taxes of the Grayson • citizen. It is submitted that the existence of such a condition is an insult to the principles of democratic government and an in- justice to the honest tax-payers of any community. By what right is one citizen called on to pay four times as great taxes on his property as another citizen of equal wealth? As a punish- ment for what offence of honesty should one tax-payer take from the fruits of his field four times as much to satisfy the government as another citizen with an equal harvest? It has been impossible to examine the land books one by one and to ascertain the extent of undervaluation which are absolutely unbelievable : good farm lands yielding a living are assessed at less than $1.00 the acre; land assessors have returned property at $10.00 the acre when the owners have stated publicly that they would not accept $100 the acre ; houses and lots have been assessed at less than 5 per cent, of what they would bring on the market the next day. Examples of Undervaluation. During the reassessment of 1910, the land assessors were re- quested to mak^ note of some of the most striking instances of undervaluation which they discovered. Most of these which are cited below have been corrected; but there is reason to believe that others will be found equally as bad under the present assess- ment. Ind.ied, the following are typical cases at any time under tha present method of making the assessment. 146 Report of Tax Commission — Appendix. In Accomac county the assessor located a tract of more than 1,200 acres which he found assessed at $5.50 the acre. The land was admirable and its reassessed value of $20 the acre represented probably 60 per cent, of what the owner would ask for the land. In other words the old assessment was about one-sixth of the value of the property. In Alleghany county an assessor found two properties assessed at $372 and $838 which he raised to $475 and $2,026 respectively. Even these assessments probably do not represent the full value of the property. In Amherst county a splendid farm of 288 acres was found to be assessed at little more than $6,300; the new assessment of $11,540 is certainly less than the owner would take for the property. In Buckingham county an assessor found a track assessed at $24.40 which he raised to $1,525; another at $13, which he raised to $500. Granting that the present assessment represents 'full value, the extent of the former undervaluation is obvious. In Charlotte county, we personally found some lands assessed prior to 1910 at not more than 10 per cent, of their real value. In Fairfax county, some values were so low that the assessors were forced to raise them from 50 per cent, to 200 per cent. In Hanover, a mill property was raised from $2,250 to $5,000, though there had been no marked improvements in the property. The previous undervaluation was ridiculous. In Isle of Wight county, the land assessors found the following condition, to quote his own words: "One tract of 83 acres, good land in high state of cultivation, assessed at only $81. One track of two acres with fair buildings with four rooms, cook room, barns, etc., land was assessed for $20 and would have sold for $100 per acre. One of the finest farms in District, over 600 acres, fine buildings, only assessed at a little less than $2.25 per acre." In Louisa, lands assessed at $8 were so ridiculously low that an assessment of $50 was not unreasonable. In Orange, a lot formerly assessed at $200 was reassessed in 1910 at $1,000 and sold for $2,000. Another lot assessed in 1909 at $250 was reassessed at $1,000, was sold for $2,000 and is being held for $2,500. A farm near the town of Orange was assessed in 1909 at $40 per acre and sold for $150 the acre. Report of Tax Commission — ^Appendix. 147 In Powhatan county assessors found lands assessed at $2 and $3 the acre which, in their judgment, should be assessed at $20 and $30 the acre. In Pittsylvania county, one district, a tract of 30 acres was found assessed at $1,000; the assessors considered it cheap at $8,400 and assessed it accordingly. In Prince William county, land was assessed at $4 the acre which probably could not be bought for $15. The assessor of 1910 raised the valuation to $12 in such case. In Princess Anne county prior to this year, land was assessed at $7 the acre which, in the judgment of the assessor would have brought $40 the acre, cash in hand. In Roanoke county, a tract estimated to be worth $30,000 was found to be assessed at $8,773. For another lot of property, adjacent to Roanoke and assessed in 1909 at $6,500, the ownar has been offered $40,000. Another orchard in the same county, assessed at $3,000 produced in 1909 a crop of apples which sold for $16,000. In Richmond county, some lands were assessed so low that the land assessor raised the valuation 500 per cent, and then did not assess them for as much as they would bring on the market. In Shenandoah county, an assessor found a farm of 93 acres assessed so low that he increased it 100 per cent, and even the owner agreed at the time that the valuation was not excessive. In Scott county, one tract of 3^^ acres was increased from $35 to $500 and a number of other assessments were found almost as low. In Sussex county, land was found assessed at $1.50 per acre which probably could not be sold for $33 ; and land was assessed at $100 the acre which was raised to $1.0 the acre and was still within reason. In Williamsburg, central town lots were raised, in some instances from 50 per cent, to 100 per cent, and were within the limit of the law. This list might be indefinitely extended to include tracts and buildings in practically every county in the State. Even in the banner counties of Loudoun, Fauquier and the like — ^where valua- tions are high and the assessment is close — land assessors under oath reported glaring instances of undervaluation disclosed when they went to make the reassessment of 1910. 148 Report of Tax Commission — ^Appendix. It is safe to say that human fancy can scarcely conceive an instance of undervaluation the actual counterpart of which will not be found on the lands books of this Commonwealth. Undervaluation in Cities. Study of the tables printed above will show that land sand im- provements in the cities are generally assessed higher than in the counties. Accepting the estimates returned by the clerks only thirty counties assess at more than 55 per cent, of the real value of the property, while only one city falls below SO and all save four assess at more than 60 per cent. On the other hand, the cities vary much among themselves. Third Defect: Faulty Administration and Omissions in the Land Assessment Law. It is impossible to review the table citied above without asking the question, how can such a condition of affairs ever have arisen? The answer is that there are defects in the laws for carrying out the constitutional provisions requiring the assessment of lands at their fair market value. Some of these defects, it will appear, are due to omissions in the law; others are due to the faulty and care- less administration of existing laws. The appended outline of these is based upon the replies of the land assessors of 1910 to an exhaustive circular sent them. These replies have been verified by personal observation and by discus- sion with those familiar with the operation of the law. First, the Assessment is Not Made by Trained Men. There is defect in the administration of the law in that the assessment of lands is not made by trained men. The statute provides that land assessors appointed by the court shall make the quintennial assessment, but neither the organic nor the statute law prescribes any training or previous experience for the men appointed to perform this most important duty. As a result, only a small percentage of the men named last year had any prac- tical experience in the routine of their work. Of 204 assessors reporting to us on the subject, only thirty-three had made earlier assessments, and only twenty-eight others had been employed in Report of Tax Commission — ^Appendix. 149 even one previous assessment, making a total of only sixty-one who had ever handled land books or "extended" taxes. The remaining 143 had never done the work. Moreover, the court in many cases had difficulty in securing men, even untrained men, really competent to make the assessment. One hundred and eighty-one assessors reported to us on this point, and of this number only eighty-two had sought the place. In many of the remaining ninety-nine cases the appoint- ment was made without the knowledge or consent of the appoin- tees. In some cases the men who took this work upon themselves did so most unwillingly and many of them declare they will never make another assessment. As one of them wrote us, he did not know why he was appointed "unless the Judge had a grudge against him." Finally, the previous occupation of many of these men was not calculated to equip them in any special way for their- work. Of 208 who reported 154 were farmers. This, of course, is a very loose expression and there is as wide a difference in the intel- lectual and special qualifications of farmers as there is in man- kind generally: some of them were very able men and the Com- monwealth was lucky to secure their services; others were by no means well qualified. In any event it was a dangerous experi- ment to select the assessors from the class most widely taxed. Even where the farmer began the discharge of his duties with a full determination to abide by the letter and spirit of his oath, it is safe to say that he had an intuitive leaning to his own class and would, in consequence, be liable unconsciously to put a low valuation on farm lands. Precisely the same objection lies against the assessment of any class of property by men of the same class. Railroad Presidents, for instance, would hardly be chosen to assess railroad property. The following table will show the previous occupation of the men answering our inquiry upon this point. Editors 1 Farmers 154 Commissioners of Revenue 2 No Occupation 3 Lawyers 3 Retired 2 150 Report of Tax Commission — ^Appendix. Real Estate Agents 14 Police officers 2 Merchants 12 Engineers 2 Watchmen 1 Teachers 3 Liverymen 1 Physicians 1 Carpenters 2 Laundrymen 1 Blacksmiths 1 Contractors 2 Insurance Agents 1 Without reflecting in any measure on the assessors of 1910, the writer submits that, generally speaking, the majority of the men mentioned above could scarcely be called technically or specially trained for their work, with the possible general ex- ception of the Commissioners of the Revenue, the real estate agents, the editors and the lawyers. Yet one of the great demands of tax reform in America is that the work be done by men trained in both the theory and the practice of the subject. As one of the leading tax authorities of the country has said, the business of assessment has become a profession and it should never be entrusted to other than professional men. Second: Underpaid Assessors. The second defeat in the administration of the land tax is that the men who did this work were grievously underpaid. The Assembly of 1910, it will be recalled, after long debate, decided to allow the land assessors only $2 the day for their services, with the understanding that the counties and cities were to contribute additional compensation. Investigation has shown that in the absence of direct enactment by the Assembly, the counties seldom paid their assessors anything for their work. Indeed eighty per cent, of the assessors received no other compensation than the paltry $2 allowed by the State, from which sum they had to pay for their board while "riding" and for the keep of their horses. There could be but one result: trained men, whose judgment of values would produce an equitable and reasonable assessment. Report of Tax Commission— Appendix. 151 could not afford to take this work ; the courts had to secure such men as would work for the miserable pay allowed by law. The wonder is not that the assessment of 1910 was bad, but that it is as good as it is. The Commonwealth paid for a cheap assess- ment, — and got it. Those localities, like the city of Richmond, which increased the pay of the assessors to a figure which would warrant trained men in undertaking the work, got what they paid for, — an even and equitable assessment, not very much below the figures required by law. The conditions which crippled the courts in their selection of assessors last year are much to be deplored. Self interest at least dictated liberal pay. Trained men cannot be had without good reasonable remuneration, and without trained men, the assessment contemplated by the Constitution is impossible. A mistaken idea of economy has cost the Commonwealth thousands of dollars as a result of defects in the reassessment of 1910; and ere a new assessment can be made, the loss will easily reach a million dollars. Nor is this all. A proper regard for the land assessors should prompt financial return that is at least decent. Land assessors must suffer much hardship and many indignities. The edge of these must not be sharpened by pay little better than that of the city ditch-digger. We cannot pass from' the subject without expressing the opinion that many of the men who under- took the assessment last year at $2 the day were actuated by patriotic motives and deserve the thanks of the community. Certain it is that they deserve something to make up for the proper pay they failed to receive. Third : The Assessors Were Without Proper Instructions. The third defect in the administration of the land tax is that the assessors are sent to their work without proper instructions. The Auditor of Public Accounts, when transmitting them the land books, forwards a copy of the assessment laws and generally gives such instructions as are adaptable to the whole State. In the nature of the case, however, these are more or less formal and cannot be suited to the particular needs of the individual as- sessor. The law makes no further provisions for the instruction of the assessors, except the provisions, considered below, that they shall confer before they complete the assessment. It has been custo- 152 Report of Tax Commission — ^Appendix. mary, however, for the Judges who appoint the assessors to^in- struct them regarding the assessment laws, to explain to them the nature and importance of their work and to lay down such reasonable regulations for the discharge of their duties as conform to the spirit of the law. Inquiry has shown us that this admirable custom is passing, and that practically fifty per cent, of the assessors receive no instructions from the court. Of about 200 assessors who re- ported to us on this subject, seventy-nine had received no in- struction from the court, and twenty-six had received only copies of the law or instruction to "assess as required by law." In some instances, however, it is worthy of note that the court gave to the land assessors instructions which were admirable both in content and in temper. The instructions given the as- sessors in the district of Judge E. S. Turner, for example, are so carefully worded and so reasonable that they are a model of their kind. In the nineteenth Judicial District, Judge G. K. Anderson called a meeting of all the assessors of the counties of the dis- trict at Clifton Forge, and had them formally confer and exchange views regarding the assessment. The idea was an admirable one, and its effects are already noticeable in that this district has now perhaps the most equitable assessment it has ever enjoyed. In the absence in many cases of detailed instructions from any central administrative office and without instruction from the court, the assessors had to rely upon their own mother wit and upon the conference among themselves provided by law. The statute, it will be recalled (sec. 442) provides that prior to the completion of their labors the land assessors shall meet and equalize assessments. As a matter of correct procedure, the assessors should meet prior to the work of assessment and agree upon the rate of assessment. Still, had the conferences been made the occasion of formal agreement and equalization, they would have been productive of great good. As it was, the con- ferences, while generally held, were informal and were not utilized to produce substantial agreement. Most of the assessors failed to reach agreement among themselves and at most would only promise one another not to assess below a certain figure. It is obvious from this review of conditions that the land as- sessors who had not had previous experience in their work began Report of Tax Commission — Appendix. 153 assessment at a decided disadvantage. In some instances, of course, detailed study of the law, was sufficient, and the work of assessment was well done. In many other cases, however, it is superfluous to say that a correct definition of the law, detailed instructions, guides in the assessment of property, tax maps and the like would have more adequately equipped the assessors for their work. Fourth: The Assessors Proceeded to Assess by Varying and Conflicting Methods. The absence of previous training, the miserable pay and the lack of proper instructions in the discharge of their duties natur- ally combined to produce a result which may be defined as the fourth defect of our tax administration; the assessors proceed to assess by varying and conflicting methods. This was shown in many ways, a few of which may be cited as typical of the whole. A. Different Theories of the "Fair Market Value." Manifestly the basic work of assessment depends upon agree- ment as to the meaning of that section of the Constitution re- quiring the assessment of lands at their fair market value. If the "fair market value" mean the price a lot would bring at a land grabbers' sale, an assessment at fifty per cent, thereof is manifestly lower than an assessment at twenty per cent, of the price which the land would bring under normal conditions of sale. There must be substantial . agreement upon this point where there is the possibility of proper valuation and equaliza- tion. Yet the certified statements of land assessors show the widest possible disagreement on this point. Appended are a few of their replies to the inquiry "what is your construction of the phrase 'the fair market value' as defined in the law for the assess- ment of lands." The land assessors of Accomac disagree; one defines the fair market value to be the consensus of opinion as to the cash value of the property and the other defines the fair market value to be "a fair market value for the purposes of taxation," not a fictitious value. 154 Report of Tax Commission — Appendix. The Albemarle assessors define the phrase to mean respectively, "the price I am willing to pay for a piece of property at a bargain," "such a value that anyone would buy it at once," and the "price it would bring on the market at a sale other than a forced sale." In Alexandria county the assessor construes the term to mean the price for "cash if sold under adverse circumstances," while the assessor of Alexandria city thinks it means "what the prop- erty would bring on the market under normal conditions, but not not at a forced sale." Other definitions are: "What the property would bring when sold at public auction for spot cash." "The value it would bring or sell for at that time." "What it would bring if put on the market." "Value as derived at from all sources, including a price that can be obtained and the percentage of interest that might be realized from a rental or other revenue." "What the land would bring at public auction after being duly advertised." "Value for which the land would readily sell, even under ad- verse circumstances or conditions." "What it would bring if put up and sold." "What it would bring under the hammer for cash." "What it would bring when sold at public auction for cash with little advertising." "What it would bring on the market, payment in one, two and three years." "Price from a sixty day sale, half cash, balance secured by good note or deed of trust on property." A price "just both to the individual and the government." This list might be multiplied to include definitions almost as numerous as the assessors engaged in the work, but these are sufficient to make it obvious that under such varying definition, a uniform valuation is an absolute impossibility and reasonable equality the wildest dream. B. Lack of Uniformity in Per Acre Assessment. It was observed, likewise, that in the absence of instruction, th,ere was the wildest variation in the methods of per acre assess- ment. Some assessors took the pains to ascertain whether or Report of Tax Commission — Appendix. 155 not there was wide variation in the character of the land on a given farm, and where they found such to be the case, gave a per acre valuation to lands of different classes and added the totals. Other assessors, however, merely averaged the farm, good lands, and bad. The result, in most instances, was a per acre assess- ment yielding a total valuation less than a classified valuation. C. Lack of System in the Assessment of Improvements. The absence of experience and instruction led in the same man- ner to a very wide difference in the method of assessing improve- ments. It is obvious that much better and more equitable results can be achieved by uniform procedure in this respect. Where original cost, deterioration, and improvements are given like consideration all through the State every building is assessed on a parity with buildings of Hke construction and existing con- dition. So well appreciated is this method of procedure that in many States formal instructions are given the assessors on these points, with cards forthe proper classification of all improvements. In this Commonwealth, however, our assessors had none of these guides to- efficient work. Their reports show absolutely no system in assessing improvements and comparatively little scientific effort to estimate the present value of any building assessed. The work was done haphazard, except in the cities and in a few counties. The result was inevitably unsatisfactory, from every point of view. D. Lack of Information as to the Extent and Acreage of the Assessment Districts. To the same source — lack of instruction and equipment — must be attributed the next defect in the administration of our land tax laws : our assessors were in the dark as to the extent and acreage of their assessment districts. In all districts save the larger cities,^ they were absolutely without tax maps — so essential to correct work, and had no other index to the extent and owner- ship of property th^n the list of transfers furnished by the clerks and the books of the previous assessment. The lists of transfers, it is pleasant to report, were almost always complete and satis- factory, but the books of the 1905 assessment were found to con- tain numerous errors. Precisely how extensive these were, and exactly how much land is not at present included in the survey 156 Report of Tax Commission — ^Appendix. covered by the land books, is problematical. The assessors, how- ever, report to us that they located and put on the books property to the extent of 40,724 acres and to the assessed value of $233,950. It is likely that many other smaller items were not recalled by the assessors, which, if added to the above would raise the grand total to $400,000. Some of this land had probably been on the books at an earlier date; some of it has probably never paid any taxes. A list of these properties follows: Accomac: two or three small lots of marsh land. Alexandria City : some slight errors in quantity. Alleghany : two lots, value $300. ' Amelia : acres, value $3,000. Amherst: 429 acres, value $3,249. Other tracts omitted during last five years. Augusta: one small tract, value $20. Bath: several small properties, little value. Bedford: 236 acres, value $1,786; four buildings, value $2,125, several small unimproved tracts. Bristol : one lot, value not given. Botetourt : several town lots, value not given. Brunswick: 3,500,000 feet of timber, value $8,350.00. Buckingham: several small tracts. Campbell: thirty-two acres and other tracts, dimensions not known, value $8,400. Caroline: twenty-three acres, value unknown; waste land, value $83. Carroll : ninety-seven acres, value $164; other lands not reported. Clarke: eleven acres, value $550. Clifton Forge : one lot with buildings, value $1 ,700. Chesterfield: 196 acres, value $1,140. Charlotte: buildings not assessed on assessed lands: value $6,000. Culpeper: several tracts, no detailed report. Danville: tract near city limits, value not known. Dickenson: several tracts, value unknown. Dinwiddie: 498 acres, value $2,072. Essex: 2,000 acres, value (estimated) $8,000, with "a large number of buildings, some of them very costly, which had never been put on land books." Fauquier: small, unimportant tracts only. Report of Tax Commission — Appendix. 157 Fluvanna: acres, value $2,000. Floyd: 199 acres, value $796. Franklin: 1,391 acres, value $4,450. Frederick: two lots with buildings and one small tract, value $800. Fredericksburg; lots, value $3,500. Gloucester: 258 acres, value $2,272. Grayson: 7,346 acres, value $14,692. Halifax: acres, value $7,050. Henry: "several hundred acres," value not known. Hanover: 357 acres, value (estimated) $3,065; other small tracts not included. James City: fifty-eight acres, value (estimated) $174. Isle of Wight: 599 acres, value $3,999. King and Queen : several small tracts of little value. Lee: 1,531 acres, and other tracts of unknown dimensions, $5,969. Loudoun: 135 acres, value (estimated) 540, acreage unknown, $5,580, several lots increased in acreage. Louisa: 932 acres, value $4,423.50. Lunenburg: several small tracts, value $150. Madison: one small tract only. Mecklenburg: acres, value $2,900. Middlesex: five tracts, value (estimated) $8,000. Montgomery: acres, value (estimated) $3,000. Nelson: 1,713 acres, value $3,510. "It was mostly mountain land. There was none of it very important. I dropped more than I took up, in my opinion." New Kent: small scattered tracts. Northumberland: one acre, value not given. Northampton : several small tracts of trifling value. Orange: 1,395 acres, value $25,340. Patrick: 451 and other tracts, $1,745. Powhatan: 270 acres, value $1,210. Pulaski : few vacant lots only. Page: few small tracts, value $400. Portsmouth: eight lots, value $1,200. Pittsylvania: 100 acres and small lots, value $1,200, 299 acres, value $1,500. Prince William: "308 acres, value $2,404." 158 Report of Tax Commission — Appendix. Princess Anne: "two or three tracts, value about $4,500." Radford: a few town lots, value not stated. Roanoke: acres, valuation $1,500. Rockbridge: 188 acres, value $432; acres, value $6,918. Rockingham: 9,000 acres, value $5,850. Rappahannock: 200 acres, value (estimated) $2,000. Richmond: small tracts, value $300. Richmond (city) : numerous lots, value small, not given. Russell: 102 acres, value $153; several other small tracts. Southampton: 420 acres, value $1,680. Smyth: certain unimportant tracts of mountain lands and one house and lot, value not given. Shenandoah : acres, (estimated) $4,000. Scott: 5,000 acres, value $20,000. Sussex: acres, 27,000. One district reported an increase of 4,880 acres. Surry: acres, value $6,030. Tazewell : few town lots of small value. E. Lack of System in Checking Up the Land Books. The next detect in the administration of the land tax is the absence of any satisfactory system for checking up and comparing the land books. Generally speaking, the improvements and changes made between the quintennial assessment of lands are properly reported by the Commissioners of the Revenue ; and, as a consequence, except for omissions and errors in the previous general assessment, the books are in satisfactory condition when they reach the land assessors. When a new assessment is completed, however, our system is faulty in checking up the work. The law requires that the books be made out in triplicate by the assessors, properly added by him, when complete, be compared by the clerk of the court. (Pollard Code, sec. 521). The clerk is allowed only a small fee for this ($15 @ $35) and, in consequence, is unable to give to the work the attention it deserves. In the case of a large land book, including, say, 5,000 entries, it is manifestly impossible to prevent a great many errors under this system. Try as they will, land assessors will make errors in copying the books ; and be as accurate as they may, clerks will not always detect these errors. Thus it often happens that a number of numerals will be dropped from an Report of Tax Commission — Appendix. 159 assessment, as, for instance, in a case noted by the writer, where an assessment on a country hotel was changed, by dropping two digits, from $1,600 to $16. It is impossible to estimate how much the Commonwealth loses through this or to state what complica- tions arise because of it. Lack of System in Assessing Town Lots. Again, our administrative tax laws are faulty in their provisions for the assessment of town lots. This work is done by the land assessor for the district, where the town is not a separate district in itself. Provided the assessor is competent this system is about as good as any that can be devised ; and its great defect lies in the fact that there are no adequate provisions in the law either for ascertaining town lot values or for compelling land assessors to make the separate valuation required by law. We do not be- lieve that the assessment of town lots and improvements is worse than the assessment of farm lands; but an examination of special values leads us to believe it is every whit as bad. In fourteen counties, the assessors return no town lots and buildings, though, as a matter of fact, there are towns in practically all these coun- ties. Manifestly, since town lot values are generally high, the Commonwealth should see to it that land assessors assess these on a basis of real value and carefully report them. If they are farm lands, they should not be carried as town lots; if they are town lots they should not be assessed with farm values. Standing Timber is Not Properly Assessed. The next defect in the administration of the land tax law is that standing timber is not always assessed, and that no satisfactory record of the sale of such timber is available. The law requires that where standing timber on the property of one freeholder has been sold to a second party, it shall be assessed against the latter. Technically speaking, where the seller is willing to assume the tax by not telling the assessor that the timber has been sold, the Commonwealth loses nothing, provided the value of the tim- ber is given due consideration in the assessment. But it often happens that the seller will not report the sale of the timber for fear the Commissioner of Revenue might ask questions as to the disposition of the receipts — a course which is rendered all the 160 Report of. Tax Commission — ^Appendix. easier since land assessors seldom assess timber on the property of the orginal owner at anything like it real value. The writer finds that forty-seven counties report no standing timber. While he has not been able to check up these counties, one by one, in some instances he has positive evidence of standing timber sold, while in the other cases it is not unreasonable to suppose that such sales have been made. H. Fundamental Defect: The Absence of Supervisory Power. The seven defects which have been enumerated in the adminis- tration of our tax laws may be summarized into one; there is no supervisory power over the work of the land assessors or over their finished work. This is the fundamental defect, to which most of those enumerated above are directly attributable. From the time the land assessor is appointed until his books are sent to the clerk for verification, he is responsible to no man. He knows only that if his assessment be too high, it may be reduced in court and he is aware that this process will require his appearance and defense. He knows, likewise, that if his assessment be high, he may expect the ill will and resentment of his neighbors, who are naturally anxious to escape with as light taxes as possible. On the other hand, if he assess too low he has little to lose; the law for correcting such assessments does not affect him. His fees are the same in any case and he may gain the good will of his county-men by making an assessment which even his enemies will confess to be "reasonable." Finally, during all this time, he is without instruction or assistance; is he is in doubt as to values, he has no responsible head to whom he can look for advice. If he raise a storm of opposition, there is none to en- courage him or to support him in fair assessment. There is only the Auditor of Public Accounts, to whom he is responsible ; and the Auditor has no force with which to supervise the work of the assessment, even if he were the correct officer for that work. We submit that in the premises, it is unreasonable to expect a proper assessment. When the land assessors' books are completed, they are sent to the Auditor of Public Accounts. In the office of the latter they are examined by men who may never have been in the county assessed — men who know nothing of local conditions and who, in the discharge of other duties, are practically impotent Report of Tax Commission — Appendix. 161 to give to the work the attention it deserves.* What they are able to do, they do well; but they are obviously not the proper officers for this work and cannot pass adequately on the facts presented. The result of the whole is that the assessment of lands, on which almost twenty per cent, of the State's revenue depends, is in the hands of practically irresponsible local officers. That such a condition of affairs should have given us an increased valuation of even seventy-seven million in 1910 is little short of miraculous — a tribute to the fundamental honesty of our asses- sors rather than to any good features in the system of assessment. Fourth Defect: Reassessments are at too long Intervals. To inequality, undervaluation and defective administration of faulty, laws must be added the fourth and final criticism of the existing system. The quadriennial assessment of lands is too infrequent and operates to deprive both locality and State of proper revenue. The nature and extent of this defect can best be illustrated by a single example. Between 1905 and 1910 no new assessment lands was possible in the city of Richmond. Where lots were im- proved by buildings, it was, of course, possible to assess the build- ings; but the lands paid taxes in 1910 on the basis fixed in 1905. During this time, however, the progress of the city was won- derful. In 1905, there were comparatively few buildings west of Allen avenue; the field was barren and, while the assessment was at about sixty-five per cent, of the value of lots in the locality, the value was not great. After 1905 however, the overcrowded con- dition of the city and the increased wealth of the citizens led to an immense building movement in the West End. Houses sprang up literally by the hundred, great improvements were made; values doubled, tripled and, in some instances, quadrupled. Yet until the present year the land in which these houses were built paid on the same basis as in 1905. In other words, for a period varying *In this connection we wish to commend the services of Mr. W. R. Parr, who has charge of the land and personal property books in the offices of the Auditor of Public Accounts. Mr. Parr is a man of unusual ability and of close attention to his duties. In view of the fact that he has little assistance in his examination of the books sent him, he has done admirable work in briaging them to their present degree of accuracy. He has frequently worked fourteen hours a day to keep his books to date and has shown a most commendable zeal and fidelity in the discharge of import- ant work. 162 Report of Tax Commission — ^Appendix. from five to one year, land owners paid on an assessment much below the real value of their property and much below the general standard of the city. The situation was rendered even worse from the standpoint of the Commonwealth and the city by the fact that these lands had originally been bought very cheaply and were being held by land speculators and investors for precisely what happened : the westward expansion of the city. When these lands were sOld, the owners profited by the move- ment of the city and realized the so-called "unearned increment" on precisely that "community value" of which the single-taxers speak. Roughly speaking, the valuation of lands in the West End of Richmond in 1910, was about 300 per cent, of what it was in 1905; yet during all this period, when investors were realizing fortunes, the Commonwealth was gaining nothing. The same conditions existed in Danville and in a number of other cities. In Danville — almost a model city from the stand- point of taxation — the following table will show how values in- creased in an outlying section annexed in 1908: Location. Valuation in 1905. Valuation in 1910. West Main street . . $666 $6,000 West Main street. . 150 2,000 West Main street . . 50 2,000 West Main street . . 150 1,750 Randolph street . . . 50 800 We submit that even granting that the Commonwealth should receive no more revenue from this property than a tax on like values elsewhere, it should at least have some revenue from these lands during the time their value is increasing by leaps and bounds. Manifestly the fault lies in the long period between assessments, and in this respect Virginia is one of the most backward of States. Only five other States assess so infrequently; the others have found that the rapid increase in values outstripped the slow as- sessment. Virginia is progressing; her advance is wonderful; her lands are increasing in value as never before in our history. It is only fair that the Commonwealth should share, year by year, in the prosperity and riches of the citizens she protects. Report of Tax Commission — -Appendix. 163 General Summary of Defects in the Land Tax. Our land tax needs reformation and amendment for the four general reasons that under it gross inequality exists, under- valuation is rampant, the administration of the laws is defective, and the reassessments are too infrequent. Keeping in mind these general facts and the various particulars, outlined above, in which the administration is defective, let us pass now to a considera- tion of the remedies proposed for these evils and of the steps necessary to place our land tax law on a proper footing. Briefly state, the following are the general remedies. The writer proposes: First, the appointment of a State Tax Commissioner, subject to the General supervision of the Tax Commission outlined in the chapter of personal property, who shall have general super- vision of the land assessment, according to the specific conditions laid down below. Second, the assessment of lands in every county and city ac- cording to the actual market price of such lands, the same to be determined fro-m the transfers of property recorded in a method to be outlined below; and the taxation in the counties of lands at an average per acre on the basis of the values so determined with the taxation of lands in the cities according to a system of standards based on transfers recorded. Third, the abolition of the land assessor as a special officer of assessment. Fourth, the establishment of local boards of equalization for each county or city, where the local authorities may so decree, which Board may equalize assessments but may not reduce the county average fixed by the State Tax Commission. Fifth, provision at law by which the transfers recorded may be- come a true index to the market value of property. Sixth, constitutional amendment to place the dates of re- assessment in the hands of the General Assembly. Operation of this System. Before outlining the many advantages of this system, let us first follow its proposed operation, in order that the underlying principles of the whole may be understood. 164 Report of Tax Commission — ^Appendix. First, a constitutional amendment is enacted, by which the General Assembly is empowered to order a reassessment of lands whenever it thinks proper. Under such a system, let us suppose a reassessment to be ordered for the year 1915, as now fixed by law. Ere the work of assessment were begun, the State Tax Com- missioner would prepare a list of averages, showing at what aver- age price per acre lands have been selling in the various counties of the State and a like list showing the price at which lots of standard dimensions have been selling in the various cities and towns of the Commonwealth. At present, such a list could only be prepared with the greatest difficulty. Under the proposed plan it would be comparatively simple. Every transfer recorded in the county during the last year would be accompanied by a statement of the owner, on file with the clerk, which statement would show the exact valuable consideration involved in the transfer. From this list under normal circumstances, the Com- missioner would be able to tabulate the number of acres sold and the price paid therefor. This would give the average sale's price per acre. If, for any reason, the land sold were below or above the county average in character, this fact would also be recorded by the Commissioner. At a fixed time, prior to the Assessment, the State Tax Com- mission would gather. This body, composed of the Governor, the President of the Senate, the Speaker of the House, the Chair- man of the Corporation Commission, the Chairman of the Finance Committees of the House and Senate, the Treasurer, the Auditor of Public Accounts, the Attorney General and the Tax Commis- sioner would consider the averages proposed by the last named, would hear any protest made against these by any county or municipality and would then fix the average, giving the county the right of appeal. At the same time they would approve such general regulations for the assessment of improvements and for ascertaining excess values as they deemed reasonable. When this work was complete the assessors would be appointed by the courts. Under the proposed law the assessors will be Commissioners of the Revenue, trained in the work of assessment. These Commissioners would then name a proper number of deputies, directly responsible to them, who would begin the work of assessment. In the discharge of their duties, they would have the constant support, guidance and suggestions of the State Tax Report of Tax Commission — ^Appendix. 165 Commissioner and, in cases of doubt, might call on him for advice and even for direct assistance in the work of assessment. They will have uniform instructions, will know precisely how to esti- mate the value of improvements, of the extent of deterioration and will be under constant supervision. If they fail in the dis- charge of their duties, they can be suspended by the Tax Com- missioner and, with the consent of the Tax Commission, can be supplanted by new assessors. The assessors, likewise, will have a much simpler burden with their people and will not be subject to local influence to the same extent as at present. They will be compelled to assess at a figure which will yield a standard per acre average and their chief care will be to equalize the assess- ments within the county. When the work of assessment is complete, the county board of equalization, composed of the clerk of the court, the county treasurer, the Commonwealth's attorney and the assessor for the district, can meet and pass on the assessment. They shall be empowered to change any assessment and to equalize the same within the county or district, provided that in so doing they shall not reduce the county average. When the corrected books are sent to the Auditor of Public Accounts they are to be duly examined by the Tax Commissioner and, if it be found that they contain a true statement of the acre- age of the county and show a per acre valuation equal to the per acre valuation fixed for that county by the Tax Commission and an assessment of town lots according to the standard fixed by the Tax Commission, the books shall be accepted by the Auditor and the assessor shall be given proper remuneration. If the books are not properly made out, pay may be withheld until they are corrected; or the Tax Commissioner may order a reassess- ment, by a special deputy, in which case the new assessor shall receive the pay which would otherwise revert to the original assessor. In case any citizen is aggrieved by the assessment made by the local assessor and approved by the local board of equalization, he has the appeal now authorized by law; in case any county, town, city or any twelve citizens of any one of these feel aggrieved at the average leviejd, they shall have appeal to the Circuit Court of the City of Richmond for a modification of the average, with the costs on the plaintiffs in case the average be sustained. 166 Report of Tax Commission — ^Appendix. Advantages of this System, Careful investigation of the systems of equalization in other States shows that this is the best and most efficient that can be devised under existing conditions. Its advantages are numerous, its operation is simple and its results — if the experience of other States be a guide, cannot be otherwise than satisfactory. Some of the advantages of this plan may be enumerated here: First, its assures uniform valuation at a rate required by law. The fair market value is manifestly the value of property sold on the market. Reliable transfers show values on the market. If these be accepted as the basis and land be assessed accordingly, all land is manifestly assessed at its fair market value. Thus, undervaluation with all its consequent evils, is impossible. Second, it will re-establish that equality in taxation which lies at the basis of our legislation. When all land, in all counties is assessed at what that land brings on the market, then equality is established. The only differences in the taxes paid by the citizen of Smyth and the citizen of Southampton will be the difference in the value of property held by them. Each will pay precisely in proportion to the market value of his property; neither will be bearing an unjust part of the public burden. Third, all variations in the county average will be considered to give the true average, thus establishing the truest possible equality. It would manifestly be unfair to assess a given county on an aver- age given one year's sales by the transfer of the largest and most valuable farm there; it would be equally unjust to fix the average on the basis of a year's sales in which, for any reason, a majority of the land sold was bare mountain land or waste swamp land. The Tax Commission will have the transfers of an entire year at hand and will, in this manner, be able to make a reasonable average ; but in case any untoward circumstances affect the county average, the county will then have the right to be heard in ex- planation of this and the Tax Commission, representing all sec- tions of the State and all interests, will be able to give a fair valuation. Fourth, this system gives every locality an opportunity for absolute justice and equahty. No locality can be assessed with a fixed per acre average without being heard, and, if the decision of the Tax Commission seem unreasonable, the county still has the Report of Tax Commission — ^Appendix. 167 right of appeal and can be heard before the Circuit Court of the City of Richmond. This process is amply sufficient, in our judgment, to insure the interests of the locality and to protect them against any unreasonable discrimination of injustice. Fifth, this system will enable a county to equalize assessments within its own borders, without 'depriving the State of its proper revenue and without placing a burden on other communities. The county average is fixed; no county can change this and, by the uniform assessments of improvements, buildings throughout the State will bear their proper part of the public burden. But within the county, a board of competent men, including the offi- cers of the county, will be empowered to equalize taxes and to make sure that while every citizen pays his proper taxes to the State, these taxes, equal between counties, shall likewise be equal between citizens of the same county. At the same time, through the operation of the average, the State will be protected from equalization which reduces the proportionate part any county pays toward the public charge. Sixth, the Commonwealth is assured the services of a trained company of assessors. The Commissioners of the Revenue are permanently employed in the work of assessment. They have no other occupation in most instances and give a great part of their time, if not their whole time, to the work of assess- ment. It is folly to supersede these men in the most important work of assessment by a group of men who often have no pre- liminary training whatever. If they be named as assessors, all their experience can be brought to bear in making a proper assessment ; they will have the benefit of the knowledge required between assessments regarding the cost of improvements; from their property books they will know how much personalty each land owner has, and, in this way, can judge his general standard of living. Seventh, the Commonwealth and the localities are guaranteed against an improper or careless assessment by the employment of men whose term of office and whose remuneration makes them responsible alike to the State and to the locality. The Com- missioner of the Revenue is elected or appointed. In either case he is responsible to the people ; but as much of his pay comes from the State, he can be held to a strict accountability. Moreover, as the proposed plan gives the Tax Commission power to remove 168 Report of Tax Commission — ^Appendix. him, for good cause, or to appoint a special assessor, he can be expected to properly discharge his duties. Eighth, the Commonwealth and the localities are assured a uniform method of assessing improvements, thereby restoring equality and proper valuation in this class of property. It is impossible to enact statute for the assessment of improvements. These vary so much and have to be judged by so many standards, that some degree of discretion must be given the administrative authority. In other States, it has been found that the best method of procedure is to empovirer the Tax Commission to adopt uniform rules which can be applied and adjusted under all condi- tions, to the various classes of improvements. Ohio, New Jersey, New York, and other States have recently formulated such regu- lations; they work admirably; if adopted in Virginia they would secure like uniformity of assessment. Ninth, the land assessors will have ample legal backing in their work of assessment. This is an advantage which is much greater than would appear at first sight. Protected as he is by existing statutes, the land assessor still has that tremendous element of personal judgment in his work. While the law says he must assess at the "fair value," it leaves him to say what the value is. Grudging tax-payers, personal friends, powerful interests can often intimidate the land assessor into making an assessment not proportionate to the value of the property. And if asked about the assessment, he can always say that in his judg- ment, the assessment was at the fair market value. All this will be changed when the land assessor has to produce a county aver- age. He can tell the tax-payer that he must, under the condi- tions of his office, assess at an average of so many dollars an acre. His only discretion will be in determining how much above or how much below the average of the county is the property of the individual. This gives him a stability in his work which could not be given by a sheaf of statutes. Tenth, the land assessors will have ample moral support in the discharge of their duties. It is a mistake to suppose that every land assessor wishes to violate the law. Many of them start out with a determination to obey the letter and spirit of the law, they fail in this, on many occasions, because they lack moral support. Report of Tax Commission — ^Appendix. 169 An instance of this, occurring during the reassessment of 1910 will be typical of conditions. A land assessor from one of our counties wrote the Commission that he was having much difficulty in making his assessment and that in obeying the law he was encountering much opposition. He asked for our support and encouragement. A member of the Commission visited this assessor, went over some of his work, and while advising him that the Commission had no authority in the premises, promised such moral support as could be given. The effect was admirable — doubly so when the member of our Commission met a company of disgruntled tax-payers, told them that the land assessor was in the right and reminded them of the provision of law, by which, if they lost their appeal for a reduction in the assessment, the court might raise the assessment to the real market value. We believe that if all the assessors had the same moral support, their work would be much more satisfac- tory. Eleventh, under more frequent assessments, as contemplated in the statute, the Commonwealth and the localities would get the benefit of the "unearned increment" and would share in the rise of values just in proportion as they increased. This advant- age is so obvious that we do not think it worth while to enlarge upon it. The only objection that can be raised to it is that it tends to produce instability in the real estate market. A man will hesitate, it is argued, to purchase property, when he does not know what the next year's assessment on that property will be. In answer to this it need only be said that it is not the policy of the Commonwealth and never will be, to burden the private citizen, and that no man has a right to share in the prosperity and progress of the Commonwealth without contributing his part to its support. Twelfth, the final advantage of this system is that it will pro- duce either a very great increase in the revenue of the Com- monwealth and of the localities or it will permit a market de- crease in the tax rate. The following table will show the real value of the real estate and improvements in the Commonwealth, estimated on the basis of the assessed to the real value. This table, it will be observed includes improvements and town lots, two items not considered in the bare land valuation cited above. 170 Report of Tax Commission — ^Appendix. TABLE SHOWING THE ESTIMATED TRUE VALUE OF REAL ESTATE AND IMPROVEMENTS IN THE COUNTIES AND CITIES OF THE COMMONWEALTH, ON THE BASIS OF ASSESSED VALUES 1910.* County OR City. Assessed Value Real Estate and Im- provements. Percentage of Assessed to Real Value. Estimated True Value. Aceomac Albemarle Alexandria. . . . Alleghany Amelia Amherst Appomattox . . . Augusta Bath Bedford Bland Botetourt Brunswick Buchanan Buckingham. . . Campbell Caroline Carroll Charles City . . . Charlotte Chesterfield . . . . Clarke Craig Culpeper Cumberland. . . Dickenson Dinwiddle Elizabeth City . Essex Fairfax Fauquier 5,180,059 5,325,125 4,022,667 2,970,893 1,129,240 2,117,184 1,164,076 10,532,499 1,310,331 4,277,081 592,035 2,627,625 3,654,166 17,785 1,567,230 3,780,865 2,200,305 718,190 792,917 2,583,534 5,401,980 2,480,297 567,132 2,929,592 1,087,199 2,071,249 4,222,387 1,262,344 5,224,970 7,351,944 25 ® 33 33 33 @50 65 (40 @ 60) 37 43 (50 @ 60) 33 40 @50 (65 @ 70) 20 50 or less 55 @80 40 (40) 48 60 ©80 20 60 75 @80 60 33 @40 40 40 33 25 33 40 65 33.7 75 15,715,330 16,136,742 8,045,334 4,570,604 3,052,000 4,932,683 1,940,126 35,073,221 2,602,662 6,110,115 2,960,175 5,255,250 4,567,770 44,462 3,918,075 7,876,802 2,750,381 3,590,950 1,321,528 3,229,417 9,003,300 6,200,742 1,417,830 7,323,980 3,620,372 6,897,259 10,555,967 1,942,067 15,504,362 9,802,592 *In preparing this table, care has been taken not to overestimate the true value of property. As a means to this end, where clerks reported a variable valuation, as for instance "40 @ 60," the higher figure has been used, except in the case of Norfolk County, where a reasonable one (70%) has been employed. The lower figures would show an increased revenue of about $200,000 in addition to that shown in the table. We have preferred however to cite only figures on which we felt assured the Assembly could base a safe estimate. Report of Tax Commission — Appendix. 171 CotTNTY OR CiTT. Assessed Value Real Estate and Im- provements. Percentage of Assessed to Real Value. Estimated True Value. Floyd Fluvanna Franklin Frederick Giles Gloucester Goochland Grayson Greene Greensville Halifax Hanover Henrico Henry Highland Isle of Wight . . . James City King George .... King and Queen . King WilUam . . . Lancaster Lee Loudoun Louisa Lunenburg Madison Mathews Mecklenburg Middlesex Montgomery .... Nansemond Nelson New Kent Norfolk Northampton. . . Northumberland . Nottoway Orange Page Patrick Pittsylvania. . . . Powhatan 906,867 767,288 1,781,791 3,306,588 906,303 1,462,659 1,247,949 1,106,890 682,711 1,601,420 4,837,297 3,267,910 12,259,268 1,838,225 2,580,227 2,713,675 827,460 627,668 951,515 1,102,235 1,057,418 1,379,548 8,285,311 1,958,632 1,042,197 1,765,764 911,107 2,633,657 1,139,205 2,263,775 4,144,548 1,686,049 622,662 16,571,796 2,478,883 530,763 2,277,497 2,711,166 1,973,710 1,297,684 5,920,636 1,025,974 18 (29) 35 40 30 30 40 75 (60) 20 57 50 @60 65 (65) (75) (50) 50 (60) 45 40 35 60 75 (65) 50 25 66% (60) 55 30 ©40 43 33 ©40 70 25 60 65 25 © 40 50 © 85 (av. 70) 25 50 45 40 333 40 45 45 1 922, 4 454, 11 021, 3 021, 3 656, 1 663, 5 534, 1 197, 2 669, 7 441, 5 027, 16 345, 3 676, 4 303, 6 030, 2 068, 1 793, 1 585, 1 469, 2 114, 5 518, 12 440, 3 264, 1 894, 4 414, 2 118, 6 854, 1 627, 9 055, 6 907, 2 593, 1 456, 23 673, 9 915, 3 061, 5 061, 6 777, 5 927, 3 244, 13 156, 2 279, 468 510 477 960 016 647 932 450 738 033 995 553 690 450 783 388 650 337 858 645 836 192 406 386 903 410 853 142 435 096 580 921 655 994 532 526 104 915 057 210 968 942 172 Report of Tax Commission — ^Appendix. County Assessed Value Percentage of Estimated True OE Real Estate and Im- Assessed Value. City. provements. to Real Value. Prince Edward 2,516,393 66% 3,778,367 Prince George 1,749,037 75 2,332,049 Princess Anne 2,899,274 50 5,798,548 Prince William 2,771,489 38 7,293,392 2,736,435 333 8,217,522 Rappahannock 1,521,403 40 3,802,507 Richmond 760,170 40 1,900,425 5,168,259 37 13,968,267 Rockbridge 4,101,952 40 10,254,880 Rockingham 11,640,273 42 27,714,935 Russell 1,550,308 1,496,297 333 50 46,555,576 Scott 2,992,594 Shenandoah 4,182,338 35 11,949,530 Smyth 2,375,175 25 9,500,700 Southampton 3,476,631 65 5,348,663 Spotsylvania 1,380,323 33 3,450,807 Stafford 902,755 1,667,719 333 666 2,710,975 2,504,082 Sussex 2,434,691 75 (60) 3,246,254 Tazewell 2,584,041 30 8,613,470 Warren 1,443,493 333 4,334,819 W^arwick 1,685,290 3,487,703 50 40 3,370,580 Washington 8,719,257 Westmoreland 1,402,900 40 3,507,250 Wise 268,563 2,784,320 40 36 671,407 Wythe 7,734,222 York 821,658 42 1,956,328 Report of Tax Commission — Appendix. 173 Cities. Asssssed Value Real Estate and Im- provements. Percentagj of Assessed to Real Value. Estimated True Value. Alexandria Bristol 5,103,563 2,397,425 630,891 2,642,000 1,552,220 7,969,711 2,408,372 16,421,230 9,089,581 43,966,950 9,820,780 8,785,730 78,326,898 '1,237,975 14,275,110 2,880,535 566,460 2,321,991 (65 @ 70) 40 @60 70 @75 60 (65) 75 @80 20 (70) 70 1 77 666 @ 70 75 666 @ 70 70 @75 70 50 @55 60 60 50 @55 7,290,807 3,829,041 841,188 4,403,333 3,388,030 9,902,138 Buena Vista Charlottesville Clifton Forge Danville Fredericksburg Lynchburg Newport News Norfolk 3,440,531** 23,458,900 11,804,650 62,809,928 Petersburg Portsmouth Richmond 13,094,373 12,551,042 104,435,864 Radford 1,768,535 25,954,745 Staunton. . . 6,467,553 Williamsburg Winchester 944,100 4,221,801 This table proves the point. The present assessed value of real estate and improvements is $477,078,768; the true value, as estimated, is $897,649,711. The present assessment is therefore but 53 per cent, of the real value and the revenue is in proportion. If the Assembly adopts this plan, it can have available after the next assessment of lands a new revenue of $1,471,998. This represents the difference between the present assessed revenue from lands, $1,669,775 and the assessable revenue on the basis of the true value, $3,141,773. We do not believe that the Assem- bly should exact taxes to this amount from our citizens and would recommend that in lieu of increasing our revenue, the pro- ceeds of this tax be applied to a reduction in the tax rate. To state the case succinctly, if the Commonwealth will put into **One Fredericksburg authority places the percentage valuation at "from 15 to 20 per cent.," others give a higher figure. In the table of Undervaluations a mean percentage of 40 per cent, has been taken, but to insure a conservative statement, 70 per cent, has been allowed in this calculation. fAfter this table was prepared, the clerk of the Corporation Court filed exact figures, showing the valuation to be 72.3 per cent. 174 Report of Tax Commission — ^Appendix. effect the statute recommended the land tax can be reduced to 20 cents. This will be obvious from the following table, based on a tax extended on a valuation of $897,249,711, the estimated true value of real property. Rate of Tax. Assessed Revenue. 18c $1,615,769 19c 1,705,534 20c 1,795,299 The Assembly could certainly perform no greater service for Virginia and could send no better advertisement forth to the world, than to adopt the laws which will cut our tax rate from 35c to 20c. The world judges rates of taxation, not of assessment. While equalizing taxes, and securing a full valuation, let us have as low a tax rate as possible. The final advantage of this system is that it is based exclusively upon the experience of other States and offers that solution of inequality and undervaluation which has been found efficacious. While our proposed system does not copy in its entirety the code of any one State, it contains those provisions from the laws of Michigan, Kansas, West Virginia and other States which have enabled those States to reform their tax laws, to remodel their financial systems, to equalize assessments and to reduce their tax rates. Every provision is backed by the experience of successful American Commonwealths. Objections to this System. A careful criticism of the plan here proposed discloses what may appear to be minor defects. A word of explanation must be given these. The System of Averages. Objection may be made, for instance, to the system of average valuations which we propose. None will deny that the machinery for ascertaining these averages and the appeal allowed any locality is sufficient for the protection of its interests; but it may be ob- jected that our experience will duplicate that of Michigan; the assessment of no county will ever be above the average fixed by law. Report of Tax Commission — ^Appendix. 175 In answer to this it may be said that where the average truly represents the sales value, there is no reason why the assessment should exceed the average. If it reaches the average, the State is satisfied; that the average be equalized within the county is a matter for the consideration of the county, not of the State. We believe the Commonwealth can afford to levy a low tax on the true average, based on sale's value and will still secure proper revenue from lands. Centralization . It may likewise be objected that this system centralizes the administration of our tax laws too much into the hands of a small group of men. Such a system it will be argued, is contrary to the genius of our Constitution, and should not be approved. To meet this outworn objection, but one statement need be made: no State has ever yet devised a tax law which will maintain equality and secure uniform assessment, unless that law be administered by a central supervisory authority. We wish to emphasize the pbint with all our power, and we cannot overstate its importance: Virginia can never hope to establish a reasonable and equitable tax code in the place of the present outrageous conglomeration of law, unless she is willing to entrust the admin- istration of the law to a centralized administrative authority with ample powers and some discretion. The system we propose does this as far as is necessary but no further. The powers of the proposed Tax Commission are limited; he is under the supervi- sion of a responsible Commission composed of the chosen officers of the people. If the proposed Commission cannot be trusted, it is high time to call representative government a farce and a failure. Recording Transfers. It may be objected, likewise, that the requirement for the recordation of transfers is an unreasonable burden on those who, for valid reasons, wish to conceal the amount involved. In answer to this it may be said that such a system is essential to the operation of any law basing assessments on true value. Furthermore, there can be no valid objection to the plan we pro- pose : every transfer in recording which either party may not wish 176 Report of Tax Commission — Appendix. the consideration known, can be filed to the clerk and be kept as a sealed record, open only to the State Tax Commissioner or his deputy. Summary of Recommendations: First, the appointment of a State Tax Commissioner with general powers of supervision and administration as outlined in the chapter on Personal Property. Second, the appointment of a State Tax Commission, with power to fix the average of valuation for lands in the counties and cities. Third, the taxation of lands on the basis of actual transfers of lands, requiring the assessment of any district to show an average valuation equal to the average sale's value of land. Fourth, the enactment of law providing for the establish- ment of boards of equalization in counties and cities desiring them, which boards shall have power to change the assessment within the county but not to modify the county or city average. Fifth, the enactment of statute authorizing any county or city or any twelve citizens thereof to appeal from the average fixed by the State Tax Commission. Sixth, the enactmept of law giving the State Tax Commission and its executive officer, the State Tax Commissioner, the power to promulgate reasonable rules and regulations for the assessment of improvements. Seventh, the enactment of laws providing for the removal or suspension of land assessors who fail to maintain the average fixed by the State Tax Commission or who neglected their duties, giving to such assessors the right to be heard before the State Tax Commission. Eighth, the abolition of the land assessor as a separate officer of law and the assessment of lands by Commissioners of the Revenue or their deputies. Ninth, the enactment of law requiring that all transfers of property be accompanied by sealed statement, filed with the clerk, showing the actual valuable consideration involved, which statements shall be made the basis of the county averages. Tenth, the amendment of the Constitution so as to provide for the reassessment of lands at the discretion of the General Assembly. Report of Tax Commission — ^Appendix. 177 CHAPTER IV. THE INSURANCE TAX LAWS. In considering the existing insurance tax laws of the Common- wealth, both the principle involved in these laws and the rate of the taxes imposed by them must be considered. The two are inseparable. Even if the rate of these taxes as levied at present be found correct, the system cannot- be approved until it be demonstrated that the principle of taxation under which these taxes are levied, is just, sound and equitable. The Theory of Insurance Tax Exemption. In fundamental theory, insurance should be exempted from taxation. Where an insurance company was originally a co- operative body of men, investing a small amount of savings in mutual protection, it is easy to see why the policies issued by such a co-operative body and the body itself should not have been forced to pay taxes. The company, in such a case, was not established for profit; the policy was a protection and not an investment; to tax the company would be to tax a body which was working to reduce the burden of the community in caring for indigents; to tax the policy would be to tax a man's desire to save the community from this burden. In theory, it would be as just to tax a fire department as an insurance company, and as wise to burden a man who was providing for his family as to tax the means of permanent provision for them. Why This Theory Does Not Hold. As the insurance business has advanced and as the assumption of risks has become a science, its operation has been placed on a^ commercial basis, and while it is no less beneficial to the com- 178 Report of Tax Commission — ^Appendix. munity than in former times, it has lost, in most instances, all claim to be regarded as exempt from taxation. This is due to three reasons. First, many of the insurance companies now doing business in this State are on a stock basis, owned by private individuals and operated for profit. While it is perhaps safe to say that the private ownership of these concerns does not mitigate against their usefulness, it is nevertheless true that the profits derived from the conduct of their business belong primarily to the stockholders, except by contractural arrangement. Secondly, insurance has ceased to be simply a protection and has become an investment. In all but non-participating policies and "term*" insurance, the premiums paid by individual policy holders amount to about twenty-three per cent, more than the cost of the in- surance as shown by the tables of mortality; and in New York alone, the policies issued by companies of that State during 1909 carried a "leading" or expense and investment surplus amounting to $9,325,314.27, with accumulated loading amounting to $20,- 347,680.* As perhaps four-fifths of the standard insurance busi- ness done in Virginia comes within this classification, it is manifest that the holders of the policies are investors in a business enter- prise from which they receive annual or deferred dividends as on any other investment security. There is no more reason why this invested wealth should not be taxed than there is why stocks and bonds should not pay their proper taxes. These arguments apply primarily to the taxation of "old line" life insurance companies. In the case of fire insurance companies there are even greater reasons why they should be taxed. They are in no sense participating; their policies carry with them only protection against fire and every dollar made over and above the actual loss incurred belongs to the stockholders of these companies. The company guarantees nothing to the policy holder except that his loss from fire within certain limits shall be paid, and the companies agree among themselves as to the rates which shall be charged for this insurance. The only exceptions to this are the Farmers Mutual Fire Insurance Com- panies operating under special statutes. Moreover, fire insurance is much more in demand than life insurance, and literally sells itself. The life agent has a limited *This is exclusive of the surplus accumulated from investment, endowment insurance. Report of Tax Commission — Appendix. 179 market, and can only place his wares, so to say, by long and ac- tive soliciting. The fire agent always has a considerable patron- age and, in some instances, is more sought after than seeking. As proof of this may be cited the general fact that fire insurance companies have no trouble in securing agents, while life com- panies secure them only with the greatest difficulty. As a result of these conditions, the expense of selling life insurance is much greater than that of selling fire insurance. Commissions on the former run from forty to sixty per cent, of the first pre- miums, according to the class of business; on fire insurance, commissions are seldom over fifteen per cent. The Methods of Insurance Taxation. Every State in the Union recognizes the commercial character of the insurance business and taxes it accordingly. The only difference between the laws of the States is in the methods by which companies are taxed and, in the amount of taxes they are re- quired to pay. Several methods of insurance taxation are still in use. These are as follows: First, an exclusive flat or graded license tax to do business in the State. This is generally accompanied by a tax on individual agents and by municipal licenses taxes, together with certain fees. This system of taxation is in vogue in Louisiana, but has practically been abandoned in every other State, owing to its manifest injustice and its obvious inequality. No two compan- ies are upon exactly the same basis; a flat license tax on every company is obviously unjust. Second, a tax upon the net premium income of companies. This system is not in general use and at present is only applied in the State of Illinois by the municipalities. It is easy to see the faults of this system and the difficulty of administering any laws based upon it. Third, a tax upon the value of policies in force. This system is in use in Massachusetts only, where every company is required to pay an annual excise tax of .0025 upon the net value of policies in force. Fourth, a tax on the market value of the shares of stock of insurance companies. This tax is limited in scope, and is con- fined in its operation to Connecticut. Under it, stock companie.Ti 180 Report of Tax Commission — ^Appendix. are required to pay annually a taix of one per cent, on the market value of their stock, less the amount of taxes paid on real estate held in Connecticut. Fifth, a State tax on the gross premium income of the com- panies. As will be seen by reference to the appended table, forty-six of the States and territories of the Union already have this system of taxation in use ; and the States and territories hav- ing other systems are fast changing the old laws and conforming to it, as the best system yet devised. This method of taxing the companies is extremely simple. Every company is required to report the total amount of premiums re- ceived in the State from policy holders ; and on this basis a per- centage tax is levied against the company. In many States al- lowance is made for losses' incurred, for dividends paid policy holders, for reinsurance premiums paid or received, and, in some instances, for the amount of taxes paid on real estate. The justice of this system of taxation and its advantages over the system outlined above are obvious: in the first place, a tax so levied operates directly on the company and, if it be reasonable, will be paid from the loading of the company. This means that the net cost of the insurance will not be raised and that the indi- vidual policy holder will pay this tax indirectly from the amount he invests in insurance over and above the cost of the risk. Where a tax is unreasonable, of course, the policy holder may have to pay more for his insurance, but where a tax is just, the net cost of insurance to the policy holder is not greater. In the second place this tax affects every company alike. The basis of the tax is the same; no company has an advantage over another; all pay in pro- portion to their receipts and the amount paid cannot in any case cripple a solvent company or endanger its risks. It is difficult to conceive of any system of taxing insurance companies which will be more just in its operation, more equitable, more easily assessed and less burdensome on the policy holders. This is a system at present in vogue in Virginia, so far as State tax is con- cerned, and to it the writer gives his heartiest approval. It is the best system yet devised and it should be continued. Fees and Other State Charges. Practically every State which taxes the gross premium income of insurance companies exacts additional fees and other charges Report of Tax Commission — ^Appendix. 181 from the companies operating there. These fees are, in the main, franchise taxes such as are levied against all corporations, license taxes, registration charges and special fees on account of the ex- amination and inspection of companies. The imposition of such fees rests upon sound principles of taxation where the fees are reasonable and equitable. An insurance company enjoys special privileges in a community for which it must pay; it is a business of trust and as such must be strictly regulated. This can only be done through a suitable bureau. Such bureaux should be main- tained at the expense of the companies authorized to do business in the State. Virginia imposes its special taxes on this principle and assesses insurance companies according to its general laws on the subject. There is no reason why this system should be changed. Municipal Taxation of Insurance Companies. Investigation has shown a wide diversity among the Virginia municipalities taxing insurance companies. The taxes imposed by them are of three general classes, namely, license taxes levied against the companies, license taxes levied against the individual agents, and taxes on the premium income of the companies. The first of these three classes is the most important and the one in which there is the greatest variation. Some municipalities levy license taxes against the companies in accordance with the amount of business done by the companies; others, for some strange reason, fix the amount of the license according to the size of the company. In Richmond City, for instance, the scale of license is based on the assets of the several companies doing business in the city, regardless of the amount of business transacted or the premiums received. The license tax against the agents is generally used to supple- ment the tax on the company and is not generally onerous. There are few towns in Virginia where the sole tax is of this character. The third form of municipal insurance tax, the tax on premium income, is one to which the greatest exception can be taken, ex- pecially when this tax is levied at a high rate. This form of tax is in use in four Virginia cities, namely, Lynchburg, Petersburg, Newport News and Winchester, in which cities the taxes paid by the insurance companies are out of proportion to the revenue re- 182 Report of Tax Commission — ^Appendix. ceived by the companies in these cities.* In Petersburg, indeed, there are three forms of taxation in use, a license tax levied against the company, an agent's license tax and a tax on the premium income of the company. It is needless to say that unless all of these taxes were placed at an extremely low rate, the burden would be heavy. The revenue derived from insurance companies by the muni- cipalities varies much, and varies not entirely in proportion to the amount of business done in any town or city by a given com- pany or by all the companies. The following table will show the total revenue from insurance licenses and other charges, the total license revenue and the percentage of insurance licenses to the total in a number of Virginia towns and cities : *The Winchester ordinance on this tax is typical of the other and is as follows: Section 30a. On the assessments collected, and the premiums received and the obligations for such premiums taken by an insurance company, or underwriters or other insurers or their agents, the tax shall be one and one-half per centum on the amount, or amounts thereof, no matter where the parties who paid said premiums or assessments or give said obligations reside, provided said premiums, assessments or obligations are paid in Winchester or through agents representing any such insurers at Winchester, Va. Every agent doing business in this corporation shall report on the first day of January, April, July and October to the Commissioner of Revenue the amount of assessment and the premiums or obligations for such received or taken by him as aforesaid during the preceding quarter, under the penalty of $50 , if he fail to make said report. Report of Tax Commission — ^Appendix. 183 Town. Abingdon. . . . Alexandria. . . Bedford City. . Buena Vista . . BerryviUe. . . . Clifton Forge . Charlottesville . Danville Pincastle Fredericksburg Graham Hampton Harrisonburg. , Leesburg Lexington .... Lynchburg. . . , Middletown. . . Manassas Norfolk Newport News Phoebus Portsmouth. . . Petersburg. . . . Radford Pulaski Roanoke Richmond Rocky Mount . South HUl WilUamsburg. . Waverly Waynesboro . . . Wytheville. . . . Winchester. . . . Wakefield Woodstock . . . . West Point . . . . Total Revenue License. $ 2,901.76 16,737.08 3,615.62 1,921.97 846.53 4,200.00 17,664.57 31,156.81 120.00 13,440.15 1,190.88 10,180.25 12,230.06 907.00 3,140.23 107,764.60 60.00 851.22 353,796.56 50,386.76 10,980.00 55,800.12 41,474.65 3,925.03 2,451.65 87,928.51 137,008.11 4,780.00 510.50 ,159.66 423.15 ,474.16 ,895.28 10,431.77 224.00 900.25 3,096.15 Revenue from Insurance Licenses and Tax. $ 510.00 3,224.50 519.62 25.00 250.00 625.00 2,766.25 4,090.83 20.00 2,515.00 10.00 1,947.50 1,965.00 210.00 615.00 7,146.67 20.00 95.00 23,129.47 4,457.54 250.00 6,000.00 11,443.34 223.75 330.00 3,450.00 10,375.00 120.00 115.00 205.00 40.00 242.00 250.00 3,389.66 30.00 75.00 50.00 Percentage of Insurance Tax to Whole. 17.5 19.2 14.3 1.3 29.5 14.7 15.6 13.1 16.6 18.7 1.19 19.1 16.0 23.0 19.5 6.63 33.3 11.1 6.53 8.84 2.27 10.7 27.5 5.68 13.4 3.92 7.57 2.51 2.25 17.6 9.45 16.4 13.1 32.4 13.4 8.33 16.1 plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus plus 184 Report of Tax Commission — ^Appendix. In other words, in the towns and cities where insurance com- panies, agents or policies are subject to taxation, the percentage of license revenue, in proportion to the whole license revenue, varies from 1.3 + percent to 33 + per cent. In Petersburg the percentage is more than 27 per cent, and in Winchester it is 32.4 per cent. When it is remembered that of 140 towns and cities in Virginia exacting license taxes, only seventy-four tax insurance, and these seventy-four tax it in the sum of $125,- 987, it will be obvious to any one that this tax, if not too onerous, is at least unequally proportioned. To view the question in a somewhat different light, the total municipal insurance licenses in the State, $125,000, is but 11.6 per cent, of the total municipal license revenue, $1,071,000; yet in twenty-five towns and cities, the percentage is high, varying from 13.1 per cent, to 32.4 per cent, among the cities and to 33.3 per cent, among the towns. It should be the policy of the State to encourage legitimate business and to foster competition. The onerous and unequal taxation of insurance companies by some of our municipalities is a gross violation of this principle. The Aggregate Tax. Aside from the very obvious inequality resulting from the im- position of unreasonable local taxes, the question arises, is the aggregate tax on insurance in Virginia a reasonable tax. The appended table, based upon sworn reports of practically all the insurance companies operating in the State will show what revenue was paid by these companies on their 1909 business.* *It may be objected that this statement of the taxes paid by the insurance com- panies should be based upon the reports of collecting officers and not upon the com- panies' statement. An attempt was made in this direction, but the reports forwarded by local officers, were, in many instances, so carelessly made and so manifestly inaccurate that they threatened the accuracy of the whole report. The figures hers cited were secured through the co-operation of the Bureau of Insurance and are accurate. Report of Tax Commission — Appendix. 185 INSURANCE TAXATION. Table Showing the Total Amount of Taxes Paid by Various Insurance Com- panies, Authorized to do Business in Virginia in 1909, Showing the Amount Paid bt Each Company to the Localities Where Operating, the Amount Paid by the State, and the Total Amount op Both Taxes.* FIRE INSURANCE COMPANIES. Name of Company. ■s5 I ^- ^5| 111 Total. Aachan and Munich jEtna Fire Agricultural American Central , American Atlas Boston Biitish America Caledonian Capital Citizens' Fire Citizens' Insurance Commercial Union Continental Insurance Delaware Dixie Eastern Shore Equitable Fire Fidelity Phenix. Firs Association of Philadelphia. Fireman's Fund Franklin Fire Georgia Home German Alliance German American German Fire Germania Girard 376.54 1,800.00* 712.75 880.04 552.57 661.54 397.60 504.61 538.34 315.86 391.60 1,056.26 1,086.57 1,568.08 301.14 586.21 621.52 572.99 1,113.56 1,642.58 757.00 1,132.88 379.32 1,772.69 372.34 995.03 1,486.52 595.50 1,518.85 954.44 1,113.56 889.25 1,010.69 165.50 705.75 803.60 414.35 569.51 1,240.25 1,315.37 1,474.57 340.00 817.30 20.50 1,045.84 1,592.54 1,357.48 224.16 1,233.51 1,007.74 1,263.33 84.25 1,276.63 926.26 972.04 3,318.85 1,667.19 1,993.60 1,441.82 1,672.23 563.10 1,210.36 1,341.94 730.21 961.11 2,296.51 2,401.94 3,042.65 641.14 1,403.51 642.02 1,618.83 2,706.10 3,000.06 981.16 2,366.39 1,387.06 3,036.02 456.59 2,271.66 2,412.78 *In the case of a few companies from whom no exact or accurate statement could be secured, estimates of the probable amount of their taxes have been made, which estimates are based on the amount of business done in the State by the companies in question, as shown by their annual statements filed with the Commissioner of Insurance. 186 Report of Tax Commission — ^Appendix. Name op Compant. t4-. -4 "35 C *^ O ^ -fcJ "H I i il «(j Eh '3 Total. Glens Falls Globe and Rutgers Hamburg Bremen Hanover Hartford Fire Home Fire of Virginia Home Fire of New York Homestead Insurance Co. of North America. Interstate Fire Jefferson Fire Liverpool, London and Globe . . . London Assurance Corporation . . London and Lancaster Lumbarman's Marine Michigan Commercial Milwaukee Mechanics Mutual Assurance Mutual Fire National Fire National Union New Brunswick New Hampshire Niagara Norfolk Fire North British and Mercantile . . . North River Northern Assurance Northern Neck Mutual Norwich Union Orient Palatine Pennsylvania Fi'-e Peoples National Petersburg Saving, etc Phoenix Assurance Phoenix Insurance of Hartford . . . Providence Washington Queen Rochester German Royal Exchange 663.58 802.27 1,295.16 872.37 3,834.69 1,123.51 978.27 1,531.06 1,143.44 2,103.49 3,340.31 649.70 1,183.58 2,413.43 719.20 3,423.84 787.77 749.64 381.07 441.93 649.77 790.80 1,601.05 2,209.80 1,093.06 400.00* 812.00 767.80 487.61 1,330.51 736.16 1,012.47 423.94 826.64 520.21 569.78 1,050.00* 1,082.40 3,751.21 1,018.16 1,110.25 00.00 1,034.82 952.09 658.90 1,946.84 752. 12 1,599.56 953.87 133.80 1,770.00 1,070.94 929.40 100.50 691.95 1,086.42 474.96 116.20 1,130.50 1,172.35 754.43 00.00 1,227.69 552.72 1,211.89 932.42 1,035.38 00.00 1,157.37 804.52 901.33 900.00* 523.18 11,405.83 1,006.97 1,254.97 00.00 1,339.29 676.80 00.00 1,787.09 1,780.54 2,826.22 2,015.81 5,938.18 5,287.15 1,401.82 2,783.14 3,367.30 853.00 5,193.84 1,858.71 1,679.04 481.57 1,133.88 1,736.19 1,265.76 1,717.25 3,340.30 2,265.41 1,154.73 812.00 1,995.49 1,C40.33 2,542.40 1,668.68 2,047.85 423.94 ,984.01 ,324.73 ,471.11 ,950.00* 1,605.58 15,157.04 2,025.13 2,365.22 00.00 2,374.11 1,628.89 658.90 Report of Tax Commission — Appendix. 187 Name of Company. Us 5 ° ! S s > 8 "3 ] X w i H -3 Total. Royal Scottish Union and National Seaboard Fire Security Shawnee Fire Southern Underwriters Springfield Fire and Marine Spring Garden St. Paul Fire and Marine Subscribers at Lloyd's Sun Insurance Co United States Fire Virginia Fire and Marine Virginia State Insurance Co Westchester Williamsburg City Total Fire Insurance Companies. . 3,426.49 730.34 950.00* 327.33 640.07 880.27 1,897.78 653.25 950.44 299.50 669.91 369.95 3,767.98 1,689.12 687.71 651.41 1,035.38 1,050.67 3,000.00* 367.25 871.50 767.48 1,497.70 827.68 691.65 00.00 891.99 50.00* 1,556.77 2,436.18 1,009.51 995.85 4,461.87 1,781.01 3,950.00* 694.58 1,511.57 1,647.75 3,395.48 1,480.93 1,642.09 299.50 1,561.90 419.95 5,324.75 4,125.30 1,697.22 1,651.26 887,615.66 $87,508.61 $175,124.27 LIFE AND MISCELLANEOUS INSURANCE COMPANIES. Name of Company. Amount of Taxes to the State, 1909. Amount of Taxes to Muni- cipalities, 1909. Total. $ 2,713.28 1,452.11 319.00 230.00 1,410.07 659.14 300.00* 299.91 1,331.51 502. 19 393.92 531.99 $ 301.00 660.59 292.75 100.00 1,821.87 370.50 750.00* 25.00 312.25 68.75 141.50 238.90 $ 3,014.28 2,112.70 American Bonding Company American Credit Indemnity 611.75 330.00 3,231.94 1,029.64 Atlantic Trust and Deposit 1,050.00* 324.91 Continental Casualty 1,643.76 TnmiTirp fitatp Suretv 495.07 "Rmnl overs' Indemnity 534.23 Employers' Liability 770.89 188 Report of Tax Commission — ^Appendix. Name op Company. Amount of Taxes to the State, 1909. Amount of Taxes to Muni- cipalities, 1909 Total. 7,770.27 1,482.27 9,252.54 56.11 00.00 66.11 1,588.45 916.65 2,506.10 840.98 345.40 1,186.38 1,640.61 265.50 1,906.11 797.51 287.50 1,086.01 699.28 115.25 814.53 494.54 225.50 720.04 280.28 00.00 280.28 412.31 180.50 692.81 3,117.74 1,027.08 4,144.82 1,101.55 165.50 1,267.05 292.50 00.00 292.50 75.27 00.00 75.27 10,665.07 6,281,63 16,946.70 285.26 40.75 326.01 262.27 54.00 316.27 1,158.78 546.07 1,704.85 1,264.43 630.99 1,895.42 2,177.30 819.95 2,997.25 10,580.19 2,339.25 12,919.44 410.60 45.50 456.10 3,746.67 1,026.75 4,773.42 730.97 347.50 1,078.47 9,135.28 1,175.96 10,311.24 583.66 438.00 1,021.66 940.00 422.75 1,362.75 493.72 243.50 737.22 6,864.41 1,161.64 8,026.05 330.00 78.25 408.25 7,737.75 1,162.24 8,899.99 709.83 371.26 1,081.08 2,763.36 492.00 3,256.36 547.41 20.00 567.41 1,247.85 100.00 1,347.85 793.64 150.00 943.64 934.05 731.00 1,665.05 1,398.77 546.07 1,955.84 687.37 289.70 1,077.07 258.08 00.00 258.08 1,844.73 1,100.67 2,945.40 Equitable Life Farmers and Merchants Fidelity and Casualty Fidelity and Deposit Fidelity Mutual Life General Accident, etc Germania Life Greensboro' Life Guarantee of North America. . . Hartford Steam Boiler Home Beneficial Home Life Illinois Siu'ety Indiana & Ohio Life Stock Ins. Co Life Insurance Company of Va . . . Lloyd's Plate Glass London Guarantee and Accident- Maryland Casualty Maryland Life Massachusetts Mutual MetropoUtan Life Missouri State Life Mutual Benefit Life Mutual Insurance of Richmond . Mutual Life of New York National Insurance Company . . . National Life National Smety New York Life New York Plate Glass Northwestern Mutual Ocean Accident and Guarantee . . Penn Mutual Life Phoenix Mutual Life Pittsburgh Life and Trust Providence Life and Accident . . . Providence Life and Trust Prudential Life Reliance Life Reserve Loan Life Richmond Beneficial Report of Tax Commission — ^Appendix. 189 Name of Company. Amount of Taxes to the State, 1909. Amount of Taxes to Muni- cipalities, 1909. Total. Security Life and Accident Smith Atlfl.nt.ifi T'ifp 338.62 1,669.09 1,498.26 1,400.00* 300.00* 606.07 733.81 905.86 3,889.23 4,243.82 787.63 418.14 1,020.43 569.98 368.20 360.00* 136.25 688.74 768. 15 00.00 1,200.00* 154.75 200.75 641.60 1,070.25 903.50 115.00 56.50 596.35 231.05 94.00 550.00* 474.87 2,357.83 2,266.31 1.400.00* Southern Aid Society Southern Mutual Aid Southwest Virginia Trust Co Standard Accident Co 1,500.00* 760 82 State Life 934 56 Sun Life 1,547 46 Travelers Life 4,959.48 5 147 32 Union Central Life Union Mutual 902.63 United States Casualty . . 474 64 U. S. Fidelity and Guaranty Virginia Beneficial and Insurance Virgioia State Deposit & Trust Co. Virginia Trust Company 1,616.78 801.03 462.20 910.00* Total Life and Misc. Cos $117,888.24 $38,479.30 $156,367.54 The following abstract of this table will make its main facts obvious : RECAPITULATION. Total State Taxes reported by Fire Companies I 87,615.56 Total State Taxes reported by Life Companies 117,888.24 Total State Taxes reported by Life and Fire Companies 205 , 503 . 80 Total Municipal Taxes reported by Fire Companies 87,508.61 Total Municipal Taxes reported by Life Companies 38,479.30 Total Municipal Taxes reported by Life and Fire Companies 125,987.91 Total Taxes paid by Fire Companies 175,124.27 Total Taxes paid by Life Companies 156 , 367. 54 Total of all Taxes paid by Fire and Life Companies 331 ,491 .71 On this basis the taxes paid by the various companies to the State and to the various municipalities bear the following ratio to their gross premiums during 1909, deducting the returned premiums of fire companies: 190 Report of Tax Commission — ^Appendix. Branch. Total Gross Premiums. Taxes, State and Local. Percentage of Taxes to gross Premiums. All $13,464,880 4,261,205 8,110,327 $331,491.71 175,124.27 156,367.54 2.46 Fire and Marine Life and Misc 4.10 1.92 In 1910, it will be recalled, the Assembly increased the rate of the taxes on all insurance companies, making reserve life companies pay 1.40 per cent, and regular fire companies 1.75 on their gross premiums. This will somewhat change the percentage given above, but as the insurance report for 1910 has not yet appeared (August, 1911), the exact addition to the percentage taxes of the insurance companies of either class can- not be stated. Allowing, however, the same municipal taxes and the same premium income for 1910 as for 1909, the total taxes of the com- panies and the ratio of these to their gross premium income would be as follows: Branch. Taxes, State and Local. Percentage of Taxes to Gross Premium Income. All Fire and Marine $363,953.39 '194,208.14 169,745.25 2.70 4 55 2 09 Comparison of these percentages with those of the taxes im- posed by other States will show that in taxes on life insurance, Virginia is not above the average; but that in taxes on fire in- surance, our percentage tax is only equalled by that of a very few States. In any readjustment of the law, the writer believes the fire companies have a valid plea for a reduction, though, to be sure, their complaint must lie not against the Commonwealth but against the cities. Report of Tax Commission — Appendix. 191 Proposed Changes in the Tax. Indeed, a study of the situation shows that the weak point in our entire insurance tax laws Hes just here: the localities are given too much latitude in taxing insurance companies. They may tax them out of existence; they may tax them to the Hmit of endurance; they may tax them to such a point that they them- selves, in increased insurance rates, will pay the taxes they assess. Justice to the companies and to those localities which levy a reasonable tax would dictate the imposition of taxes by the locality, according to some fixed standard, or else the removal of local taxes altogether. In accordance with this principle, the following alternative plans for the modification of the law are suggested: First, to prohibit taxes by the localities on insurance com- panies, their policies or their agents, except taxes on the capital of domestic companies and on tangible personalty and real estate owned by the companies. Second, to collect an exclusive State tax and then to appor- tion a part thereof among the localities according to the premiums collected there. Third, to limit the amount of tax to be imposed by any lo- cality and to define its character. Each of these may be considered briefly. An Exclusive Tax. An exclusive State tax would certainly be the most con- venient and most easily assessable system. It would have the following great advantages: First, it would accord with the sound principle of admiiais- trative economy that where a business is licensed by the State, and is inspected and regulated by the State, such business should, where possible, be taxed exclusively by the State. The Com- monwealth alone, through the Insurance Bureau of the Corpora- tion Commission, gives an insurance company the right to operate in Virginia. It inspects the business of such a company; it re- serves the right to revoke the license of any company whose fi- nancial administration does not conform to the strict require- ments of our laws. The State is thus, in a sense, the official sponsor of the company. It exacts no such requirements of other 192 Reportof Tax Commission — ^Appendix. business an,d, with the exception of the banking business, places no such limitation upon any industry. The company and the State are contracting parties. The State requires certain con- ditions and grants certain privileges; the company accepts the conditions that it may enjoy the privileges. In such a case the contract should be exclusively between the State and the company and the regulation of the company by the State should include the payment of all fees and taxes due by the company direct to the State and not to a sub-agent of the State, a muni- cipality. Second, an exclusive State tax on insurance would be a sub- stantial benefit to the companies licensed by the State, in remov- ing from them limitations which are most burdensome. As the matter stands today, the State, contracting with the com- panies, exacting a tax from them and conferring upon them the right to do business in the State, cannot authorize a company to sell insurance in any city or in about thirty per cent, of the towns. Before the privilege to do business in Virginia, granted by a State license, becomes operative the companies must pay a separate municipal tax in any city and most towns where it desires to operate. In other words, the privilege for which they pay $205,503 the year to the State is not enjoyed until they pay $125,987 to the municipalities. Even then, most insurance com- panies operating in Virginia, are limited in their field; few of them, if any, care to pay all municipal taxes, that they may do business everywhere. An exclusive tax by the Commonwealth would put an end to this. Any company that met the re- quirements of the State law and that paiiil its legitimate charges to the State could sell insurance in any part of the State without municipal restriction or taxation of any sort, except, of course, the payment of a tax on its tangible personal property and real estate. Third, an exclusive State tax would certainly promote com- petition and would induce more companies to enter the State. At present, Virginia is practically a closed insurance field. Few companies not now in the State, can afford to pay our very heavy entrance fees and the necessary municipal taxes in addition to the regular State taxes. Especially do these foreign companies object to the municipal taxes, which are so levied that before a new company can write a dollar of business, it must make an Report of Tax Commission — ^Appendix. 193 outlay far beyond the anticipated profit from its first few years' business. The removal of the municipal tax and the substitu- tion of an adequate exclusive State premium income tax would unquestionably bring many new companies to the State with a consequent benefit to those wishing insurance. On the other hand, there are two objections to such a tax as that here proposed. The first of these is that the State can not afford to put itself on record as establishing a precedent in adjusting the taxes of any particular business to the con- venience of that business. While the levy of an exclusive State tax on the insurance business is altogether right and defensible, no sooner would such a tax be imposed than other industries would come before the Assembly with the same plea. In the writer's judgment, no exclusive State taxes should be imposed until some feasible system of separation can be devised. The second objection to the complete removal of the local taxes on insurance is that this would deprive the localities of $125,987 of revenue the year, without adequate return. While the amount taken from the localities under this system would be divided among the cities and towns and would in but a few cases amount to a serious loss, there is no justification for the removal of local revenue without adequate return. An Apportioned Tax. To levy an exclusive' State tax and to apportion the same among the localities would be to give the localities some return for the privileges conferred on the insurance companies and would meet, in large measure, the needs of the insurance business. Thus, for instance, a tax of 2.5 per cent, of gross premium income might be levied. Of this the State would receive two per cent., and the localities .005 per cent., apportioned according to the premium income of the various companies in the cities and towns imposing licenses on insurance, companies. The revenue to the localities from life companies, under such an arrangement, would be about that now received by them, but this would be very differently apportioned. There is but one serious objec- tion to this system of taxation: it is a tremendous task for the insurance companies to ascertain their premium income in all 194 Report of Tax Commission — ^Appendix. the cities and towns where they operate. While this objection does not invalidate this method, it should be given serious con- sideration before the State decides on any change in the law. 3. Limitation of the Tax. The third alternative is to limit the amount of tax that can be imposed by any locality and to define the character of the tax. This is the expedient adopted in most progressive States and it has very obvious advantages. While ur^der this system, an insurance company does not gain th'e great desideratum — ability to transact business in any locality, regardless of municipal ordinances — it has the assurance that if it enters a city or town, its taxes will not exceed a certain maximum. The limitation generally placed on all localities by laws of this character is that the tax so imposed shall not exceed a certain percentage of the premium income or an equivalent thereof. To summarize, an exclusive State tax is desirable when it can be imposed under a general plan of separation; but at other times it is objectionable. Between the other alternatives, there is little to choose, save in convenience. A limited and an ap- portioned tax are both good. The writer therefore, submits both plans to the Commission for enactment at the present time, with the hope that a plan of separation may finally be devised by which the insurance business can be subject to an exclusive State tax. Tlie Rate of the Exclusive Tax. Inasmuch as the adoption of an exclusive tax may be but a question of time, the following information regarding the rate of such a tax is submitted. Reference to the table printed above will show at what rate the insurance companies are now paying. This table will also show a marked difference between the taxes paid by life and by fire companies — a difference out of proportion to the difference in the character of the business done. If life insurance taxes are high enough, then fire insurance taxes should be lowered; if fire insurance taxes are not too high, then life insurance taxes must be raised. The writer inclines to the former view, after an examination of the taxes in other States, Report of Tax Commission — ^Appendix. 195 and accordingly, in making an estimate, has transferred life taxes to an exclusive State basis at practically the same rate now ex- isting, except for department fees and charges, and has lowered fire rates to what he regards as a more equitable basis. The ratio between the various classes of life, fire and miscellaneous busi- ness has been continued approximately as it is under the present law. The following table will show the basis of this estimate : Branch. Premium income. Present Tax Rale. Revenue. Proposed rate. Revenue. Reg. Fire $3,873,350 113,114 274,741 6,661,733 514,381 934,213 1,093,378 @ 1.75 @ 1.00 @ 1.25 @ 1.40 @ 1.00 @ 1.75 @ 0.50 $67,783.63 1,131.14 3,434,26 93,264.26 5,143.81 16,348.73 5,466.89 @ 2.25 @ 1.50 @ 1.75 @ 2.00 @ 1.76 @ 2.25 @ 1.00 $87,150.38 Va. Mutual Small Cos 1,696.71 4,807.97 ReE. Life 133,234.66 9,001.67 Cas. and Misc Indu. Sick Ben 21,019.79 10,933.78 $192,572.72 $267,844.96 This will yield a gross premium tax revenue of $267,844.96, which with the bureau tax, certificates of registration, etc., will yield a total revenue to the State of $327,976.76.* It will be observed at once that this shows a decided decline in the revenue from this source compared with the estimated revenue on the basis of the 1910 tax. This decline is as follows: Estimated revenue under separation $327,976 . 76 Estimated 1910 revenue. State and local, as shown above 363,953 . 39 Decrease $ 35,976.63 This decrease comes from the reduction in the comparative rate of taxation on fire insurance companies, a reduction which appears to be justified. If, however, the Assembly thinks other- *This estimate is made by taking the revenue, as given above, and adding $13,645 for the support of the Bureau ($1,000 more than in 1909) and $14,486.80, the regis- tration, etc. charges for 1909. This revenue will be subject to an average annual increase of approximately $8,000. 196 Report of Tax Commission — Appendix. wise and thinks that the tax on life companies is high enough, the increase in the taxes on fire companies might be apportioned as follows : Reg. Fire companies @ 3.00% $116,200.50 Va. Mut. Companies @ 2 . 00% 2,262 . 28 Small Companies @ 2.50% 6,868.53 $125,331.31 Increase over estimated revenue under previous arrangement $31,676.25 Net decrease 4,300.38 This arrangement would increase the net revenue gained by the State from insurance taxes under an exclusive State tax to $106,948.49. Other State Taxes on Insurance Companies. In addition to the regular tax on their gross premium income, the insurance companies now operating in Virginia pay the fol- lowing taxes' and fees : 1. An annual license tax of $200, levied on all standard fire, life and miscellaneous companies. 2. A tax of 1-10 of 1% for the support of the bureau of insur- ance annual. 3. A tax of 1-20 of 1% for the custody of the bonds deposited with the Treasurer. 4. An annual fee of $5.00 for a license certificate, levied on all companies except fraternal orders and county mutual fire companies. 5. An annual registration fee of $5 @ $25 on all companies. 6. A tax of $1 for each agent representing each company. 7. An annual license fee of $20 for every fraternal order and county mutual fire company. New companies entering the State are also required to pay the following in addition to the taxes mentioned above and the de- posit of specific bonds. 1. Entrance fees from $30 @ $5,000. 2. Charter registration fees @ about fifty cents the page. 3. Fee of $1 for recording power of attorney. Report of Tax Commission — ^Appendix. 197 Finally, there is a charge of twenty cents the page for trans- scripts from the records of the Insurance Bureau, and a fee of $1 for the seal of the Bureau attached thereto. It must be confessed that the multiplicity of these fees rather than their amount makes them onerous. Aside from changes in the administration of these taxes, to be recommended in another connection, there would seem to be no reason for changing any of these taxes and fees. They are, perhaps higher than the average of such taxes in other States, but the same is true of all our taxes, and no distinction can be made here. It would be well to lower the fees for entering the State, but as this would involve a re- shaping of an act which is operating most successfully, it is prob- ably unwise to make immediate modification. To distinguish between insurance companies and other foreign corporations in this connection might lead to serious complications. The Taxation of Fraternal Beneficial Companies. In the investigation of insurance taxes, it has been found that $1,023,083 the year is invested by Virginians in the insurance is- sued by fraternal beneficial orders. This had led to an examina- tion of these orders in an effort to ascertain whether or not they should be taxed, and if so, at what rate and on what basis. These concerns are peculiar and sui generis. Based upon no theory of scientific insurance and operating, in many instances, upon no table of mortality, they offer insurance of a certain class at a very low figure as a part of membership in their orders. They claim that this is purely for the protection of their members and that in issuing this insurance they are performing public service for which they should not be taxed. They protect the families of those who cannot afford to buy standard insurance, they claim, and in doing so, save the community from the expense of providing for the families of these men in case of their death. Counsel for these orders are wont to laud them in the highest terms and to rank them as among the great philanthropic forces of the day. In Virginia we have not only the great fraternal orders, operat- ing among the whites, with annual receipts and disbursements amounting into millions, but a large number of small fraternal orders which operate exclusively among the negroes and generally in limited territory. In theory these companies are founded upon the same principles and operate, broadly speaking, on the 198 Report of Tax Commission — ^Appendix. same lines. So active have they been in presenting their claims to legislative bodies as philanthropies that they have escaped general taxation in every State save one and elsewhere pay only small charter fees or registration charges. Why These Companies Should Be Taxed. Although the fraternal theory of insurance has great possi- bilities, and unquestionably does much good, its proper exemption is doubtful, and for the following reasons : First, it is doubtful wisdom to give the sanction of State law to concerns which operate upon a false theory, and hence are funda- mentally unsound. By this it is not meant that the large frater- nal orders licensed in Virginia are bankrupt and unable to meet their present obligations; rather it is meant that they cannot sell permanent and safe insurance at the rates they charge. The American Tables of Mortality and the other tables in use by the standard reserve companies are as inexorable as the laws of the Medes and Persians and their operation cannot be evaded. Com- panies operating on these tables are accustomed to loading their premiums from 20% @ 25%, in order to give their insurance an added investment value; but below this figure no company can operate without coming to bankruptcy, sooner or later. Yet there are fraternal companies selling insurance to-day in practi- cally every American State at about fifty per cent, of what the combined experience of American and foreign companies has found to be the minimum actual cost. The question is sometimes asked, if such be the case, why have some of these companies been able to operate successfully for so many years? If their theory is unsound, why have they not al- ready failed? The answer is easy: "current cost" insurance, such as is issued by most of the fraternal companies, is very cheap when sold to young men. Naturally, few of these die at once and consequently, for a long term of years, the fraternal companies are able to meet the expenses of their low mortality and not call upon their certificate holders for any considerable assessments. At the end of this time, however, the mortality will begin to mount up; young men become old and die many times as rapidly as during their earlier years. As no reserve has been accumulated to meet these claims, the companies have either to go into bank- ruptcy or else to unreasonably raise their rates to a figure far Report of Tax Commission — ^Appendix. 199 beyond the cost of standard insurance to a man entering the com- pany in his youth. The recent experience of one of the old orders in the State which was forced to "freeze out" older members by most exhorbitant rates is an instance of this practical operation of this principle; and the shoals of American insurance history are covered with the wrecks of like orders. Only by constantly adding "young blood" are they able to defer their day of doom. The more liberal advocates of fraternal insurance admit freely this situation but declare that even if the fraternal orders fail in the end, they do good much good while they are in existence. Moreover, they say, many of these orders are now working to put themselves on a standard reserve basis and will, in the course of years, be able to meet their obligations as surely as the standard reserve companies. The answer to this is simple : the mere fact that the fraternal orders pay the death claims of men who die young does not justify them in operating upon a theory which will leave them no money to pay the certificates of men who live the normal expec- tation. It is well enough to provide for the former, but not at the expense of men who will forfeit their insurance or find it too ex- pensive at a time when they need it most. So far as placing the companies on a reserve basis is concerned, this argument places them all the more on a parity with the stan- dard reserve companies and is really a reason why they should pay their proper taxes. Taxation and regulation go together, and, while the latter is not within the scope of this investigation, it is unwise to exempt from the operation of our tax laws any business manifestly upon an unsound and uneconomic basis. The second objection to the exemption of these concerns is that there are among them a large number of orders designed and operated solely for the benefit of the supreme officers and other potentates. Our insurance bureau has been active in eliminating these from the State and has an enviable record in this direction, but it has not been able to drive from the State some orders which are of doubtful philanthropy, but which collect paltry sums from the ignorant and unthinking. If these concerns are money- making enterprises they should be taxed as any other business. This objection does not apply to all of the fraternal orders. 200 Report of Tax Commission — ^Appendix. as a table prepared by the writer will make obvious. The prin- cipal points in this table appear in the following abstract: RECAPITULATION. Companies licensed and operating in 1909 70 Total revenue from reg. mortuary, etc., assessments. .$45,508,571.30 Total revenue from reserve, expense emergency, etc., assessments 7,897,667.07 Total revenue from sale of lodge supplies 226,838.08 Total revenue (current) from every source 59,067,685.91 Total disbursements for benefits paid, 1909 41,025,449.76 Total disbursements for every purpose, 1909 47,215,931.68 Percentage of total disbursements for benefits paid to total disbursements 86.8 Average percentage of disbursements for benefits paid to total disbursements, all orders 64.1 Total of salaries to officers, other than deputies, etc. . 559,849.74 Total of ditto chargeable to Virginia members 78,293.01 Total of salaries to deputies, organizers other than regular agents 2,501,344.99 Total of ditto chargeable to Virginia members 60,937.79 Total of all assessments paid in 1909 by Va. members. 1,023,083.26 Total of all benefits paid in 1909 to Virginia members. 910,644.92 Thus it appears that the average ratio of benefits paid to total disbursements by all the orders operating in Virginia is but 64.1%. This is extremely high, both relatively and compara- tively, when it is remembered that the expense account of the average old-line companies of many years standing runs from 12% @ 20%, with most of the companies ranging around 15%.* In other words, benefits paid range from 80% @ 88%. As compared with this the expense of the average beneficial order in Virginia is 35.9%, or from 15% @ 23% in excess of the ex- penses on the established old-line companies. *Even this comparison is not a fair one, because it must be remembered that in addition to the actual expenses incurred by standard companies for the transaction of business, there is always the item of reserve. The real rate of insurance expense is not, therefore, to be estimated on the basis of the gross premiums but on the gross premiums plus the additions to the reserve fund. This will reduce their ratio of expenses. The current cost companies do not have this item of reserve. All their expenses are those incurred solely in assessing, collecting and distributing their funds. Report of Tax Commission — ^Appendix. 201 On the other hand, taking the total assessments, etc., collected by these companies, $47,215,931.68, and comparing it with the benefits paid, $41,025,449.76, it will appear that the expense rate on total business is but 13.2%. The great difference be- tween this rate and the average is due to the fact that in the smaller companies, especially the colored orders, the ratio of expenses to benefits is much higher than among the white orders. This will be apparent from the following table, showing the percentage of benefits to total disbursements, other than reserve, in a number of standard orders of both races. White. Percentage. Ben Hur 78.1 Catholic Knight 95.4 Mystic Circle 76.0 Heptasophs 91.2 Knights of Maccabees 86 . 6 Royal Arcanum 97.2 Woodmen of the World 79.3 Colored. Order of Calanthe 54 . 5 Knights of Pythias 61.1 Knights of Gideon 44 . 8 St. Lukes 56 . 1 True Reformers 67.6 To argue from this showing that the Royal Arcanum, for instance, is a money-making enterprise, is as foolish as to allege that the Knights of Gideon is not a money making-scheme. Difficulties in Taxing these Orders. This difference between the orders is at the basis of the diffi- culties in taxing them; the good are so mixed with the bad, the beneficial with the non-beneficial, that no plan can be devised which will reach all of the latter without endangering the former. Our Virginia certificate holders in these orders, while receiving in benefits eighty-nine per cent, of the assessments paid, con- tribute $139,230.80 for salaries and fees to officers, or 13.6% of 202 Report of Tax Commission — ^Appendix. all their assessments. Yet this sum is so unequally divided that it is well-nigh impossible to strike those who take the greater part of this sum without any valuable consideration proportion- ate thereto. Two general plans for taxation have been proposed. The first is to tax them, as all other companies, on the basis of their assessments. This is the principle applied in Alabama; but in Virginia it will certainly work injustice. To impose this tax on the total amount paid by Virginia certificate holders seems unreasonable, in view of the fact that these companies return eighty-nine per cent, of all they receive. Moreover, such a tax, under existing conditions, would certainly work grave injustice, if generally applied. Some of the largest companies operating in the State today paid, during 1909, death claims much in excess of their assessments collected. Thus the Royal Arcanum, for instance, which collected 23.5 per cent, of all assessments re- ported in Virginia during 1909, received $240,989.95, and paid in claims $288,445, or 119 per cent, of the amount collected. A tax on this company is therefore, impossible, and its condition renders taxation on this basis impossible for the present at least. The other plan is to tax those orders which have "delegates" or "deputies" soliciting business in the State, in much the same manner as other companies. This seems just on its face, but is subject to one very serious disadvantage. Many of the fraternal orders are only able to operate by the constant addition of new and young members, whose low mortality will make up, at pre- sent, for the high mortality of the older members. As fraternal orders are now very numerous and as the competition between them is keen, new members can only be secured through solici- tation. To prohibit this, therefore is to estop the enlargement of the companies and thereby hasten their ruin. One hesitates to recommend such a tax. Feeling, however, that the fraternal companies have not, as a whole, a valid case for exemption, it is recommended that they be assessed with a flat annual license tax of $100 each, in addi- tion to the registration fees, provided this shall not apply to orders which have less than five lodges in the State or are confined to one city or not more than three contiguous counties, which shall pay $20 as before. This is not a model system, but it has some advantages. It will make these companies pay charges sufficient Report of Tax Commission — ^Appendix. 203 to cover the cost of examining and regulating them. It will not burden new orders entering the State and will thus not prevent free competition between solvent orders. It will not affect those small colored orders which do much good in burying the the dead and in reducing the county costs of caring for the in- digent. This tax will yield about $5,500 revenue. Administration of the Insurance Tax. In the Commission's hearings on the insurance tax, the work of the present Bureau of Insurance was loudly praised, and it was generally stated that this bureau had been operated to the genuine benefit of the legitimate insurance business. It is a pleasure, therefore, to report upon this evidence and upon person- al investigations of the methods in use here and in other States, that the administration of the Insurance tax is eminently satis- factory. A survey of the whole field shows us but one defect in the present system, which can be remedied without important changes in the law. This is the need of uniform tax bills for accounts owed by insurance companies. As the matter stands today, the companies are required to pay their various taxes at widely varying times. Aside from the municipal license taxes, most of which terminate on April 30, the companies pay other taxes as follows: Standard companies of all kinds, license and cert, fee Apr. 30 Fraternal and mutual fire Hcense certificate fee Jan. 1 New certificates for agents When wanted. Renewal of certificates for agents July 31 Record and seal fees When records are desired Tax for support of Bureau June 1 Specific license tax May 1 (Standard companies.) Registration fees March 1 Treasurer's fee for custody of bonds Jan. 1 As these fees are paid to the Auditor, the Treasurer and the Commissioner of Insurance, there is endless confusion in the minds of agents and officers who pay them. It would, in our 204 Report of Tax Commission — Appendix. judgment, be administrative economy to make all these payable at the same times, and to require the Commissioner of Insurance, or the Auditor, to forward the proper officer of each company, thirty days before the given date, a full statement of all charges due on account of all current taxes. Summary of Recommendations. To summarize, we recommend: First, the ultimate removal of the municiapl taxes on all in- surance companies, their agents and policies, except the tax on real and personal property owned by them, the same to be oper- ative as soon as a plan of separation is devised. Second, the enactment of law levying an exclusive State tax on premium incomes and its apportionment between the State and the localities; or, the limitation of the taxes to be imposed by the localities. Third, the levy of all insurance taxes as of a standard date and the mailing of bills therefore. Fourth, the imposition of an annual license tax of $100 on all fraternal orders operating more than five lodges in the cities, or in more than three contiguous counties. The orders excepted above to pay a license tax of $20 as at present. Report of Tax Commission — Appendix. 205 ABSTRACT OF THE INSURANCE TAX LAWS OF THE UNITED STATES. Note: — Where percentage is given this applies to taxation of gross premium income without offset, unless so stated. Fraternal com- panies are not listed except where they pay regular taxes. Fees of Fraternal companies are not here listed. Alabama : Fire, 13^%; all others, 2%; domestic companies, 1%; frater- nals, 1%. Local license taxes limited. Arkansas : All companies, 2j/^%, less cancellations, reinsurance, losses and commissions. No local taxes. California : Life, 1%; all others, 2%, less returned premiums, reinsurance and losses actually incurred. Local taxes allowed. Colorado : All companies, 2%, less net reinsurance premiums paid plus returned premiums. State corporation tax of 2c on every $1,000 of capital stock. Local taxes allowed. Connecticut : Stock companies chartered in Conn., 1% of market value of their stock, less taxes on real estate. Foreign companies, 2%; mutual fire and life, one-fourth of one per cent., less deductions. Retaliatory provisions for higher taxes in other States. Delaware : Life, 2%; fire and miscellaneous, 13^%. Domestic fire and miscellaneous companies, .0075%. Small local taxes. District of Columbia: One and one-half gross premiums, less returned premiums and reinsurance premiums. No tax on mutual fire companies. Florida : All companies, 2%. Local taxes not to exceed 50% of State taxes. 206 Report of Tax Commission — ^Appendix. Georgia : All companies, 1% gross, except that fire and marine com- panies may deduct returned premiums. Hawaii : All companies, 2% less returned premiums, losses and rein- surance. Idaho: All companies, 2% less returned premiums and losses. No local taxes. Illinois: Net receipts are taxed locally as personalty of Illinois com- panies. Cities with fire departments may assess 2% gross, fire and marine. Indiana: All foreign companies, 3% less losses and returned premiums on cancelled business. Domestic companies pay small- fees only. Local taxes small. Iowa: All companies, 2J^%. Fire companies may deduct amount paid on intra-State cancelled policies. Kansas : All companies, 2%; companies of foreign countries, 4%, less returned premiums on cancelled policies. Localities may tax fire companies 2% additional if they have fire apparatus valued at $1,000. Kentucky : All companies, 2% with deductions for fire companies under certain conditions. Local taxes allowed. Louisiana : License taxes based on premiums collected, ranging from $150 for $10,000 premiums to $4,500 for $300,000 premiums. Mis- cellaneous companies pay special rates. Municipal taxes allowed on same scale. Maine: All companies, 1^^%, less returned premiums and premiums on farm property. Local taxes allowed. Report of Tax Commission — Appendix. 207 Maryland : All companies, 13^% Retaliation. Local taxes allowed. Massachusetts : Annual excise tax of one-fourth of one per cent, on net value of policies, with 2% gross substituted in certain classes. Local taxes allowed. Michigan : Fire and Marine, 3% less returned premiums and reinsurance premiums paid. All others, 2%. No local taxes. Minnesota: 2% gross, less returned premiums, with one-fourth of one per cent, for fire marshal's office. No local taxes. Mississippi : Life, 2% gross new premiums, one-tenth of one per cent, on renewal premiums more recent than March 5, 1902. All others, 2%, less returned premiums. Fire marshal's tax of one-fifth of one per cent. Local taxes allowed. Missouri : All companies, 2%, less reinsurance of fire companies. Municipal license taxes of $100 in towns over $100,000 allowed. Domestic companies pay on property and assets, less reserve. Montana : AH companies must pay $125 on first $5,000 year's premiums; all others at 2%. No local taxes. Nebraska : All except fire, 2%. Fire companies taxed locally on gross premiums receipts as personalty. New Hampshire: Life, 2%, less deductions, provided not less than 13^%. Fire and miscellaneous, 2%, less reinsurance and returned premiums. Retaliation. Local taxes allowed. 208 Report of Tax Commission — ^Appendix. New Jersey : All foreign companies except life, 2%, less reinsurance and re- turned premiums. Reciprocal taxation of life companies. Local taxes allowed. New Mexico: All companies, 2% gross. Local taxes appear to be allowed. New York: Life and casualty, 1%; fire, 2% less reinsurance; mutual fire, 1%. Local taxes on fire companies. Nevada: All except life, 2% less returned premiums and reinsurance premiums paid; life companies in retaliation. Local taxes allowed. North Carolina: All companies, 2J/^% gross, less returned premiums; fire com- panies pay 1-5 of 1% for State fire service. No local taxes except }/^ oi 1% on fire companies in towns with fire apparatus worth $1,000 and with fireman's relief fund. North Dakota: All companies, 2J^%, less returned premiums on cancelled policies. No local taxes. Ohio: All companies, 23/^%, less returned premiums and reinsurance premiums received. Fire companies pay also H of 1% for fire marshal's office. No local taxes. Oklahoma : All companies, 2% gross, less cancellations and reinsurance. Life companies may also deduct dividends paid. Local taxes appear to be allowed. Oregon : All companies, 2% gross, less return premiums, losses paid and reinsurance premiums paid. Local taxes. Report of Tax Commission — ^Appendix. 209 Pennsylvania : All companies, 2% gross. Domestic companies not subject to local taxes upon property except upon property over and above its unearned premiums. Local taxes thus limited. South Carolina: All companies, 2%, which is reduced to 1% if 75% of State reserve be invested in State. Fire companies pay also taxes of 1-10 of 1%. Local taxes allowed. South Dakota: Life, 2]/^% gross; fire pay local 2)4,% gross, except mutual fire 1% for mutual fire department; State may exact J^ of 1% for fire marshal's office. Local taxes allowed. Tennessee : All companies 2J^%, less return premiums and cash dividends. No local taxes allowed. Texas : Fire and miscellaneous, 2%; life, 3%; but when 30% of Texas reserve is invested in Texas real estate, tax is 2.6%; when 60% ■ Texas reserve so invested, tax is 2.3%; when 75% so invested, percentage is 2%. Local taxes allowed. Utah: All companies 1^%, less property taxes paid, and less returned premiums. Local taxes allowed. Vermont : All companies 2% less return premiums, cash dividends and reinsurance in authorized companies. Local taxes allowed. Washington : Life companies, 2%; all others, 214%, less returned premiums. Local taxes alloweld. West Virginia: All foreign companies, 2% gross, less premiums returned for cancelled policies. Local taxes allowed. 210 Report of Tax Commission — ^Appendix. Wisconsin : Fire and Marine, 2%, less return premiums and cancellations of direct business. Fire companies pay also 3-8 of 1% for ex- pense of fire marshal; fire companies pay also 2% of all pre- miums in towns having standard fire departments. Casualty and surety companies 2% gross premiums; Life and assessment companies pay $300 license and local taxes, except where re- taliatory provisions enter. Local taxes thus limited. Wyoming : All companies, 2% gross premiums. Local taxes allowed. Report of Tax Commission — ^Appendix. 211 CHAPTER V. BANKS AND TRUST COMPANIES. Historical. The development in the law for the taxation of banks in Vir- ginia has inevitably followed the changes in the National Bank- ing law. Prior to the passage of the National Banking Act of June 3, 1864, banks had been taxed on their capital. Following this act, and the amendments of the act of February 10, 1868, a State tax on the capital of a National Bank was declared illBgal.* When Virginia was readmitted to the Union, her first general revenue act contained provisions conforming to this actf, and taxing shares of bank stock at the same rate as "other moneyed capital in the hands of individuals." This law stood the test of the revised National Banking Act in the revised statutes of 1873, J but as it did not stipulate between the taxation of bank stock at its market or book value, the act was finally amended in 1884**, and the tax levied at the market value. In this form the act remained until revised in 1903, when it was provided that the market value of stock of any bank should not be less than the prorated value of its capital, surplus and undivided profits, jf The Assembly of 1908 alio '^ed an offset of 10 per cent, in the tax on banks, on account of the debts due by share-holders, owing to some doubt as to the legality of the act in its previous form.|| By an act of 1889, the counties and cities were allowed to tax bank stock, in the same general manner as the State, with a proviso that where the stock was returned in one locality and the *ror the text of these acts see Huntington and Mawhinney: Laws of the United States, concerning Money Banking and Loans, 1778-1909 (National Monetary Commission) 350-365-66. •Acts of 1870-71, p. 290. : Huntington and Mawhinney, op. cit., p. 409. **Act of March 15, 1884, Acts of 1883-84, p. 568. ttPollard's Code, p. 2199, Acts of December 12, 1903.' tJActs of 1908, p. 325. 212 Report of Tax Commission — ^Appendix. bank was located in another, the value of the stock so reported should be deducted from the total value of the shares assessed against the bank.* This is the law as it remains to-day. Revenue from the Taxation of Banks. Inevitably under a system which requires the report of every available dollar of taxable assets of banks, as shown in the value of their shares, there has been no change in the revenue from this source, other than the natural increase to be expected from the general increase in the banking capital of the State. The revenue has risen steadily and at present the State derives $134,233.04 net from this source. Justice of This Tax. Under a model tax code, taxing all property at its fair market value the present State tax on banks would be most admirable. It aims to reach every dollar that should be taxed, and to reach it without needless administrative delay or attempted evasion. It does these things and does them in a manner that is unexcep- tionable. Except for a certain administrative defect which is to be discussed in a later connection, the law leaves nothing to be desired. The only complainants against it are the banking interests. All others declare it a model law from the abstract point of view. As compared with the bank tax laws of other States our law is one of the best in the Union. The following illustrative acts will make this comparison obvious: Illinois: Sec. 35. The stockholders in every bank located within this State, whether such bank has been organized under the banking laws of this State or of the United States, shall be assessed and taxed on the value of their shares of stock therein, in the county, town, district, village or city where such bank or banking associa- tion is located, and not elsewhere, whether such stockholders reside in such places or not. Such shares shall be listed and assessed with regard to the ownership and value thereof, as they existed on the first day of May annually; subject however to the *Acts of Assembly, 1884-90, 111. Report of Tax Commission — Appendix. 213 restriction that taxation of such shares shall not be at a greater rate than is assessed upon any other moneyed capital in the hands of individual citizens of this State, in the county, town, district, village or city where such bank is located. The shares of stock (capital) of national banks not located in this State, held in this State, shall not be required to be listed under the provisions of this act. Indiana : Sec. 60. The shares of capital stock of any bank, banking association or trust compnay located within this State, whether organized under the laws of this State or of the United States, shall be assessed to the bank, banking association or trust com- pany in the township, city or town, where such bank or banking association or trust company is locarted, and shall be taxed at the same rate as other property in the same locality is taxed, and with reference to its value on the first day of March of the current year. Sec. 61. . . . The assessor shall determine and settle the true cash value of each share of stock, after an examination of such state- ment and also an examination under oath of such officer if he deem it necessary; and in determining and fixing the true cash value of each of said shares of stock, he shall be governed by the market or usual selling price of such stock at private sale at the place where the bank is located; and, if there is no market value, he shall determine the actual value, taking into consideration the surplus and undivided profits, if any, just as he would with respect to other moneyed capital in the hands of individual citizens of the State. New York: Sec. 24. In assessing the shares of stock of banks, or banking associations organized under the authority of this State or of the United States, the assessment and taxation shall not be at a greater rate than is made or assessed upon other moneyed capital in the hands of individual citizens of this State. The value of each share of stock of each bank and banking association, except such as are in liquidation, shall be ascertained and fixed by adding together the amount of the capital stock, surplus, and undivided profits of such bank or banking association and by dividing the result by the number of outstanding shares of such bank or 214 Report of Tax Commission — ^Appendix. banking association. The rate of tax upon the shares of stock of banks and banking associations shall be one per centum upon the value thereof, as ascertained and fixad in the manner hereinbafore provided, and the owners of the stock of banks and banking as- sociations shall be entitled to no reduction from the taxable value of their shares because of the personal indebtedness of such owners, or for any other reason whatsoever. The said tax shall be in lieu of all other taxes whatsoever for State, county, or local purposes upon the said shares of stock and mortgages, judgments and other choses in action and personal property held or owned by banks or banking associations the value of which enters into the value said shares of stock, shall also be exempt from all other State, county or local taxation. Pennsylvania : Sec. 1. Every bank or savings institution having capital stock, incorporated by or under any law of this Commonwealth or under any law of the United States, and located within this Commonwealth, shall make to the Auditor-General a report . . . setting forth the full number of shares of the capital stock sub- scribed for or issued by such bank or savings institution, and the actual value thereof, which shall be ascertained as hereinafter provided ; whereupon it shall be the duty of the Auditor-General to assess such shares for taxation at the same rate as that imposed upon our moneyed capital in the hands of individual citizens of the State, that is to say, at the rate of four mills upon each dollar of the actual value thereof, the actual value of each share of stock to be ascertained as hereinafter provided; whereupon it shall be the duty of the Auditor-General to assess such shares for taxation at the same rate as that imposed upon other moneyed capital in the hands of individual citizens of the State, that is to say, at the rate of four mills upon each dollar of the actual value hereof, the actual value of each share of stock to be ascertained and fixed by adding together the amount of capital stock paid in, the sur- plus and undivided profits and dividing the amount by the number of shares. And provided further, that in case any bank or savings institution having capital stock incorporated under the laws of this State or the United States shall collect annually from the shareholders thereof, said tax of four mills on the dollar upon the actual value of all shares of stock of said bank or savings Report of Tax Commission — ^Appendix. 215 institution, and pay the same into the State Treasury on or before the first day of March in each year, the shares and so much of the capital and profits of such bank or savings institution as shall not be invested in real estate, shall be exempt from local taxation under the laws of this Commonwealth. Except, how- ever, that any bank or savings institution incorporated as afore- said, in lieu of the method hereinbefore set out for ascertaining the actual value of the shares of capital stock may elect to collect annually from the stockholders thereof a tax of ten mills on the dollar upon the par value of all shares of said bank that have been subscribed for or issued, and pay the same into the State Treasury on or before the first day of March in each year; and the shares of such bank or savings institution, as shall not be invested in real estate shall be exempted from local taxation under the laws of this Commonwealth. Connecticut : Sec. 2331. The secretary, treasurer or cashier of every bank, national banking association, trust insurance, investment and bridge company whose stock is not exempt from taxation, shall annually file in the office of the Tax Commissioner of this State a statement under oath, showing the number of shares of its capital stock and the market value thereof on the first day of October, the name and residence of each stockholder and the number of shares owned by each on said last named date; and on or before the last day of the following February, each of the cor- porations aforesaid shall pay to the treasurer of this State a tax of one per centum on the market value of each share of its stock — less the amount of taxes paid by such corporation upon its real estate in Connecticut during the year ending on the first day of said February. Sec. 2333. On or before the fifteenth day of April in each year the treasurer of the State shall remit co the treasurer of each town in the State . . . the amount of the tax received as afore- said upon such shares of the capital stock of any of the aforesaid corporations as were, on the first day of October of the preceding year, owned by persons who resided or corporations which were located in such town. The tax derived from the shares of any national banking association located in State, which were on 216 Report of Tax Commission — ^Appendix. the first day of preceding October owned by non-residents of chis State, shall be paid over to the treasurer of the town within which such banking association is located. Massachusetts : Sec. 9. All the shares of stock in banks, whether of issue or not, existing by authority of the United States or of the Com- monwealth, and located within the Commonwealth, shall be assessed to the owner thereof in the city or town in which such bank is located and not elsewhere, in the assessment of State, county and town taxes, whether such owner is a resident of said city or town or not. They shall be assessed at their fair cash value of the first day of May, first deducting therefrom the pro- portionate part of the value of the real estate belonging to the bank, at the same rate as other moneyed capital in the hands of citizens is by law assessed. "[The rest of the law refers to the complicated method of distri- buting the taxes so collected to the towns where the shareholders reside. The taxes on shares of non-resident stock are x'etained by the State.]"* The Law in Practice. Admirable as it is in theory — indeed, well-nigh perfect as it is, the bank tax in practice works inequality in three directions. First, it works great injustice, under existing conditions, in taxing banks at a much higher rate than real or tangible personal property. As has already been pointed out, tangible personalty is nowhere assessed at its "fair cash valuation" and lands are nowhere taxed at their "fair market, value." Personal property may be taxed at a tithe or a half of what it is worth ; lands in no localities are assessed at more than 85 per cent, of what they will bring on open market. Yet bank shares are taxed at the pro- rated value of capital, surplus and undivided profits, at the full value, in a word, of everything taxable under the National banking act. Even where the bank takes advantage of the 10 per cent, deduction, it pays on 90 per cent, of the full value of its property. It thus happens that the owner of a bank stock will *TheBe acts are selected from those cited in the report of the California Tax Com- mission, 1906. Report of Tax Commission — Appendix. 217 be paying 35c on the hundred dollars full value of his marketable product when the land owner will be paying 35c on property which will, throughout the State, bring about $160. This is inequality. The second inequality, which is essentially practical is between the owner of bank stock and the owner of other intangible personal property. The advantage is with the latter, for the owner of bank stock is forced to "stand and deliver." The Commissioner of the Revenue has a complete list of his holdings, and he can only deduct 10 per cent, of the value of his stock on account of debts due. The man who owns stocks and bonds has every oppor- tunity of defrauding the State by false returns, and, in addition has a latitude for "debts due" that often reduces his holdings to a fictitous zero. It is certainly right, as long as we tax principal and not interest, to assess the owner of bank stock on every tax- able dollar he has; but it is certainly not right to so assess him thus, while giving every opportunity to another property owner to escape all tax burdens. It is fortunate for Virginia that the Supreme Court in defining "other moneyed capital" which must be taxed at the same rate as bank stock has been liberal in its interpretations. Otherwise the Commonwealth could not hope to be more successful than California in Bank vs. Dodge, when the failure of the State to assess competing capital at a same rate or on the same basis invalidated the California bank tax. The third inequality, is between banks and has to do with the deduction of debts. Under the act of 1908 mentioned above, banks are allowed to deduct 10 per cent, from the value of their taxable property for debts due by their shareholders. Whether or not a bank does this is optional, and the inequality which results is certainly beyond the range of law; but that inequaHty does result, statistics compiled by the Commission show conclusively. Of the 363 banks assessed by the State in February 1910, 244 did not avail themselves of this law. In other words, 119 banks of the State were enabled to give their shareholders a discount of 10 per cent, in the amount of their taxes, while the others paid at the rate of 100 per cent, of the real value of their shares. Doubtless many shareholders preferred to lose this discount rather than to file the statement of debts due and" securities held, as required by 218 Report of Tax Commission — ^Appendix. law; but this does not modify the original statement, — that in- equality in taxation has resulted. Summary of Inequalities. None of these inequalities mentioned above is sufficient in itself to invalidate or even seriously impair the tax on banks, but the aggregate is sufficient to give certain banks of the State a slight advantage over others and to place all at, a disadvantage when compared with other taxable property. To meet these con- ditions, which are common to most States, a number of laws have been devised. These correspond in the main with those already outlined in connection with the taxation of insurance, and are as follows : First, complete exemption of bank shares from taxation by the locality; second, an apportionment of a single bank tax between the State and the locality; third, limitation on the taxes to be imposed on banks by any locality. The first of these — complete exemption from local taxation and the imposition of an exclusive State tax, has many advocates. It is now in use in a number of States and is unquestionably the tax best suited to present conditions. It has a number of advan- tages, the possible operation of which in Virginia deserves to be noted. 1. Better Administrative Control. As has already been pointed out in the chapter on the taxation of insurance companies, it is sound administrative economy to tax exclusively any business or industry the nature of which requires strict public supervision. This is obviously as true of banks as of insurance companies and may be passed by as a manifest advantage. 2. Equality Between Banks. It is argued, in advocacy of this plan, that the State, in char- tering banks under the same general laws and in giving them equal opportunities for the transaction of business, should not permit their activities to be diminished or their legitimate interests thwarted by unjust local taxation especially when, as has been pointed out, the banks are assessed as are no other properties in the State on the full value of their taxable property. It is claimed Report of Tax Commission — ^Appendix. 219 also that there is no justice in compelling banks in one town — char- tered and inspected by the State, to pay 1 per cent, more for the privilege of doing business, than banks in another city likewise chartered and inspected by the State. If the bank in a town where the rate is high were receiving greater advantages than the bank in town where the tax rate is low, there would be justice in tax- ing them at a different figure ; such is the case in the taxation of lands and personal property, where there are greater public improvements, and there is no complaint. But banks operate on a different basis and their best interests demand equality of taxation. To place them all on the same basis would be to give to them all an equal opportunity to compete for the banking business of the State, and it is hoped to compete in the larger field of Southern activity. The Removal of Existing Administrative Evils. An exclusive State tax would likewise remove certain adminis- trative evils which tend to increase inequality under existing laws. The present statute requires, in conformity with the National bank law, that the stock of extra State share-holders be taxed at the situs of the bank, and provides the same method of taxation in all other cases except where a share-holder may desire to have his stock taxed in his own locality. In such a case the owner lists his stock and the Commissioner of Revenue notifies the Commissioner of the district where the bank is lo- cated. The latter deducts the value of the shares so returned from the amount to be assessed against the shares at the bank. This is a doubtful expedient at best, since every man will be inclined to pay his tax and to settle with the bank, if he resides in a district where the rate is lower than at the bank; but this fundamental injustice has been aggravated by the failure of the Commissioners of the Revenue, either to notify the Commis- sioner of the district where the bank is located or even, in some instances, to require the listing of stock where he knows it is not taxed in the other districts. Confusion and inequality result. It has been impossible to ascertain the extent of this evil, but from the ignorance of this law exhibited by some Commissioners, there is reason to believe it is grossly neglected. If the tax on banks were made uniform throughout the Commonwealth, share- 220 Report of Tax Commission — ^Appendix. holders would have no incentive to list their stock elsewhere than at the bank. Neither they nor their community would gain anything by having the tax assessed in their locality. In the same way, an exclusive State tax would remove that inequality and consequent bad administration which follows from the varying usages of local taxation. Our bank tax law authorizes the locality to levy on bank stock in the same manner as the State, but interposes a "may" which has led to confusion. Apparently, many counties have not failed to avail themselves of this law, or, if ever formally authorizing the levy, have let it fall into disuse. For instance, bank stock is apparently not assessed for local purposes in 45 counties. Manifestly, with a flat State rate, levied alike on all banks, there can be neither omission nor inequality. 4. Reduction of the Rate. An exclusive State tax would reduce the burden on those banks which are of most importance to the financial development of the State and would place a proper tax on many banks which are now making no adequate return for the benefits received from the Commonwealth. As the law stands to-day the bank tax rate in most of the cities is higher than the proposed rate; yet, as will appear from the balance sheet below, the substitution of a flat rate of $1.25 would lessen this tax while bringing the State ap- proximately the same revenue as is now derived from local taxes on banks. No thinking man desires to burden the small or rural bank. Indeed, it should be the policy of the State to aid and develop these in every way possible. But common justice dic- tates the proper and equal taxation of every bank wherever located. To summarize, it is claimed that an exclusive State tax on banks, when such a tax be possible, would foster better administra- tive control of the banks, would remove inequalities among banks of the Commonwealth, and, in addition, would remedy existing administrative evils, while giving to all an opportunity of equal competition. While the ends to be accomplished by an exclusive State tax are in the main, most desirable ; it is questionable whether or not banks should be exempted from the operation of general laws Report of Tax Commission— Appendix. 221 taxing all property in a locality at a uniform rate. To this extfent a flat tax by the State, and the exemption of the banks from local taxation is certainly improper unless the State return to the localities an exact quid pro quo for the taxes they lose. Apportionment and Tax Limitation. If it be granted that banks should be taxed at a rate different from that imposed on all personal property and moneyed capital in a locality, apportionment or limitation is certainly desirable. Where this premise be not granted, little is to be gained by such a method except better administrative control. The Best Policy is Equalization. To summarize the whole situation, the only serious fault with the present law, aside from the question of offsets, is that the law unquestionably operates to tax banks on the full value of their property, while other individuals are not so taxed. But the remedy here lies not in lowering the assessment ot bank shares, but in increasing that of other property to the same standard of valuation. Instead of removing discrimination by lowering the banks to the standard of other assessments, we should remove discrimination by assessing all property at its full market value. Viewed in this light, the establishment of equality in dealing with this class of property lies without the letter of the present law and in the general equalization of property. Accordingly there would seem to be no reason for changing the present law, unless it be to remove the present exemption. When the Assembly of 1908 allowed the banks to deduct 10 per cent, from the full value of their shares of stock on account of debts due by shareholders, the Assembly in fact realized that the banks were paying at a higher rate than were other property holders and gave them this as a practical offset. Now that the Commonwealth intends to assess all property at its fair market value, there is no reason why the banks should be allowed this deduction. The writer accordingly recommends the repeal of the act of 1908. As the question of an exclusive tax will doubtless be presented to the Assembly when partial or complete separation is possible the writer appends two brief statements in the appendix bearing 222 Report of Tax Commission — -Appendix. on this subject — ^the one, a computation of suggested rates and the other, a brief discussion as to the legality of an exclusive tax. The Tax for the Examination of Banks. When the banking law of the Commonwealth was revised by the General Assembly of 1910, a tax was levied on the banks for the support of the bureau of banking. This took the form of fees (p. 56388) which have ranged, in practical operation, from $35 to $200. The whole yielded in 1910 an assessed revenue of $16,610. Some complaint has been made that these fees are too large and that, in some instances, they are positively burden- some to the banks. The writer has been unable to see the justice of this contention. The aim of the banking law is to give security to the State banks and to protect the depositors from unfair and dishonest methods. This can only be done by careful examination and careful exam- ination is only possible where competent examiners and experts are employed to go over the books of all banks. These, in turn, can only be secured at reasonable salaries. Moreover, bank examination to be successful must be frequent, and can only be successful when enough men are employed to give every State bank a careful and thorough inspection at least once a year. The State at present employs a chief examiner, two assistants and two record clerks. The total pay roll is $10,300 the year with expenses which are inevitably high. As the State intends to make its examination more and more careful, decreased fees would mean decreased efficiency and the postponement of ideal bank supervision. The existing scale of fees should be continued. Equalization by Commissioner. In conclusion attention should be called to the fact that the Tax Commissioner, proposed in another part of this report, would have general supervision over the assessment of bank taxes, would see that Commissioners of the Revenue impose the taxes where local ordinances require them, and in this way would secure a uniform assessment of this property, and would remove the inequalities that now exist. Specific recommendations are not made on this point as the general powers granted the Tax Com- Report of Tax Commission— Appendix. 223 missioner under the act proposed will be sufficient for the pur- pose. Summary of Recommendations. First, the continuance of the present system for the present, without modification except the repeal of the act allowing banks a ten per cent, offset on account of debts due by shareholders. Second, equalization of bank taxes through the assessment of all property at its fair market value. Third, the continuance of the present scale of fees for the examination of banks. APPENDIX A. Legality of an Exclusive State Tax on Banks and Trust Com- panies. As has already been stated, in drafting a law for the taxation of banks, it is always necessary to conform that law to the pro- visions of section 5219 of the Revised Statutes, which defines and limits the nature and amount of the tax which may be levied on banks. This section reads as follows: Section 5219. Nothing herein shall prevent all the shares in any association from being included in the valuation of the per- sonal property of the owner or holder of such shares, in assessing taxes imposed by authority of the State within which the associa- tion is located; but the legislature of each State may determine and direct the manner and place of taxing all the shares of national banking associations located within the State, subject only to the two restrictions, that the taxation shall not be at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State, and that the shares of any national banking association owned by non-residents of any State shall be taxed in the city or town where the bank is located and not elsewhere. Nothing herein shall be construed to exempt the real property of associations from either State, county or municipal taxes, to the same extent, according to its value as other real property is taxed. The question therefore arises, will an exclusive tax on banks and trust companies comply with the provisions of the law. The only important Hmitation is that "the taxation shall not be at a greater rate than is assessed upon other moneyed capital 224 Report of Tax Commission — ^Appendix. in the hands of individual citizens of such States." Will a tax on banks, levied by the State, when there is no State tax on stocks and bonds conflict with this section? In view of the attitude of the courts in construing this law, there is little doubt but that such a law is of unequestionable validity. This opinion is based upon the long line of decisions by which the courts have defined the meaning of "other moneyed capital" and limited the application of the phrase. The courts from the first have held that "other moneyed capital" is capital competing with the national banks and none other. Mercantile Nat. Bk. vs. New York, 121 U. S., 139. Nat. Bank Garnett vs. Ayers, 160 U. S., 660. Talbott vs. Silver Bow County, 139 U. S., 438. First Nat. Bank vs. Chapman, 173 U. S., 205. Aberdeen Bank vs. Chehalis County, 166 U. S., 440. Bank of Commerce vs. Seattle, 166 U. S., 463. This excludes from the discussion the taxation of all capital which is now employed in any business not in competition with banking, such as shares of private industrial corporations, public service corporations and the like. By a similar line of decisions, savings banks and building and loan associations have been ex- cluded from the definition of other moneyed capital. Jenkins vs. Neff, 22 S. C. Rep., 905. Bank of Redemption vs. Boston, 125 U. S., 68. Davenport Bank vs. Board, 123 U. S., 83. Mer. Bank Cleveland vs. Hubbard, 98 Fed. Rep. 465. Even within these limitations, the courts have held that a tax on banks was invalid only when other taxable moneyed capital was assessed at a lower rate. When other capital was not taxed, the courts in recent years have held that no discrimination was involved within the meaning of the law. Van Allen vs. Commissioners, 4 Wall., 244. Lionberger vs. Rouse, 9 Wall., 468. Nat. Bk. Wilmington vs. Herbert, 44 Fed. Rep., 158. The last cited case guarantees the constitutionality of an exclusive tax, so far as the failure of the State to levy any tax on other shares and securities is concerned. An act of the Delaware legislature providing for just such a policy of partial Report of Tax Commission — Appendix. 225 separation as we propose was contested in this case. This act levied a State tax on real estate, live stock and bank shares and taxed no other property for State purposes. The court held that this was no discirmination against national banks within the meaning of the statute. It may be objected that even if there be no discrimination under the proposed State law, the assessment of local taxes on competing moneyed capital may constitute discrimination against the banks. This, however, has been settled beyond question. The courts have decided that neither a different rate of assess- ment or valuation nor a difference in local rates constitute dis- crimination, so long as the State and National Banks are taxed alike. Mer. & Mfg. Bk. vs. Penn., 167 U. S., 461. Nat. Bk. Baltimore vs. Baltimore, 100 Fed. Rep., 24. Nor can the inevitable differences in valuation which are in- volved in such assessments be alleged a discrimination. Stanley vs. Supervisors, 121 U. S., 535. Bank vs. Kimbal, 103 U. S., 732. Exchange Bank vs. Miller, 19 Fed. Rep., 372. Moreover, the proposed tax does not come within the list of discriminations outlined by the courts. Bradley vs. People, 4 Wall., 459. Bank vs. Penn., 167 U. S. 461. Hill vs. Exchange Bank., 105 U. S., 319. Whitbeck vs. Mer. Bank, 127 U. S., 193. Evansville Bank vs. Britton, 105 U. S., 322. Pelton vs. Bank, 101 U. S., 143. Whitbeck vs. Bank, 127 U. S., 193. Finally, the proposed tax is well within the limits of the case of Bank vs. Dodge, 25 S. C. Rep., 384, does not conflict with the more recent interpretations of Boyer vs. Boyer, 113 U. S., 689, and is easily within the discretion allowed the States in the va- rious cases defining other points in the law: Bank vs. Caldwell, 13 Fed., Rep., 429. San Francisco vs. Bank, 92 Fed. Rep., 273. Rosenblatt vs. Johnson, 104 U. S., 462. Banks vs. San Francisco, 129 Cal., 96. Owensboro Bank vs. Owensboro, 173 U. S., 664. City Bank vs. Paducah, 1 Nat. Bk. Cres. 300. 226 Report of Tax Commission — ^Appendix. Peoples Bank vs. Marye, 107 Fed. Rep. 570. Bank vs. Commonwealth, 1 Wall., 353. Omaha Bank vs. Douglas Co., 3 Dillon, 330. Palmer vs. McMahon, 133 U. S., 660. Mer. Bank vs. Penn. 167 U. S., 461. Bank Commerce vs. New Bedford, 155 Mass., 313. Hepburn vs. School Directors, 33 Wall., 480 (o). Talbott vs. Silver Bow County, 139 U. S., 438. APPENDIX B. The Rate of the State Tax. In recommending $1.25 (plan A) as the rate of any proposed exclusive State tax, two considerations are involved. First, this figure is about the average of the present State and local tax throughout the State. The former is thirty-five cents and the latter, ninety-seven cents; making in the aggregate $1.33. The nearest easily computable figure to this amount is $1.25. In the second place, a tax on banks at $1.25 will yield approximately the same revenue as is at present collected by the State and by the localities and will, in this way, make the taxes of all banks about the same while equalizing taxes between them. This will be apparent from the following balance sheet: Present State tax on bank shares (1910) $135,245.73* Reported local taxes on bank shares (1909) . . . 333,532.56t Estimated local taxes not reported 12,280.79 Total amount of present State and local taxes. .$481,059.08 *This is the amount assessed: the amount collected was $134,233.04. fThis sum is added to the reported amount of the tax, and is apportioned among tlife counties of the State where banks are located, to safeguard the estimate made. There is a lack of uniformity among the counties in respect to bank taxes, and, as is stated in another connection, 45 counties apparently levy no county taxes on banks. Moreover, even where banks are taxed, treasurers do not list them under a separate heading, but in some instances, list them with the total personal property figures or do not list them at all. They are not included in any county with the personal property totals returned the auditor, since the local treasurers do not collect State taxes from banks. It is believed that the amount allowed here is at least sufficient to cover the full amount of any bank taxes not reported; and, if anything, the amount allowed is too large; The total taxes of $33,000,000 of the $35,000,000 of taxable bank property are included in the reported figures, $333,532.56. Report of Tax Commission — Appendix. 227 The amount of assessed taxes on a basis of $1.25 would be determined, of course, by the total capital, surplus and un- divided profits of the banks. On the last call (January, 1911), these were as follows: STATE BANKS. Capital $ 9,857,637.98 Surplus 4,704,152.33 Undivided profits 1,860,282.56 Total ....$16,422,072.87 Less value of banking houses, furniture and fixtures and real estate owned $ 2,643,202.37 Total taxable $13,778,870.50 NATIONAL BANKS. Capital $16,393,500.00 Surplus 10,614,331.34 Undivided profits 2,539,876.71 Total $29,547,708.05 Less value of banking 'houses, furniture and fixtures and real estate owned and mort- gaged $4,223,796.95 Tota.1 taxable 25,323,911.10 Total taxable, State and National Banks $39,102,781.60 Total proposed tax, @ $1.25 $488,784.77 Present tax. State and local 481,059.08 Net increase in taxes 7,725.69 Total proposed revenue $488,784.77 Present State revenue 135,245.73 Net increase in State's revenue $353,539.04 It will be observed in this estimate no allowance has been made for the present deduction of ten per cent, from the taxable prop- 228 Report of Tax Commission — ^Appendix. erty of banks on account of debts due by shareholders. If, however, it be deemed best to allow such a deduction, the balance sheet would then be as follows : PLAN "B." Total taxable property. State and Nat. Banks.$39,102, 781.60 Less 10% for debts due by shareholders 3,910,278.16 Total taxable less reduction $35,192,503.44 Taxed at $1.25 $439,906.29 Present tax 481,059.08 Decrease 41,152.79 Additional revenue to State deducting amount of present State tax 304,660.56 If it were desired to continue the present tax and still to allow the deduction of ten per cent., this can be accomplished by raising the rate to $1.40 instead of $1.25. This would yield a revenue as follows: PLAN "C." Taxable property, less deduction of 10% $35,192,503.44 Taxed at $1.40 492,695.05 Present revenue. State and local 481,059.08 Increase in tax 11,635.97 Net increase in State's revenue, deducting amount of present State tax 357,449.32 Report of Tax Commission — ^Appendix. 229 CHAPTER VI. THE TAXATION OF RAILROADS AND CANALS. Historical. Railroad building has marked as great an epoch in taxation as in transportation. The railroad was the first of an entirely new species of property; its taxable value could not be ascer- tained by comparison with any existing property; its earnings were problematical; no man knew to what extent the venture would prosper. So much was this the case that when the As- sembly of 1827-28 chartered the horse-drawn Chesterfield rail- road;* and, two years later, the Petersburg Railroad f — the first steam line in the State — it fixed no taxable basis and made no ef- fort to tax them. Even when the general act for railroad incorpo- ration was passed at the session of 1836-37, the law was silent as to the method of taxation. J But as these were ','internal improve- ments," manifestly calculated to do genuine public service, there was every reason to exempt them from taxation, and thus to evade the baffling question of their proper taxation. By 1842, however, the railroads in the State had at least shown their value; and in the Assembly of that year an act was passed which imposed a tax on all future railroads not exempted from taxation by law. This act** was general in character, applied to every "joint stock company chartered by this State," and imposed a tax on "each dividend of profit," to be paid by the corporation before the dividend was disbursed. The rate was "one and one- half per centum on the dividends." ♦Acts of Assembly, 1827-28, p. 85. tibid., 1829-30, p. 59. tibid., 1836-37, p. 101. **Acts of 1842-43, p. 8-10; amended Ibid., 1845-46, p. 7. 230 Report of Tax Commission — ^Appendix. Crude as was this law, it was levied on earnings, a basis differ- ent from that of estimated property value. The patrons of the various bills incorporating railroads and canal companies during the next few years were careful, however, to secure the exemp- tions wherever possible, with the result that this law in its applica- tion to railroads was practically a dead letter. By an act of 1855, amended in 1859,* the Commonwealth outlined a real and definite policy of railroad taxation. Every company was required to fill sworn quarterly statements showing the number of passengers and the aggregate miles of their trans- portation within the Commonwealth, together with the state- ments of its gross freight earnings during the same period. The latter were apportioned, in the case of interstate companies, according to the ratio of intrastate to total mileage. On the passenger traffic, railroads were taxed one mill per passenger- mile, and on freight traffic one-half of one per centum on its gross earnings. This tax exempted companies from all other taxes, State or local, except taxes on their stocks and bonds. f When it be remembered that this law was passed when railroads were of comparatively trifling value, when the great interstate decisions had not been written and when the entire basis of tax- ation was still in doubt, the wisdom and justice of the Assembly must excite the greatest admiration. More than fifty years ago, they devised a system of taxation which many economists today, in the light of modern theory and vast experience, consider the ideal one. By acts of 1869-70, as amended by acts of 1870-72, this sys- tem of taxation was largely changed to a property basis.** Every company was required to file annual reports of the value of its various real and tangible personal property in the State, sub-divided according to its situs. The companies were like- wise required to report all dividends paid and gross and net earnings, apportioned according to mileage in the case of inter- State companies. Each railroad was declared the agent of the Commonwealth for the taxation of its dividends. On their real *Aot8 of 1865-56, p. 15; Ibid, 1850-60. Ch. 3. tActs of 1859-60, c. 1. It is interesting to observe that the law taxed every com- pany, whether exempted by law or not. The question then raised, as applied to the R. F. & P. railroad was not settled until the present year (1911). **Acts of 1869-70, p. 302; Acts of 1870-71, p. 93; Acts of 1871-72 p. 175. Report of Tax Commission — ^Appendix. 231 and personal property thus reported, the companies were re- quired to pay fifty cents on the hundred dollars' valuation; and on their indebtedness, were required to deduct from all dividends paid an annual tax of fifty cents on the market value of the dividend producing property. Local taxes were for the time prohibited ;t but by an act of 1880 were allowed on the real prop- erty of railroads, as certified by the Auditor of Public Accounts-^ Under this system the railroads were allowed to fix their own valuations on their property. The Auditor was compelled to accept as final the statements made under oath by the President of the companies and to levy taxes accordingly. There could be but one result: The valuations were ridiculous and the re- sulting taxes were trifling. The absurdity of this system became so obvious that the Assembly, at the famous extra session of 1881-1882, again changed the system of taxing the railroads. Every company was required to file an annual statement, under seven specified heads, showing the extent and character of its real and personal property, wher- ever located. Upon the receipt of this information, the Auditor of Public Accounts placed the same before the Board of Public Works, which, upon due notice given, assessed the property so reported, and taxed the same at forty cents on the hundred dollars' valuation. In addition, every company was required to file a statement of its gross and net earnings, apportioned as previously in the case of inter-State companies. From gross earnings, the company was allowed to deduct "the cost of opera- tions, repairs and interest on indebtedness," and was required to pay one per cent, on the net earnings so ascertained.* The law was silent as to the taxation of railroads by the localities, but as the act authorizing this was never repealed, it remained in force despite the changed method of taxing railroad property. The present system of taxing railroads came into being with the Constitution of 1902. In the convention drafting that docu- ment, there was great discussion as to the best method of taxing these companies; and in the committee it has generally beerl fActs of 1871-72, p. 385. The tax on the indebtedness of inter-State companies was apportioned according to the percentage of intra-State to total mileage. JActs of 1879-80, p. 82. *Act3 of Assembly, extra session 1881-82, pp. 506-507. 232 Report of Tax Commission — ^Appendix. understood that the chief discussion was whether the railroads should be taxed on their gross earnings or on the value of their stocks and bonds. The plan finally adopted was a compromise. Under the provisions of the Constitution and of the enforcing acts,* the State Corporation Commission was vested with the general powers of railroad assessment previously held by the Board of Public Works. On September 1, the railroads were required to report their real and personal property as of June 1, together with a statement of their gross earnings, apportioned in the case of inter-State companies as previously done. On the basis of the statements thus made, and upon thirty days' notice, the Commission was authorized to fix its assessment of railroad property, subject to appeal to the courts. On the prop- erty of the company, real and personal, a State tax was levied at thirty-five cents, with local taxes on the same basis; and a further State tax of one per cent, on gross earnings was imposed. The latter was declared by the Constitution to be a privilege or license tax, in consideration of which the stock of Virginia rail- roads was exempted from all taxation. The Constitution further provided that no tax should be levied on net earnings, that the franchise of railroads, under the existing law, should not be valued for taxation and that the system of taxation should not be modi- fied until January 1, 1913, unless it sooner became inoperative. After the date named, the General Assembly should have power to modify or change the system. Valuation of Railroad Property. The year 1881 marked the great epoch in the valuation of railroad property. Prior to that date, as already indicated, the railroads were practically allowed to fix their own valuation on their property. As a result, the total valuation in 1880 was $9,876,306.34 — a sum so utterly insignificant in comparison with the real value of the taxable property. Immediately after the assessment was placed in the hands of the Board of Public Works, this valuation was increased to $26,940,173.75, with a further increase of $6,800.00 in 1882. From that time the valua- tion has steadily mounted up, as will appear from the appended table : ♦Constitution of 1902, sees. 176-181; Tax Bill, Acts of 1902-04, sees. 27-28. Report of Tax Commission — ^Appendix. 233 Year. Railroads Val. 1880 $ 9,876,306.34 1881 ' 26,940,173.75 1882 33,760,567.50 1883 35,817,212.88 1884 :.. 35,830,610.03 1885 35,955,924.90 1886 34,614,427.27 1887 35,700,515.31 1888 36,575,089.52 1889 38,351,665.75 1890 42,500,843.55 1891 48,034,191.41 1892 " 51,453,575.67 1893 53,112,771.73 1894 53,486,066.08 1895 53,058,161.14 1896 53,386,040.89 1897 53,789,022.08 1898 54,084,823.46 1899 55,460,754.09 1900 56,582,345.77 1901 58,895,363.30 1902 60,810,317.89 1903 60,789,891.78 1904 63,669,015.00 1905 65,818,314.00 1906 73,036,554.00 1907 80,173,163.00 1908 82,646,377.00 1909 87,193,599.00 1910 105,011,799.00 These totals include the valuation of canal and lumber and min- ing companies prior to 1903. Since 1903 these valuations have been as follows, with the taxes thereon and the total valuation of all railroad and canal property, including these items. 234 Report of Tax Commission — ^Appendix. Grand Total Canal. Street Car. M. & L. R.R. Total of Valuation. 1904 Val. 473,700 6,425,309 Included in 6,899,009 Tax 2,181.31 46,074.61 table. 48,255.92 70,568,024 1905 Val. 561,650 6,712,688 114,350 7,388,688.00 Tax 2,707.96 50,177.76 519.31 53,405.13 73,207,002 1906 Val. 375,400 7,573,687 91,950 8,061,037 Tax 2,105.02 57,169.13 422.65 59,696.80 81,097,591 1907 Val. 404,724.00 8,432,313 81,450 8,978,487 Tax 2,211.84 65,274.69 384.39 67,870.92 89,151.650 1908 Val. 398,874.00 8,578,988 91,950 8,067,037 Tax 2,084.42 69,425.55 422.65 59,696.80 91,805.196 1909 Val. 399,774 8,643,352 220,510 9,263,636 Tax 2,050.34 66,186.77 956.56 69,193.67 96,457,235 1910 Val. 403,172 7,064,134 320,189 7,064,134.00 Tax 2,211.03 63,699.77 1,432.90 67,343.70 112,075,933 Most of this increase has been in the added per mile valuation of the so-called "standard lines" — The Atlantic Coast Line, The Chesapeake and Ohio, The Norfolk and Western, The Southern, The Seaboard Air Line, The Washington Southern, and The N. Y. P. and N. All other increases have been due to the de- velopment of new lines, the purchase of high priced equipment and the improvement of terminal facilities or, in some instances, of smaller lines. As far as can be ascertained, these "standard" lines, prior to 1881, did not value their main or "trunk" line at more than $6,000 the mile. The Board of Public Works prompt- ly raised this to $15,000 the mile, at which figure the valuation remained until in 1906, when the standard lines were then raised to $16,000. In 1910, the Corporation Commission, on its own motion, increased the valuation to $20,000 the mile, with double track lines assessed at $30,000 the mile. At this figure they are now taxed. Report of Tax Commission — Appendix. 235 The changes in the value of terminal facilities, connecting "links" and the like has also been interesting. The subjoined table will show examples of these charges. Road. Local. Road Bed Val- uation Per Mile 1888. 1903 1910 W. &S C.&O C. &0 C. &0 N. &W Alexandria County Warwick County Henrico County Richmond City Norfolk City 15,000 10,000 15,000 15,000 15,000 15,000 15,000 15,000 12,500 15,000 20,000 15,000 15,000 15,000 20,000 15,000 . 15,000 40,000 15,000 15,000 15,000 15,000 15,000 15,000 60,000 15,000 10,000 9,500 14,000 @ 110,000 20,000 @ 100,000 20,000 @ 30,000 40,000 @ 45,000 15,000 sec. trk. N. &W 20,000 N.&W N. & W Lynchburg City Roanoke 20,000 31,000 A. C. L So Petersburg City Alexandria City Richmond 20,000 30,000 R F. & P . 60,000 (Connecting So Co.) Danville . . ... 20,000 W. &P w. &s Frederick County Frederick County 15,000 15,000 Revenue From Railroad Taxes. Under the changes in the law outlined above the reven'ue to the State from railroad taxes has steadily increased, and the source of the revenue has been greatly shifted from tangible to intangible values. Taking the year 1887 as the date from which exact calculations can be made, we find the assessed revenue from railroads has been as follows:* *This includes the revenue from street railway and mining and lumber railroads, which are not included in the valuation given above; but which cannot be deducted from' the taxes noted here without endangering the accuracy of the statement. The taxes on these companies, in the aggregate has at no time reached more than $56,- 667.35, the present figure. 236 Report of Tax Commission — ^Appendix. Year. State Tax on Real and Per- sonal Property. State Income and Franchise Tax. ll n 1887 $142,802.08 146,300.68 153,406.84 170,003.52 192,136.88 205,814.52 212,451.32 213,944.36 212,232.84 213,544.28 215,156.24 216,359.61 221,843.32 226,329.68 235,581.68 243,241.26 235,135.68 235,526.92 245,625.30 256,600.81 284,048.33 312,607.18 321,397.94 337,690.42 $ 3,675.14 2,065.31 2,002.24 1,754.12 2,862.78 3,835.76 2,578.28 2,379.32 1,801.97 3,019.89 3,840.06 6,371.41 13,400.00 26,724.98 29,012.74 33,088.05 348,271.31 348,917.78 378,580.68 399,697.90 451,169.16 485,985.71 476,680.77 484,307.32 $146,477.22 1888 148 365 69 1889 155,469.08 171 757 64 1890 1891 194,999.66 209 650 28 1892 1893 215,029.60 216 323 68 1894 1895 214,034.81 1896 216 564 17 1897 218,996 30 1898 222,711.01 235,243.32 253 054 66 1899 1900 1901 235 581 68 1902 276 329 33 1903 583 406 99 1904 584,444.70 624,205.98 656.298 71 1905 1906 1907 735 217 49 1908 798,592.89 798,078.71 821,997.74 1909 1910 To the tax on gross earnings (franchise tax) most of this in- creased revenue is due. Prior to the adoption of the new con- stitution, the State tax of one per cent, on the net earnings of railroads was a farce. Its enforcement depended solely upon the honesty of the railroad and the vigilance of the tax officers. The deductions allowed by law, in computing net earnings, were ample, under some systems of accounting to reduce the taxable value to zero; on the other hand, a zealous taxing body, closely construing the law and examining every entry according to a uniform plan, could lay its hands upon sufficient net earnings to make a reasonable sjiowing. Prior to 1898, the railroads were practically left alone and were allowed to fix their own systems of net earnings; after that year the Board of Public Works be- Report of Tax Commission — ^Appendix. 237 came more vigilant and, finally, was able to raise the revenue from the net earnings tax to $33,088.05. Local Taxes and Revenue. The act of 1879-80, which authorized the taxation of the real property of railroads limited this tax to the road-bed, track, depots and like property; but, as machinery is taxed under general statutes as a part of the real estate, this act in operation provides for the taxation not only of the real property, but of practically all the tangible personal property of railroads other than rolling stock. The latter has been taxed at the situs of the main office of the company. It is impossible to compile an adequate or even an approxi- mate table of the actual amount of local taxes levied on railroads until within the last few years. Thus, for instance, the reported amount of railroad taxes levied in 1901 was approximately $125,000; though the assessed value of the property locally taxable if subjected to taxation at the average State rate, would have yielded not less than $580,000. Manifestly the local taxes reported are mere surmises. On the basis of the more accurate reports of recent years, verified where possible by local reports, we find that local taxes on railroad and canal property, electricline included, amounted in 1910 to $954,829.18. These divided as follows: TABLE SHOWING THE AMOUNT OF LOCAL TAXES ON RAILROAD AND STREET RAILWAY COMPANIES. 1910* 1909 Accomac 3,952. 13 Albemarle 11,714.67 Alexandria 16,009. 18 Alleghany 11,032.53 Amelia 3,179.33 Amherst 5,627.65 Appomattox 3,711.04 Augusta 11,567.88 Bath 2,557.56 Bedford 13,765.00 Bland 00.00 Botetourt 15,946.46 Brunswick 9,438.93 Buchanan 304. 56 238 Report of Tax Commission — ^Appendix. Buckingham 1,291.07 Campbell 18,093.45 Caroline 362.54 Carroll 2,801.05 Charles City 687.23 Charlotte 6,894.00 Chesterfield 13,766.80 Clarke ; 2,353.02 Craig 953.43 Culpeper 3,980.01 Cumberland 422. 22 Dickenson 62.00 Dinwiddle (estimated) 12 ,578. 36 Elizabeth City 6,334.88 Essex 00. 00 Fairfax 10,553.75 Fauquier 3,659.86 Floyd 00.00 Fluvanna 8,018.30 Franklin 3,197.38 Frederick 1,940.96 Giles 12,387.95 Gloucester 00.00 Goochland 5,836.66 Grayson 685.62 Greene 00.00 Greensville 5 , 171 . 71 Halifax 9,538.86 Hanover 6,595. 72 Henrico 9 ,266. 36 Henry 7,574.83 Highland 00.00 Isle of Wight (1909) 800.28 James City 3,964.04 King Georgfe 00. 00 King and Queen 00. 00 King William 871.70 Lancaster 00. 00 Lee 10,966. 18 Loudoun 1,309.25 Louisa 5,299.73 Lunenburg 2,552.08 Madison 00.00 Mathews 00. 00 Mecklenburg 9,256.25 MiddL'sex 00.00 Montgomery 10,543.83 Nansemorid 12,007.55 Report of Tax Commission — Appendix. 239 Nelson 7,027.68 New Kent 3,058.05 Norfolk 36,629.12 Northampton 4,818.41 Northumberland 00. 00 Nottoway 4,998.75 Orange 3,826.00 Page 3,455.50 Patrick (1909) 2,817.57 Pittsylvania 11 , 160. 57 Powhatan 1,371.45 Prince Edward 4,999.23 Prince George 3,199. 17 Princess Anne (1908) 3,816.47 Prince William 5,629.97 Pulaski 5,882.83 Rappahannock 00. 00 Richmond 9.00 Roanoke 8,458.01 Rockbridge 12,241.48 Rockingham 6 , 159. 35 Russell (1909) 4,408.62 Scott 11,922.22 Shenandoah 3,284.47 Smyth -. 6 , 221 . 22 Southampton (1908) 8,674.52 Spottsylvania 371.06 Stafford 00.00 Surry 1 ,478.54 Sussex 11,077.43 Tazewell 2613.60 Warren 5,709.32 Warwick 6,218. 11 Washington 10,728.06 Westmoreland 22.07 Wise 22,797.40 Wythe (1909) 9,708.62 York 1,492.28 Cities. Alexandria 1,346.12 Bristol 13,673.09 Buena Vista 1 , 165. 03 Charlottesville 1,991.54 Clifton Forge 7,672. 19 Danville 4,779.59 Fredericksbu.'g 118.63 240 Report of Tax Commission — ^Appendix. Lynchburg 11,788.75 Newport News 9,506.66 Norfolk 32 , 696. 77 Petersburg 27,972.31 Portsmouth 17,047.47 Radford 1,829.64 Roanoke 172,537. 13 Richmond 90,022.19 Staunton 1 ,432. 19 Williamsburg 00.00 Winchester 1,593.90 Total of counties 557,655.98 Total of cities 397,173.20 Total of cities and counties 954,829. 18 If this sum be added to the amount of State taxes paid by these companies during the fiscal year 1909-1910, total taxes paid were : State (franchise and property) 821,997.74 Local (property) 954,829.18 $1,776,826.92 With a total valuation of their property at $112,075,933, it thus appears that the tax on the railroads, including the franchise tax aggregated 1.59% of the hundred dollars' valuation. Ex- cluding the franchise tax, the railroads paid $1,292,519.60 on property assessed at $112,075,933. This is 1.153% plus, or $1.15 on the hundred dollars' valuation. This would make the franchise tax equal a tax of forty-three cents plus on the value of the property. *This table is based in large part upon the totals in table 46 of the report of the Auditor, 1910. This shows the local receipts from levies on railroads, during the year ending July 1, 1910, and consequently does not include the amount derived in additional taxes from the increased assessment of road bed, made in September, 1910. In the case of the cities, the total given in the Auditor's report includes the levy on telephone and telegraph companies. To secure the correct figures it has been necessary to ascertain the amount of these taxes, on the basis of the assessed value, and to deduct them from the total. Some counties and cities did not furnish the report required by law, in 1910, and consequently the figures cited for them are of different years. The year for which the taxes are given is cited, where 1910 is not the year. In the case of Dinwiddle county, the treasurer appears never to have filed a report. In consequence the estimate given is made by computing the tax on the assessed value of all railroad property, shown in the assessment of the Corporation Comroission for 1910. The same has been done in the cases of Radford, Clifton Forge and Roanoke. Report of Tax Commission — ^Appendix. 241 To view the tax in a different ligiit, in comparison with gross earnings, the following table is submitted: Gross earnings on all companies, apportioned in ihe case of interstate companies: Canal Companies $ 79,993.55 Steam railway 53,028,799.43 Electric railway 3,987,529.95 Lumber and mining 31,222.69 Aggregate 57,037,525.62 Total taxes. State and local 1,776,826.92 Percentage of taxes to gross earnings .0311 Extent of the Industry. Finally, to complete the basis for our discussion of railroad taxation, a word must be said of the extent of the railroad in- dustry in Virginia. There are fifty-two regular steam railway companies holding charters in Virginia of which forty-six are in operation (1903 reports). These companies have a total operated mileage of 27,659.72, and own in Virginia 3,492.32 miles of single main track, 479.32 of second track, 1,471.69 miles of yards and sidings, and have branch lines and spurs aggre- gating 634.79 miles. Their total mileage is 6,478.12, and their average operated mileage is 4,457.95. They report the cost of their lines and equipment in the State as $225,193,369.53, the average per mile cost of their lines as $56,896.22, of equipment as $7,313.27, and of general expenditures as $662.92. Their average per mile total cost in Virginia is $76,527.67, including' renewals, repairs, cost of litigation, etc., from the opening of the lines in- volved. Their freight revenue from the State is $35,452,620.05 (1909), and their passenger revenue $9,094,763.18, with other revenue from transportation bringing the total to $47,762,694.35. Their average per mile system earnings are $8,477.95, and their average per mile Virginia earnings are $10,772.35. Their aver- age system expenses per mile are $5,535.68, making the per- centage of expenses to gross earnings average 65.30. Their average Virginia expenses per mile are $6,578.84, making the percentage of expenses to gross earnings average 61.07%. These companies hauled 11,605,974 passengers and 43,096,584 tons of freight in the State during the report year 1909-1910. 242 Report of Tax Commission — ^Appendix. The twenty-four street and interurban electric lines in the State operate 476.24 hundred miles of track, including 17.53 miles of side tracking and turn-outs. They employ 659 cars of all descriptions with electric equipment and keep 292 cars in reserve, without equipment; and report the cost of their track and equipment to be $39,797,052.80 or $113,777.38 the mile. Their total earnings a^e $3,669,758.58 with operating expenses of $2,562,686.67 or 68.99% of the gross earnings. Their total assets are given as $57,387,460.32. There are but eleven lumber and mining railroad companies in the State, with a mileage of 97.58, with small equipment and property. Their gross earnings were $31,222.69, and their property was assessed at $320,198. (1909) The three canal companies have a bed of 28.25 miles, gross earnings of 79,993.55, and property whose assessed value is $403,172. Two of these companies report cost and equipment charges to date to be $3,211,779.34. To summarize, forty-six operating steam railways, eleven steam, lumber and mining com- panies and twenty-four street and interurban electric railways report 7,052.94 miles of track, and three canal companies report 28.25 miles of bed. These represent an invested value of $268, 202, 201.44,* and are assessed at $112,075,933, exclusive of the value of their franchises. Their taxes amount to $1 ,776,826.92 an average of .0311 of their gross earnings, or an average tax of $1.59 on the hundred dollars of property, including their fran- chises. The Basis of Taxation. With these facts in mind, the all-important question can now be answered: is this a just and fair tax. Any tax to be just and fair must fulfil certain conditions. It must be levied at a reason- able rate on a proper basis; it must be fully and equitably as- sessed on this basis; it must be so levied as to work the least hardship in exaction and payment. No tax is just and fair which does not meet all of these conditions; unless the basis be just and the rate reasonable, equality in assessment does not justify the tax. If it be just, at a reasonable rate and equitably assessed *Exclusiveof mining and lumber companies which do not report construction and equipment cost. Report of Tax Commission — ^Appendix. 243 and still be exacted under onerous conditions, it is nevertheless a bad tax. Manifestly, however, a proper basis of taxation is the first essential. We must, therefore, decide whether or not the system now in use in the Commonwealth rests on a sound and proper basis. To ascertain this basis in the case of railroads it is nec- essary to discuss somewhat in detail the theory of railroad tax- ation. Without this discussion, it will be impossible to ascertain the real nature of the problem or the character of our existing tax. And first a word must be said of the special problems which are met with in taxing railroad property. Railroads are like no other property known to taxation. They differ from corporations of a more general character, from lands and from personal property and they cannot be taxed in accord- ance with the general theory of licensed business. A continuous strip of land is chosen, equal to the whole length of the line — a strip of indifferent value, whose direction and grade is its chief recom- mendation. This land is levelled as far as possible; thousands of dollars are spent in grading it and in filling. Thus far, the property of the railroad is real estate. But ties and rails are laid, switches are installed, the line is equipped for service. These are all improvements to the real estate. With each new addition to the equipment of the railroad, there comes in a new item either of real estate or personalty ; a handsome station is erec- ted — and the realty value of the property is increased ; engines and cars bought — and the personal property of the company is in- creased. Finally, or in actual practice, first of all the railroad company secures a charter or license to transact business. This privilege amounts to nothing until the line is in operation; it then increases in value with the traffic of the company, until, finally, it may be its most valuable asset. At all times, as the railroad is a corporation, selling stocks and bonds, it does busi- ness of a character which makes it liable to corporate responsi- bility and hence is subject to corporation tax. Thus the four usual classes of taxable property are combined ; here is real estate, personal property, corporate privilege and a special franchise combined in one property. Moreover, they are so combined that the value of its property of any one class is largely dependent upon the value of the other classes. Thus, all the equipment of a line is but so much junk. 244 Report of Tax Commission — ^Appendix. unless it can be laid and operated ; the right of way and other real estate is well-nigh worthless unless it be equipped ; the corporate character of the company amounts to nothing unless it can earn an income; finally, neither the personal property, the real estate nor the corporate privilege is valuable unless there be a franchise, authorizing the company to do business. Vice versa, a franchise to haul freight and passengers is of course worth little unless there be a line on which to haul them. Thus, if the four elements of railroad property be divided, none of them is of considerable value. If they be combined, they may be the means of a large and remunerative business. From this it will be obvious at the outset that to tax a railroad on any of its four elements alone or properly to value any one of them independently of the other is practically an impossibility. The question, therefore, is how to ascertain the combined value of these elements as an operative and operating whole. As a corollary to this theorem, it must be remembered that these are few absolute- standards of value, for the value of the whole and of the parts is problematical. A railroad is practically never sold for cash, and, in this sense has no positive market value. Nor is it easy to secure a correct statement of the con- struction cost. Few railroads keep accurate construction ac- counts, and even those recently built can give no adequate re- port.* In the same way, the great items of personal property held by a railroad are difficult of valuation. There is no market for second-hand ties or rails; old locomotives must generally be consigned to the scrap-heap when a line ceases to operate But all these things, when the road is a "going concern" have a decided value. Properly to fix their real worth and, by them, the standard of value for the line is not easy. Yet such a stand- ard is necessary for the purposes of taxation. Furthermore, the earning power of a railroad, and hence its value depend upon the amount of traffic. This, in turn, de- pends upon the immediate prosperity of the section through which the line operates. A panic, for instance, may seriously reduce the passenger traffic, and may make the remunerative *As an instance of this it might be noted that the Virginian railroad, recently built, reports that it is unable to make any accurate statement of its construction cost. The General Counsel of the company was only able, with the greatest diffi- culty, to answer a few definite questions of construction cost. Yet this line was built practically by one man and was paid for in cash. Report of Tax Commission — ^Appendix. 245 freight traffic practically nil. Hence, in fixing the value of the railroad, these things must be taken into account. The rails, ties, engines, and right of way represent as much invested capital in dull times as in prosperous; but they cannot be operated to produce an equal return at all seasons. Again, the railroads occupy a peculiar position in relation to the public, which vitally affects their taxation. They are public service corporations, chartered to serve and not to rule the people. As such, the people feel that they should share the profits from the business they authorize and patronize. They feel that additional profits to the railroads should mean lower freight rates and increased taxes. The railroads have always opposed this view, and, while the policy of indifference to the public demand has been generally abandoned, the railroads argue that their stockholders have invested their money in a busi- ness venture from which they should receive a reasonable return. Naturally when the public demands more money in the way of taxes, the railroads expect to recoup in the direction of increased transportation rates. The deduction cannot be too greatly emphasized; rate making and taxation are indissoluble. If taxes are heavy, rates will be heavy, though experience has not justified the view that as taxes are decreased rates are decreased. The problem therefore presents itself, how to fix a rate of taxa- tion which will yield a fair return to the State without leading to a heavier tax on the people through the indirect channel of higher transportation rates. Furthermore, the railroads are not the taxable property of any particular locality, but of all the localities through which they operate. A railroad may be called upon to construct fifty miles of track to reach a valuable property, or to connect two rich parts of a State; yet the intervening territory may yield prac- tically nothing to the railroad. Manifestly, the unprofitable country through which the railroad passes should not receive the benefit from the taxation of the railroad property located in it to the prejudice of the adjoining territory in which there is a very profitable business. The problem here is how to apportion the tax in such a manner as to give to the whole all that it should receive, while dividing it among the parts in proportion to the part they play in building the railroad industry. 246 Report of Tax Commission — ^Appendix. Finally, railroads should be saved as far as possible from fluctuating taxes. They must either know in advance what they must pay or must pay on a constant basis. Most of the rail- roads carry very heavy bonded debts, and, in addition, have large outstanding stock issues, the holders of which are con- stantly clamoring for dividends. In addition, their operating eixpenses are high, seldom falling below sixty per cent, of their gross earnings. They are frequently being called upon to in- crease the wages of their employees, must buy equipment which is very expensive and are subjected to countless exactions for damages, donations, and the like. The result is that the margin of profit in most instances is small, and the net earnings are low. If, therefore, the railroads are from year to year compelled to pay taxes the amount of which greatly fluctuates, their margin of net earnings is con- stantly endangered; their ability to secure a fair return on their investment is in doubt, and the value of their securities may fall. It is highly important therefore, to tax them in such a manner that they will know in advance the approximate amount they must pay. Their taxes must be easily calculable, or else in pro- portion to some standard by which they regulate all their other expenses. Summary of Taxation Principles. To summarize, the desirable essentials of railroad taxation are: first, a valuation of their property by some standard which will neglect no element of value, but which will fix a value which includes alike their corporate character, their real eatate, their personalty, their corporate character and their franchise as an operating concern; second, a system which will ;nake allowances for good years and bad and for the fluctuations in their earnings ; third, a system which will secure a proper tax without raising rates; fourth, a system which will properly apportion the tax; fifth, a system which is as nearly automatic as possible. Methods of Taxation. Various systems of railroad taxation have been tried and have been discarded as the nature of the requirements for a proper tax has become better known. The systems whose advocates Report of Tax Commission — ^Appendix. 247 declare they meet these requirements in whole or in part are five in number. All the other systems in use are but modifications of one or another of the .standard systems. These are: First. Ad valorem taxation of the property, real and personal of the railroad, with no taxation of the franchise or earnings. Second. Ad valorem taxation of the property, real and personal of the railroad, with taxation of the franchise through the gross earnings. Third. Taxation of the property according to the value of the stocks and bonds of the railroad with no other taxes. Fourth. Taxation of the net earnings of the company in lieu of or in connection with the taxation of its property. Fifth. Taxation of the gross earnings of the company in lieu of the taxation of its property. It will be necessary to examine each of these in turn to as- certain their merits or demerits and to see in how far they meet the requirements of an ideal railroad tax. Ad Valorem Property Taxes on Railroads. The taxation of the real and personal property of railroads is a survival of the general property tax and is in accordance with the ancient constitutional provision that all taxes should be equal and uniform. In thirty States, it is still the sole or the chief tax. The argument in defense of this tax is very simple : The railroads are like any other tax-payers or property owners. They have certain property, all of which may either be classed as realty or as personalty. If their real and personal property be taxed as any other property and at the same rate, they are on a par with other tax-payers and contribute their proper part to the burden of government. Their privileges come from the use of certain property; to tax the property is to tax the privilege. The whole question resolves itself into this: what property does the railroad own — how many miles of track, how much real es- tate, how many cars, how many engines? What are these items and the other real and personal property worth? Ascertain these, tax them at the prevailing rate and the matter is settled. 248 Report of Tax Commission — ^Appendix. Defects of This System. 1. Exemption of Intangible Values. The defects of this system are two in number and entirely obvious, First, this system does not and cannot take into ac- count what is often the most valuable property of a railroad, namely, its franchise, or, more correctly speaking, its "intangible values."* Every railroad enjoys special privileges, the gift of the com- munity, and has special earning powers, likewise bestowed by the community. In return for public service, the railroad is allowed to run its track in certain directions, regardless of the wishes of the individuals. It can condemn property, erect stations and cross public highways — ^privileges which are denied the individ- ual. Moreover, the State, by its franchize, authorises the com- pany to perform certain service for which the community allows it to make charges which are high enough in most instances to give the company a reasonable profit. To a larger extent than in the case of any other business, this capacity to make money is the pure gift of the community, and hence is subject to taxation. Yet the value of this franchise, the situation of the road, its con- nections, the character of its traffic and the consequent earning capacity of the company are by no means dependent upon the value of its tangible real and personal property. A short rail- road line may cost very little, but it may have an intangible value which is very great. To tax the company upon its tangible property only will be to miss the taxation of the most valuable thing owned by the company. A case in point is that of the Richmond, Fredericksburg & Potomac and Richmond & Peters- burg Railroad Connection Company. This is a short line, 1.21 miles in length, connecting Elba Station with the Byrd street station in the city of Richmond and running through the center of the city. This line, operated by the Richmond, Fredericks- burg and Potomac Railroad, has cost $144,514.61 to June 30, *The term "franchise value" is used in such a variety of meanings that it should be definitely defined. Strictly speaking the franchise value is that earning capacity inherent to a privilege to transact a business in a specified manner. Yet a railroad corporation may have other intangible values, not directly involved in its franchise. Professor Henry C. Adams, has defined these to be the possession of traffic not ex- posed to competition, the possession of traffic through connections, the benefit of economies due to density of traffic and the value due to organization and vitality of industries served. Bulletin 21, U. S. Census Bureau. Report of Tax Commission — ^Appendix. 249 1909, and is capitalized at $200,000. It annually pays 10 per cent, dividends and is able to accumulate a considerable annual surplus in excess thereof. The line is assessed at $73,480 ($60,000 the miles with $880 of rolling stock, etc.) To tax this company on this amount only would be to permit one of the most valuable franchises in the State to escape taxation — a franchise which could not now be secured at any price.* 2. Inability to Fix Physical Valuation. The second objection to the ad valorem taxation of railroad property is the extreme difficulty of fixing the value of the real and tangible personal property of a railroad. It is easy enough to declare that railroad property should be taxed at its "real value," or at its "fair value," but it is a colossal, a Herculean task to discover what the real value is. Value can be determined only by a standard. In this instance, there are four standards on which a valuation may be based. These are: A. The original cost of constructing the property. B. The cost of reconstructing the property anew, at the present rate of labor and material. *In some States, notably Georgia, the attempt has been made to regard the fran- chise as property and to tax it as such. The Georgia system for valuing the franchise is crude, but the best that economists have been able to suggest is but little better. Their theory is that to deduct from the total market value of outstanding stocks and bonds the value of all real and personal property will leave a corporate excess which represents the value of the franchise. Theoretically this would be true, provided a correct valuation could be placed on the real and personal property. But this is extremely difficult, as wUl presently appear; and to attempt to value the railroad property as a preliminary to valuing the franchise is but to remove the problem one step. In practice, however, this method of estimating the value of the franchise as property and taxing it as such is well-nigh impossible, being subject to two very serious objections. In the first place it cannot apply to intar-State railroads with any degree of exactness. Such a railroad may operate under the special franchises of several States, only one of which will be valuable. To apportion the franchise value according to the proportionate mileage of the line would be to give to certain States an undue part of the value. The second objection to the application of this principle of taxing the franchise as property lies in the fact that the value of the stocks and bonds may not depend upon the property or franchise of the company, but upon its temporary importance in the railroad world. A small line, for instance, contested between two master capitalists, striving for the control of a great system, would be given an inflated value which would make the taxable value of its fran- chise far greater than the real value. Other objections to this method of taxation win be discussed in connection with the "stock and bond" plan of valuing railroad property. The Michigan plan of separately ascertaining the tangible and intangible values of railroad property will be discussed below. 250 Report of Tax Commission — Appendix. C. The cost of reconstructing the property anew, with al- lowance or deduction for deterioration. D. Original construction cost, plus improvements. The application of these different standards will be. more obvious from the citation of a specific case. The present James River Division of the Chesapeake & Ohio Railroad is built from Richmond to Buchanan along the tow path of the James River and Kanawha canal. The canal corporation sold its rights to the Richmond and Alleghany Railroad Company, the control of which was ultimately secured by the Chesapeake & Ohio. In fixing the taxable value, the roadbed is, of course, a very large item. Should the Chesapeake & Ohio, therefore, be taxed on the basis of what the Richmond & Alleghany paid for the right of way; on the basis of what it would cost to make such a right-of way had the canal never been constructed ; on the basis of what the road bed cost, plus the amount spent in improving it; or on the basis of what it would cost to reconstruct the road-bed anew, minus allowance for its present condition? While basis C. is more generally favored, it is by no- means generally accepted and the Supreme Court has apparently favored original cost (basis ,A), but has admitted that there may be valuable taxable property items which would not be included in the cost of construction.* It is perfectly obvious however, that a valuation fixed on these different bases will vary, in the extremes of perhaps 50 per cent. Manifestly, an attempt to make such a valuation is subject to grave criticism until some standard be more generally agreed upon. But there is a second and even greater difficulty in the way of fixing a physical valuation. This is the nature of the property involved. Granting that the cost of reconstruction at the pres- ent rate of material and labor, with due allowance for deteriora- tion, is the proper standard of value, the application of this standard to a great railroad system is a task requiring much money, rnore patience, much time and more ability. To make this difficulty obvious, the writer submits what would be the chief questions to be answered in the valuation of such a system as the Chesapeake & Ohio in this Commonwealth: *Smythvs. Ames, 169 U.S.546iMet. Trust Co. vs. HoustonR. R.,90 Fed. 683; Wilcox et al. vs. Consolidated Gas Co., 212 U. S. 48. Report of Tax Commission — Appendix. 251 1. If basis C. be adopted for the valuation, at what rate should deterioration be allowed in the various classes of property? 2. On what basis shall improvements (appreciation) be com- puted? 3. What would be the engineering cost prior to and during the construction of 573.30 miles of main track and 100.90 miles of spur and branch track? 4. What would this right-of-way cost through the 24 counties and seven cities in which the railroad lies? (a) At the rate of naked land? (b) At the rate of condemnation? (c) At a compromise rate? 5. What would be the cost of the 62 lots of miscellaneous real estate owned by the company? 6. What would be the cost of the 1638 curves, the 497 ascend- ing grades, the 304 descending grades and the fills on the line? 7. What would be the cost of the 16 tunnels on the line? 8. What would be the cost of the 9 stone, the 171 iron, the 2 wooden, and the 3 combination bridges and the 113 tressels on the line? 9. What would be the cost of the ties on the line? (a) Should different allowance be made for ties bought along the line and for those transported? (b) Should any allowance be made for ties that must be replaced in the current year? 10. What would be the cost of the rails on the line? (a) What scrapping value shall be allowed for worn out rails? 1 1 . What would be the cost of the track fastenings, angle bars, bolts and spikes. 12. What would be the cost of the frogs and switches? 13. What would be the cost of ballasting? (a) What part of the line is ballasted with different ma- terial? (b) What part of the ballast was bought? (c) What part quarried along the line? (d) What transportation charges shall be allowed for (b) and for (c)? 252 Report of Tax Commission — ^Appendix. 14. What would be the labor cost of laying the line? (a) Shall allowance be made for strikes, washouts, delays in receipt of material, bad weather, breaks, etc. (b) If so, at what rate? 15. What would the fencing along the line cost? 16. What would the 32 overhead and the 4 railroad crossings cost? 17. What would the interlockers cost? 18. What would the telegraph lines of the company cost? 19. What would the 49 passenger depots and sheds, the 31 freight depots, the 111 combination depots, cost? (a) Shall architects' and supervision charged be allowed separately or in the general engineering charges? 20. What would be the cost of the 14 shops of the company? 21. What would be the cost of the machinery in these shops and the miscellaneous machinery owned by the company? 22. Should this be assessed with the real estate? 23. What would be the cost of the 5 water tanks and the 52 water stations? (a) How shall the cost of getting water be ascertained? 24. What would be the cost of the 13 coal bins and elevators? 25. What would be the cost of the 2 grain elevators? 26. What would be the cost of the warehouse owned by the company? 27. What would be the cost of the company's 8 piers? 28. What would be the cost of the 70 section houses, the 104 laborers' houses, the 88 tool houses, the 26 telegraph and signal towers, the 7 cabins, the 6 round houses, the 7 office buildings, the conveyor, the 2 quarries, the 3 hotels, the hospital, the 2 canals, the 21 agent's houses, the 138 miscellaneous buildings, the 4 gravel pits? 29. What part of the tolling stock of the company should be assessed in Virginia? (a) Shall the apportionment by mileage stand? (b) If not, what standard shall be adopted and how ap- plied? (c) Is any other system legal? 30. What wpuld be the cost of that part of the equipment assessable in Virginia: 699 locomotives, 158 coaches, 38 mail and postal cars, 33 baggage and express cars, 18 parlor cars, 9 Report of Tax Commission — ^Appendix. 253 dining cars, 42 combination cars, 8 business cars, 7,831 box cars, 382 stock cars, 1,126 flat cars, 14,028 gondola flat bottom cars, 13,661 hopper gondola cars, 8 derrick cars, 2 pile driving cars, 3 steam shovel cars, 1 scale tester, 1 snow car, 9 wrecking cars? (a) If (he Master Car Builders Association classification of deterioration is not correct, what classification shall be adopted? 31. What is the cost of the miscellaneous equipment of the company: 2,730 tons of coal, road bed material, stores and shop material? 32. What would be the cost of one steamer, 5 tugs, 2 car floats, 9 coal barges? 33. What would be the cost of any special terminals not in- cluded in the above? 34. What allowance for legal expenses in the construction of the line shall be allowed? (a) Shall any additional allowances be made for litiga- tion since the company's opening? 35. What interest expenses during the construction of the line are chargeable? 36. What allowance should be made for organization during the construction of the line? 37. How can the discounts on material bought be computed? 38. Are there any other overhead charges, during and since construction properly chargeable to the cost of the line? 39. What allowance shall be made for contingencies?* It can at once be seen that in the case of any large railroad a correct valuation of these items is a matter of the greatest diffi- culty. Theoretically, competent engineers could probably agree in the main on the principal items; but on deterioration charges, overhead charges and the like, we doubt if any number of engi- neers, working separately but under the same general rules, would agree to a sufficient extent to warrant an assessment on this basis alone. When the difficulties presented in the case of a single road are multiplied by 42, the number of operating roads in Virginia, *This classification is but a slight modification of the form used in the Michigan appraisal, of which more will be said in a later connection. The changes have been made to meet conditions existing in Virginia. 254 Report of Tax Commission — ^Appendix. the magnitude of the problem will be obvious. As an instance of this, we cife the following to show how wide a variation there would be in such an item as number 4 above — the right-of-way. These figures are for the last right-of-way purchased by the reporting companies : Company. Price, Per Mile. Atlantic CoasL Line Railroad $9,390.00 Big Stone Gap & Powell's Valley 165 .92 Big Sandy & Cumberland Chesapeake & Ohio 2,540 .00 Chesapeake & Western 000.00 Greansville & Dinwiddle Inter-State 200.00 Ivanhoe & Carroll 00.00 Louisville & Nashville 1,500 .00 N. Y. P. &N. (1,917.3 feet) 1,287.25 Norfolk & Southern 1,600 .00 Norfolk & Western 1,750.00 New River, Holston & Western 851 . 10 Norfolk & Portsmouth Belt Line 7,270 . 00 Delaware, Maryland & Virginia bought none Rosslyn Connecting 7,120.00 Potomac, Fredericksburg & Piedmont Seaboard Air Line 10,000 .00 Southern (800 feet) 336 .00 Surry, Sussex & Southampton given Virginian 1,047 .00 Virginia & Southwestern (2,800 ft.) 2,400 .00 Va. Anthracite Coal, etc Tidewater & Western given On this showing, a physical valuation of the railroads of a State, for the purposes of an exclusive ad valorem tax is barely feasible, at great expense. We are confirmed in this opinion by the experience of the States which have attempted such a valuation. The best known of these is the so-called Michigan appraisal, made in 1900-01 by Professor Mortimer E. Cooley of the Univer- sity of Michigan. Prior to 1900, Michigan imposed a gross Report of Tax Commission — Appendix. 255 earnings tax on the railroads which had been the subject of re- peated litigation. Unwilling to hazard its revenue longer, the Legislature authorized a valuation of the railroads of the State in order that they might be taxed on an ad valorem basis. At a cost of $132,000,* Mr. Cooley and his assistants made a valua- tion which was as nearly perfect as it could be. They ascertained the physical elements of the Michigan railroads to have cost $202,716,262 and gave their present value (Basis C. above) as $166,398,156. As far as this valuation went it was admirable. There is neither justice nor reason in the criticisms which have been made of it. At the same time, it cannot be too often emphasized that this valuation was not for the purposes of taxation in itself. The State realized then what it is important to emphasize now, that the valuation of the physical properties of a railroad is not a valuation of the taxable properties of a road. When Mr. Cooley's valuation was completed, the State employed Professor Henry C. Adams to compute the intangible ("non physical") values of the railroads in order that these, addad to the physical values, might give a complete taxable basis. The non physical elements, it need scarcely be said, weri not property values easily expressed in term of money. Practically the same methods have been followed in the later misnamed physical valuations made by the States of Minnesota, Wisconsin, Texas, Wa'shington, West Virginia, Nebraska and New Jersey. In all of these States, the non-physical values had to be computed separately ; no State was willing to assess on the bare physical properties, even where these could be ascertained. Waiving for a moment the question whether or not the intan- gible values were computed in Lhe praper manner, it may be well to repeat the central conclusion to be drawn from the experience of these States: However correct the methods employed in mak- ing the physical part of the valuation, the final valuation was not a property valuation and consequently should not be made the basis of a tax computed on an ad valorem basis. Indeed, econo- mists generally concur in the opinion of the learned Ontario Commission, that when the final valuation was made, on which ♦Including the cost of attendant litigation, the total cost of the valuation was nearly $200,000. 256 Report of Tax Commission — ^Appendix. taxes were to be assessed, the earning capacity of the property was given more consideration than the physical valuation.* Summary of Ad Valorem System. To summarise, the exemption of the non-physical elements by a strict valuation, the difficulty of assessing the physical proper- ties, and the practical abandonment of the property basis when the non-physical properties are included in the assessment, render the ad valorem system complicated, confused and un- certain. Second System of Railroad Taxation: Ad Valorem Property Tax with Supplemental Tax on Gross Earnings. The second system of taxation which, it is claimed, meets the requirements of a proper railroad tax, is the ad valorem taxation of the physical property of the railroads, with a supple- mental tax on their earnings. This system is in use with various modifications of detail, in New York, Ohio, Pennsylvania and Virginia; and, with its chief provisions reversed, i. e., a gross earnings tax supplemented by a tax on the physical properties in Maine, Maryland, Minnesota, Vermont and Kansas. At first view this would appear to be an equitable system of taxation. The railroads have certain properties which are valuable. They should be taxed on these. In addition they enjoy privileges which yield a revenue. The measure of these privileges is the earnings. If, therefore, the railroads be taxed on their gross earnings in addition to being taxed on their prop- erty, they make their full contribution to the public burden. To put the case a little differently, as advanced by advocates of this theory, the value of the franchise, over and above the value of the physical properties, is reflected in the earnings of the company. If both be taxed, the full property of the railroad is subjected to proper levy. But a close examination of this theory will disclose elements of weakness, both practical and theoretical. These are first, that the same difficulties confront the taxing authorities _ in *The subject of physical valuation is being so widely discussed at this time that we have accumulated a great mass of date on the subject which had to be omitted from the body of our report. Some of this, will be found in Appendix A. Report of Tax Commission — ^Appendix. 257 taxing the physical property as in the case where the physical properties alone are taxed ; second, that the taxation of the earnings and of the property is, like all taxes on income from taxed prop- erty, double taxation; third, that this system makes a fair tax on both the physical properties and the earnings difficult to compute. The first of these need not be dwelt upon at length. Mani- festly, if it be possible to make a physical valuation of an extensive railroad property for an ad valorem tax, it is no less impossible to make such a valuation for the same kind of tax when used in conjunction with a gross earnings tax. The second weakness of this system — that it is double taxa- tion, may also be passed over with a word, as entirely obvious. If property be the correct basis for railroad taxes, then earnings — the fruit of the property — should be exempted ; if earnings be the correct basis, then property — the source of earnings — should not be taxed. It is widely maintained that it is not just to tax both the source and the product — the property and the earn- ings. That this is done in dozens of cases does not lessen the evil, in the judgment of many. The third weakness of this system is essentially a practical one; it is most difficult to adjust the double tax, on property and income — so as to yield a proper revenue without burdening the tax-payer or leaving a false impression on the public. Our experience in Virginia illustrates this to a nicety. The Corporation Commission has labored constantly to ex- plain to the public the real purport of the present law, but has never been able to make the public understand in what manner the railroads are assessed. The fact that the franchise value of a railroad is specifically exempted by the Constitution from local taxation, and that the tax on the physical properties is a tax on the road-bed and real estate only, has never been understood. The people have been told that an assessed valuation of $20,000 the mile is less than the value of the railroad property and they have never been able to appreciate that the greatest of all railroad values, the franchise, cannot be taxed either as a part of the property or separately. The imposition of a privilege tax, unfortunately denominated a "franchise tax," has further com- plicated the situation. No State has ever been able to adjust 258 Report of Tax Commission — ^Appendix. a dual tax of this character so as to satisfy the pubhc that the railroads were being taxed at their full value. Stock and Bond Valuation. The third method of railroad taxation is to assess the property at the market value of its outstanding stocks and bonds and to tax it accordingly. This system is known as the "Connecticut" plan, from the State wherein it was originally introduced and where it still remains as the sole railroad tax, apportioned among the localities. It is also employed in a modified form in Massa- chusetts. It works satisfactorily and yields a large revenue in both States. The champions of this system defend it by the following general line of argument. Granted that it is impracticable to fix a definite valuation on the physical properties of a railroad and conceding that even if such a valuation were possible, the franchise might escape taxation, these economists argue that the value of stocks and bonds is a sure index to the real value of the property. Speculators, in purchasing railway securities and stocks take all the items of value into account — the original cost of the property, its condition, the character and density of its traffic, its privileges, etc. The quotations of the stocks and bonds of railroads are the tangible expression of their value. Hence if the quotations for a term of months be averaged, and the m3,rket value of each security be multiplied by the number outstanding, the real value of the property is ascertained. There may be theoretical conditions under which such a system of valuation would be just; but in practice it is subject to many and overwhelming objections. First, this system cannot be applied with any degree of ac- curacy in the case of interstate lines. To apportion the stock and bond valuation, in the case of a great line, according to the mileage basis — ^which, with all its faults, is perhaps the best system known — is to neglect terminal values, and to disregard those particular conditions which give a high value to stocks and bonds. For example, a railroad may have a very large percentage of its freight traffic beginning in one State and trans- ported to a terminal through the entire length of another State in which it does little business. To fix the value of the railroad, Report of Tax Commission — Appendix. 259 thus, will be to deprive one State of much taxable property, or, — as it works in most instances — will make the taxes of the railroad in one State disproportionate to the value of the whole system.* The second objection to the stock and bond method of valua- tion is that it cannot be applied in the case of many small rail- roads. These are often built as matters of patriotism, with small prospect of dividends, and their stock and bonds are not listed on the market. As it would be well-nigh impossible to as- certain the market value of the stocks and bonds of perhaps a dozen railroads assessed in Virginia, some other system would necessarily have to be applied. The third objection to the stock and bond method of valua- tion is, that its application would, in reality, place a false valua- tion on most railroads. This theory is applied upon the prin- ciple that all the shares of a railroad's stocks, and all its bonds are worth what individual shares and bonds will bring. The value of the property is, therefore, fixed upon the doctrine that were all stocks and bonds of, say, the Norfolk & Western rail- road, offered on the New York Exchange, they would bring the current quotations. As a matter of fact this is never done, for a railroad is seldom sold outright. Every investor knows that if it were done, the stocks and bonds would at once "slump" most de- cidedly, and the whole issue probably would not bring seventy- five per cent, of its value at current quotations. In other words, except in rare instances, few railroads are really worth today, on the market, what separate shares would bring. Where capital- ists are struggling for the control of a road, a steady market might be found for perhaps thirty-five per cent, of its stocks and bonds, and an even higher market might be secured were the shares in question the deciding ones; but beyond that figure, quotations would decline sharply. A stock and bond valuation of Virginia railroads will make it manifest that such a valuation is much in excess of the more reasonable valuations, either on the basis of capitalized earnings, or on the basis of original cost. Another defect of the stock and bond method of valuation is that it can- *It may of course be argued that this objection applies with equal force to the gross earnings taxed, apportioned according to mileage. This is true, though the obvious advantage of the latter system, in other directions, outweighs this objection. An apportionment of the stock and bond valuation on the basis of station population, original shipment, car-mileage, etc., is subject to all the objections of each of these systems of apportionment. 260 Report of Tax Commission — ^Appendix. not readily be applied where a railroad holds in whole or in part the stock of a subsidiary company controlled or operated by it. Frequently, in such cases, the operating company guarantees the payment of the interest on the bonds, and even the dividends on the stock of the subsidiary concern, keeps the stocks and bonds owned by it in its treasury, and credits its own accounts with the interest or dividends on these. It likewise sometimes hap- pens that the stock of the company, which has been merged with another company, will be covered with the stock certificates of a third or holding corporation. In many of these cases the value of the original stock cannot be readily ascertained, and in some instances cannot be ascertained at all. In consequence, a valuation on so obscure and uncertain a basis cannot be satis- factory. In addition, it might be noted that this system of valuation might tempt railroad owners to manipulation of their stocks and bonds in order to give them a low value at the time of assess- ment. ' While the average per annum valuation of these stocks and bonds would obviate this difficulty, it would not remove the ob- jection that arises from the increased capitalization or the issu- ance of new securities during the course of any assessment year. Taking this method of valuation as a whole, it is by no means satisfactory, and its success in Massachusetts and Connecticut, must be attributed rather to local conditions and to an unusually stable railroad situation, than to the virtue or wisdom of the method itself. Fourth System: Taxation of Net Earnings. The fourth system recommended for the taxation of railroads is that of a tax on net earnings. Advocates of this theory de- fend it in this fashion : No matter how extensive a railroad may be, or how heavy its traffic, the real value of the railroad is alto- gether dependent upon its net earnings, over and above its oper- ating expenses. Net earnings constitute the real income of a company, and the railroad which has no net earnings is worth nothing to the stockholders. Consequently, they say, if the net earnings are taxed at the proper figure, the real value of the roads is assessed. The larger the net earnings the more profitable and Report of Tax Commission — ^Appendix. 261 prosperous the company; and as a result the larger the amount of taxes.* This theory is open to very serious objections, of which two deserve special mention. These are first the difficulty in ascer- *The term "net earnings" is very carelessly used in certain tax reports and its application here should be defined. We use the term as prescribed by the Inter- State Commerce Commission. "Net earniags" are "net operating revenue." This is the difference between "Total operating revenue" and "Total operating expenses." Total operating revenue is estimated as follows: Freight revenue, passenger revenue, excess baggage revenue, parlor and chair car revenue, mail revenue, express revenue, milk revenue, switching revenue, special train service revenue, and miscellaneous revenue from transportation compose "revenue from transportation." To this must be added "Revenue from operation other than transportation," made up of the following: Station and train privileges, parcel room, receipts, storage of freight, storage of baggage, car service, telegraph and telephone service, rents of buildings and other property and "miscellaneous." "Revenue from transportation" and "revenue from operation other than transportation" make up "total operating revenue." Chargeable against and deductable from "total operating revenue" are offsets as follows on all the above classes; Overcharges and overcoUections, switching charges absorbed, allowances and arbitraries, transfers uncollected earnings, fares refunded and ticks redeemed, and "other repayments." The following are classi- fied as operating expenses: I. MAINTENANCE OP WAY AND STRUCTURES: superintendence, ballast, ties, rails, other track material, roadway and track, re- moval of snow, sand and ice, tunnels, bridges, tressels, and culverts, over and unde- grade crossings, grade crossings, fences, cattle guards, and signs, snow and sand fences and snow sheds, signal and interlocking plants, telegraph and telephone lines, electric power transmission, buildings, fixtxu'es and grounds, docks and wharves, roadway tools and supplies, injuries to persons, stationery and printing, other ex- penses, maintenance joint tracks, yards and other facilities, Dr., ditto, CR. II. MAINTENANCE OF EQUIPMENT: Superintendence, Steam locomotives, repairs, renewals, depreciation, electric locomotives, (same three sub-classes) passen- ger train cars (same three), freight train cars (same three), electric equipment of cars (same three) ; floating equipment (same three) ; work equipment (same three) ; shop machinery and tools, power plant equipment, injuries to persons, stationery and printing, other expenses maintenance joint equipment at terminals (DR. and CR.) III. TRAFFIC EXPENSES: Superintendence, outside agencies advertising, traffic associations, fast freight lines, industrial and immigration bureaux, stationery and printing, other expenses. IV. TRANSPORTATION EXPENSES: Super- intendence, dispatching trains, station employees, weighing and car service asso- ciations, coal and ore docks, station supplies and expenses, yard masters and their clerks, yard conductors and brakemen, yard switch and signal tenders, yard supplies, and expenses, yard enginemen, engine house expenses, yard, fuel for yard locomotives, water for yard locomotives, lubricants for yard locomotives, other supplies for yard locomotives, operating joint yards, and terminals (DR. and CR.); motormen, road enginemen, enginehouse, expenses road; fuel for road locomotives, water for road locomotives, lubricants for road locomotives, other supplies for road locomotives; operating power plants, purchased power, road trainmen, train supplies, and ex- penses, iaterlockers and block and other signals, operation, crossing flagmen and gatemen, drawbridge operation, clearing wrecks, telegraph and telephone operation, operating floating equipment, express service, stationery and printing, other ex- penses, loss and damage freight, loss and damage baggage, damage to property, damage to stock on right way, injuries to persons, operating joint tracks, and facili- ties (DR. and CR.). V. GENERAL EXPENSES: Salaries and expenses of general officers, salaries and expenses of clerks and attendants, general office supplies and expenses, law expenses, insurance, relief department expenses, pensions, stationery and printing, other expenses, general administration, joint tracks, yards and ter- minals. 262 Report of Tax Commission — ^Appendix. taining what constitutes net earnings; and second, the exemp- tion of properties that have no net earnings. These objections can be explained very briefly. The bookkeeping methods of railroad companies differ very widely, and until recent years the term net earnings was con- strued in perhaps twenty ways by railroad companies of the United States. This left a very wide latitude for error, and a very grave temptation for fraud. It was difficult to adopt a standard system, and even when such a system was adopted, it was not difficult to charge against net earnings sufficient items to reduce these earnings to a minimum for the purpose of taxa- tion. The requirements of the Inter-State Commerce Commis- sion in recent years have made the return of net earnings uniform in the case of all Inter-State railroads; consequently, this objec- tion is in a measure obviated. At the same time, the Intra- state railroads not coming within the report of the Inter-state Commerce Commission, still continue to list net earnings in dif- ferent ways. It would by no means be an easy matter to check up reports of these companies and to conform them to the standard by the Inter-State Commerce Commission, even it that standard be acceptable to the State for the purpose of taxation. The experience of the Commonwealth during the long series of years when it had a tax on net earnings is a sufficient warning against the adoption of this method. The second objection to this system of taxing railroads is that it might lead to the exemption of railroad properties of very great value. Operating expenses chargeable against gross earn- ings are seldom lower than sixty per cent., and in the case of most railroads range at present around seventy per cent. Net earnings in consequence — the difference between operating ex- penses and gross earnings — ^range from thirty to forty per cent. In times of panic and industrial stagnation operating expenses cannot be reduced in proportion to the inevitable reduction in gross earn- ings. At such a time any railroad might find itself with no net earnings, and in consequence, would escape taxation. Those millions of dollars invested in realty and personalty in a "going concern" would thus contribute not one dollar to the support of government, even when the railroad was meeting its interest obligations and paying every dollar due on its funded debt. Report of Tax Commission — ^Appendix. 263 In view of these objections and the previous experience of the Commonwealth with a net earnings tax, its introduction would be a positive menace to the just taxation of railroads. Taxation of Gross Earnings. The last system widely recommended for the taxation of rail- road property is that of the tax on gross earnings. This system is as admirably simple in theory as in practice, and is applied in this manner. The total receipts of a railroad company from transportation during the year are ascertained and a percentage tax is levied thereon. In the case of an interstate railroad com- pany the systems earnings are calculated, and the net earnings are then apportioned according to a single track mileage of the railroad in the various States where it operates. That is, the tax is levied on a percentage of the gross earnings equal to the percentage of the single track mileage in the taxing States to the total mileage of the system.* Fifteen States have tried this system of taxing railroads from time to time, either as the only or the chief tax on railroads. They have not agreed as to its merits; but the vast preponderance of opinion is strongly in its favor. Seldom has it been rejected, after it has been once tried, and even in these scattered instances, the substitution of another system has been due to political, rather than to financial reasons. The advantages of this system are numerous, and in the aggre- gate render it more nearly ideal than any system yet devised. A few of these advantages may be mentioned here. First, it can easily be ascertained, assessed and collected. A railroad must perforce know what its transportation receipts are and how extensive its mileage. With this knowledge and the sworn report of the company in hand the taxes can be as- sessed by a simple mathematical calculation and can be collected by a central administrative officer without expense or delay. Secondly, a gross earnings tax is sound in theory because it is based upon income. It is generally admitted that the earn- ing power of the property is the correct basis for its taxation. As *Otlier methods of apportioning a gross earnings tax have been suggested from time to time, such as apportionment on the basis of station population, car mileage, etc. But these are all of doubtful value. A discussion of these methods and of their comparative advantages and defects will be found in the "Commercial Valuation of Railway Systems" (1904) issued as a special bulletin of the United States Census. 264 Report OF Tax Gommission— Appendix. the gross earnings of a railroad indicate its earning power they are therefore the proper basis for its taxation. Third, a gross earnings tax obviates all difficulties regarding the value of railroad property, and leaves no ground for dispute between the taxing authority and the Corporation taxed. The assessing authority does not have to face the innumerable diffi- culties outlined above which inhere in any system of ad valorem taxation. It is not necessary to ascertain what the thousands of items involved in railroad construction and operation cost or what they would cost to be reconstructed in their present con- dition. The question is only what does the property earn? It is needless to dwell on this advantage in view of the experi- ence of those States which have attempted to make a physical valuation of railroad property. Fourth, a gross earnings tax adjusts itself with reasonable accuracy to the financial condition of the railroads. If times be prosperous, gross earnings will be large and taxes in proportion. If times be hard, gross earnings will be low, and the railroad will have less to pay. Yet conversely no "going concern" will ever be exempt from taxation. If it earns anything, it must pay something. Fifth, a gross earnings tax removes in large measure the dis- crimination between railroads in matters of taxation. For in- stance, a gross earnings tax would largely reflect the differences in the value of, say, the Seaboard Air Line and the Norfolk & Western railroads. Both are trunk lines and the main trunk of both is assessed at the same figure except at terminals. Yet the per mile earnings of the former are often not more than half as great as the earnings of the latter. A gross earnings tax will be fair to both. It will exact only in proportion as the rail- road earns and will leave to each railroad the management of its own internal affairs, the extension of its property and the control of its economies. It will require every railroad to pay on the same basis, in the same manner and without discrimination or injustice. Objections to this System. Viewing these advantages as a whole we are convinced that the best economic thought of the day is correct in declaring that a gross earnings tax is the fairest, best and soundest method for Report of Tax Commission — ^Appendix. 265 the taxation of railroad property. Not only is it admirable in itself, but it seems even more admirable and advantageous when compared with the other systems in use. One need only study the simple operation of a gross earnings tax in comparison with the complex workings of an ad valorem tax or a stock and bond valuation to see its manifest advantages. The experience of 'fifteen States with the gross earnings tax either as the sole or the principal tax on railroads has, however, revealed certain faults in this method of taxation. We review these and list them here not because we consider them a serious impairment to the value of this method of taxation, but because we wish to meet these objections in our specific recommendations. The first objection to the gross earnings tax is that it cannot be assessed in the case of interstate railroads on a fair basis. All that has been said in objection to the stock and bond method of valuation for interstate companies applies here. A railroad may have its mileage practically within the border of one State, and yet receive a greater part of its traffic and, in consequence, its earnings, from another State. For the former State to tax the gross earnings on a mileage basis is unquestionably to tax that which belongs in part to the other State. On the other hand, the universal adoption of the gross earn- ings tax by all the States would result in equality among States and justice to railroads. We do not hesitate to say that the day is not far distant, if the courts will peimit, when the gross earn- ings tax will be everywhere applied. Thus a State deprived of its proper revenue from one railroad will recover from another railroad. A railroad which feels that it pays too much in one State will have its taxes reduced in another State. The second objection to the gross earnings tax is that it does not bear justly in the case of railroads whose operating expenses inevitably differ much and whose net earnings are in consequence unlike. It must be remembered that against gross earnings must, be charged the very heavy operating expenses of any line, before its bondholders or its stockholders receive a dollar of income from their investment. If the gross earnings of a company be taxed and the operating expenses cannot be reduced, it is possible that the railroad may not be able to pay any dividends to the stockholders. 266 Report of Tax Commission — Appendix. The railroads claim that in the premises a flat tax on gross earnings will work hardship. The full force of this objection will be manifest from a comparison of the income account of two small hypothetical railroads: Road A. Road B. Gross earning's $500,000 $500,000 Actual operating expenses before payment of interest on funded debt 60% $300,000 70% $350,000 $200,000 $150,000 4% tax on gross earnings $ 20,000 $ 20,000 $180,000 $130,000 Interest on funded debt $ 60,000 $ 60,000 $120,000 $ 70,000 Necessary for repairs and betterments $ 50,000 $ 50,000 Balance for current account and interest ... . $ 70,000 $ 20,000 Thus road A, with actual operating expenses only ten per cent, in excess of thctee of road B, after meeting the same fixed charges, finds itself with a balance of $70,000 from which to pay dividends, while road B will be unable to meet its stock dividends, and keep any balance in the treasury. Manifestly the ownership of road B (its stock control) is less desirable than that of A. Yet both pay the same taxes on the same basis. The condition here presented constitutes a valid objection to a flat gross earnings tax. In another connection this objec- tion is met with a specific recommendation. The third objection to this system of taxing railroad property is that its legality has been questioned by some. This doubt has been raised by the recent case of Galveston R. R. vs. Texas (210 U. S., 224), in which the court condemned a statute of the State of Texas, imposing a percentage tax on the gross earnings of the entire business of an inter- State railroad, upon the general ground that as a part of the earnings of this company were from its inter-State business, such a tax was a direct burden on inter- State commerce. Prior to that decision it was generally under- Report of Tax Commission — ^Appendix. 267 stood that a percentage tax on the gross earnings of a railroad engaged in inter-State commerce was valid when such a tax was but a measure of the value of the privilege of transacting business. This view was based on the decision of the Supreme Court in the case of Grand Trunk vs. Maine (142 U. S., 217) and succeeding cases. As a recent constitutional authority points out, the whole subject of State taxes on the gross earnings is in legal doubt; a new court may retreat from the extreme ground taken in the Texas case, or it may reaffirm the principle there laid down in unmistakable language. Certainly a State assumes a grave responsibility in enacting such a tax until the legal doubts on the subject have been settled. Summary of Gross Earnings Tax. To conclude, the writer is convinced that the gross earnings tax despite objections to it is the best, wisest and most feasible tax on railways. It has advantages which are afforded by no other existing system of taxation ; it can be assessed and collected on a known basis in an easy manner; it involves no complex calculations which are subject to dispute; it operates with reas- onable equity upon all railroads and where a differential is estab- lished it cannot be criticised in any way as working injustice to or inflicting hardship upon any public service corporation. Defects of the Virginia System of Taxation. — 1. Tax on Im- proper Basis. With this rapid summary of the proper basis for railroad taxation, an answer can be given to the question raised at the beginning of this chapter, namely, is the tax imposed on railroads by Virginia statutes a just and proper tax? In answer to this, the writer would express the opinion that the system cannot be deemed satisfactory when it rests in part upon an improper basis. The system is as good as any that can be devised which attempts to value railroad property while imposing an earnings tax, but, as has been pointed out, such a system can never fulfil the re- quirem^nts of a model tax. Virginia's system is about the best of its kind, but the kind is not the best. Every effort should be made to put this tax on an earnings basis ; no other system will 268 Report of Tax Commissiokt — ^Appendix. adjust itself to the varying conditions of business, will tax all companies equitably and will accurately measure the real value of the property. With this general statement, it would be captious to enter into a detailed criticism of existing conditions. There are certainly defects in present system such, for instance, as the valuation of railroad real estate, the classification of certain "standard roads," the uniform per mile valuation of railroad track and the like, but these all grow out of the fundamental fact that we are attempting to combine two incongruous and conflicting methods of taxation. These conditions are inevitable as long as the present law remains ; that they are not worse is due to the zeal and care of the Cor- poration Commission. 2. Railroad Property Apportionment. There is but one defect of the present system that demands any extended discussion. This is the present method of appor- tioning railroad values. An examination of conditions would indicate that the apportionment is defective in the following respects : A. The value of the line is apportioned too strictly according to the location of its mileage. B. The main line of a railroad is assessed at a uniform figure per mile. C. The rolling stock is assessed at the principal office of the company. Each of these deserves separate attention. A. Strict Mileage Apportionment. The apportionment of railroad values at present is made accord- ing to the mileage of the line in a given locality. If there are twenty miles of a "standard" railroad in a county assessed at $20,000 the mile, the railroad is assessed with $400,000 of road bed; if thi mileage is 100, the valuation is fixed at $2,000,000. Granting that the road bed is of the same general value, the county with a mileage of 100 should certainly receive more taxes from the railroad, than should the county with a mileage of 20. At the same time, this basis of valuation can readily be carried too far, especially if the earnings power of the railroad be kept Report of Tax Commission — Appendix. 269 in mind as the true taxable value. A railroad may run 50 miles through a county, solely to reach mines or other tonnage-pro- ducing property in an adjoining county. In so running, it may get very little tonnage and consequently very little revenue from the county in which its principal mileage is located. It can of course be argued that road bed is real estate and should be taxed strictly where located ; but in reply it should be said that the road bed is like no other real estate, in that its earning capacity is dependent to a small degree only on its location in any given . community. It is impossible and improper to change altogether from this system, since every mile of railroad is essential to the operation of the line. But the injustice of this system in some respects at least is manifest in many localities, and its disastrous effect is particularly felt at the terminals of the line. Take Newport News as a case in point. This is the terminus of the Chesapeake & Ohio railroad. It affords that great line an admir- able outlet to deep water; it probably has to give as much pro- tection to the railroad as any community in the State; yet the city is allowed to assess the Chesapeake & Ohio with only $683,644 of property — a figure in no way proportionate to the real value of the company's terminal. It will be rejoined that this low assess- ment is purely an administrative failing and that the Corporation Commission should make a higher assessment on property. As a matter of fact the property in se tangible and taxable, is assessed at every cent it is worth and the argument goes back to the origi- nal premise.* B. Uniform Per Mile Valuation. While the mileage apportionment of railroad values should not be too strictly followed, as long as it is in use, it should be justly applied. In practice however, such is not the case and a bad situation is rendered worse by the uniform per mile valuation of railroad property, except at the terminals. If value is to be assigned to the locality it should, as we have said, be correctly assigned, and if a locality has the taxation of 20 miles or 100 miles of railroad road bed, it should be allowed to assess according to *Tlie Chesapeake and Ohio has 1.30 miles of main track in Newport News, assessed at $100,000 the mile. It could be reconstructed for $25,000, exclusive of light-of- way. 270 Report of Tax Commission — ^Appendix. the real value of that road bed. Granted that an average per mile assessment of $20,000 or 60 per cent, of reconstruction cost per miie is all that can be made with due regard for the aggregate taxes paid, then when the line cost four times the assessment figure, it should be assessed at 60 per cent, of that amount; where it cost only the assessment amount, it should be assessed at 60 per cent, thereof. If mileage be the basis of valuation, there is no justice in allowing Sussex County to assess at $20,000 the mile a line that cost not over $30,000 the mile and in allowing Giles County to assess at only $20,000 the mile a line that cost $90,000 the mile. , C. Assessment of the Rolling Stock. At common law, -the residence of the owner is the situs for the taxation of his movable personal property. As the principal office of a railroad is its residence, the rolling stock of Virginia railroads has always been assessed in the cities where their principal offices are located. The Supreme Court of the Commonwealth in the case of the Atlantic & Danville R. R. vs. Lyons (101 Va. 1) has declared this the only possible method of apportionment in the absence of specific statutes, and in Supervisors vs. Newport News (106 Va. 764) has extended the same doctrine to inter- urban electric lines. In both cases cha court suggested the enactment of law to more equitably divide the revenue from this tax. The following table shows the apportionment of the revenue from the rolling stock tax: Report of Tax Commission — Appendix. 271 Company. Situs. g ^ 1^ Rate. Tax. Alb. &Ches. Can.. Lake Drummond. . . Atlantic C. L Atlantic & Dan .... Baltimore & Ohio . . iBig Sandy &C. ... C. C. &Ohio Chesapeake &. O.*.. Ches. & Western . . . Ches. Western Cumberland Val . . . Dan. & Western . . . Franklin Pitts Greens & Din Int j-Stat J L. & Nashville Marion &R. V. . .. Nelson & Alb New River H. & W N. Y. P. &M B. & P. Belt Line. . N. &S.* Nor. &W.* P. F. &P RoarF S. A. L.* Southern * S. S. &S T. &W V.C Va. So Va. &S. W Virginian* Wash.-So Pleasant Grove, Norfolk Co. . . Deep Creek, Norfolk Co Petersburg West Branch, Norfolk Co Winchester Rock Lick, Buchanan, Lipps, Wise Richmond City Harrisonburg, Rockingham . . . Harrisonburg, Rockingham . . , Winchester Danville Rocky Mt., Franklin Franklin, Southampton Richmond, Wise Co Norton, Lee Co Marion, Smyth Co Schuyler, Nf Ison Narrows, Giles Capeville, Northampton West Branch, Norfolk Norfolk City Roanoke City Fredericksburg Richmond, Wise Co Petersburg Richmond City Dendron, Surry Co Bermuda, Chesterfield Abingdon, Washington Co . . Wilson, Grayson Co Bristol City Norfolk City Alexandria City 11 1,400 4,900 922,737 328,928 116,535 5,797 402,070 ,848,840 9,750 15,400 8,094 58,661 12,325 13,525 54,400 278,240 26,555 14,350 9,730 342,550 32,472 252,103 ,672,517 17,810 18,400 476,248 ,179,300 40,535 39,140 21,650 6,985 542,343 ,303,105 189,485 80 80 40 80 80 20 24 40 95 95 80 40 40 45 24 05 46% 75 15 70 80 65 25 ,45 24 ,40 ,40 95 95 ,15 ,80 .85 ,65 .78 12 2, 4, 109 4 145 44 11.20 39.20 918.32 631.42 932.28 69.56 985.67 883.76 92.62 146.30 64.75 821.25 172.55 196.11 674.56 921.52 389.46 107.63 111.90 397.85 259.78 ,159.70 ,906.46 258.25 228.16 ,667.47 ,510.20 385.08 371.83 248.98 125.73 ,033.46 ,583.73 ,372.84 ♦Exclusive of the following floating equipment: C. & O., $123,300; N. Y. P. & N., $312,000; Norfolk-Southern, $45,000; N. & W., $3,900; S. A. L., $16,400; Virginian, $3,000. 272 Report of Tax Commission — ^Appendix RECAPITULATION FOR CITIES AND COUNTIES WITH MORE THAN ONE R. R. Norfolk Co $ 2,941.60 Norfolk City 25,743.43 Petersburg 1" > 5°^ • ' " Richmond 154,393.96* Rockingham 238. 92 Wise County 5,888.39 Winchester 947.03 As the total local taxes on railroads aggregate but $934,829.18 it will be sean that under the present system, nine cities and fif- teen counties secure $377,679.59, or 39.5 per cent, of this revenue from railroads because the railroads have their general offices at these places. In addition most of these counties and cities receive a further part of the total revenue from taxes on other property of railroad. One nead not do more in this connection than to point out that as all the cities and most of the counties contribute their wealth to the support of ths railroads and protect its property, it is manifestly unjust to give to a few favored locali- ties that which belongs to all. 3. Inequality Among Railroads. Examples almost without number might be cited to show how the present system operates unjustly, is unwieldly and difficult to compute; but the final test of its justice is after all the equality of its operation. Each railroad is entitled to the treatment given every other road: each one should expect to pay in taxes an amount proportionate to that paid by every other on the same property and the same earnings. Measured by this standard, our railroad tax is unfair. The following table will show the percentage of gross earnings paid in taxes by each railroad in the Commonwealth for the fiscal year ending June 30, 1910. *It is worthy of note that the city, of Richmpnd reports only $90,022. 19, from the " railroad tax (see Auditor's Report, table 46.) Report of Tax Commission — ^Appendix. 273 Name op Company. Present Tax in Per cent, of Gross Revenue from Transportation. Atlantic Coast Line . 0629 Big Stony & Cumberland .0208 Big Stone Gap .0843 Big Stony . 1369 Blacksburg & Lunenburg Carolina, Clinchfield & O .0989 Chesapsake & Ohio . 0322 Chesapeake Western . 0468 Cumberland Valley . 0198 Danville Western . 0434 Delaware, Maryland & Va . 1071 Elizabeth River Inter-State .0604 Laurel .0331 Louisville & Nashville . 0326 Lynchburg Belt Line Marion Rye Valley .0316 Mt. Aiiy & Eastern .01115 Nelson & Alb .0335 New River, Holston & W .0884 New York, Phil. & N .0192 N. & P. Belt Line .0161 Norfolk Southern .0707 Norfolk & Western .0294 Poch. Western P. F. & Piedmont .0300 Richmond, Fredericksburg & P . 00152 Richmond, Fredericksburg & P. Con .0117 Roaring Fork -0619 Rosslyn Con .0424 Seaboard Air Line .0704 Southern .0366 Surry, Sussex & Southampton .0331 Tidewater & Western .0500 Valley -0483 Va. Anth. Coal & Iron .0632 Virginia-Carolina .0300 Virginia-Kentucky .0518 Virginia-Southern . 0475 Va.-Southwestern .0489 Virginian • 0651 Washington-Southern . 0320 Winchester & Potomac • 0318 Winchester & Strasburg ■ 0268 Wise Terminal . 0352 274 Report of Tax Commission — Appendix. Railroad earnings are railroad wealth. When its earnings stop, the railroad is worthless ; when the demands on its earnings pass a certain point, then the railroad cannot profitably do business. It is, therefore, impossible to justify a tax which operates to make one railroad pay twice as large a part of all it has to pay as another railroad pays. Our system does this and does even greater in- justice. Summary of Defects. To conclude, the writer would repeat his conviction that the fundamental defect is in the system. It cannot be made to operate in a satisfactory manner. Any reform of it must be fundamental and must proceed upon the basis that we desire a tax on earnings that can be equitably assessed and properly apportioned. Proposed Remedies. The mere statement of the desired end, together with a regard for the fundamentals of railroad taxation outlined in detail above, suggests the line which reform should take. The following steps should be taken : I. The Assembly, should avail itself of the right vested in it by the Constitution to modify the existing system after January 1, 1913. II. It should provide for a single tax on the gross earnings of railroads, and the exemption of all property directly used by the ra!ilroads in the transaction of their business. III. The Assembly should provide a differential on the gross earnings tax, in order to give those railroads with high operating expenses some relief from onerous taxation. IV. The revenue derived from this tax should be apportioned between ths State and the counties and cities in which the rail- roads are located according to the value of the railroad property located there, rolling stock, terminal facilities, etc., being con- sidered. The revenue should ultimately be apportioned according to an automatic standard. Each of these remedies needs an explanation, and the method of putting each into effect must be discussed in detail. Report of Tax Commission — Appendix. 275 Changing the System. So far as changing the existing system is concerned, enough has already been said to justify this. The only question to be dis- cussed is that of method. The provision of the Constitution on this point, as contained in section 181 is as follows: ". . . . and such a system shall so remain (in force) until the first day of January, nineteen hundred and thirteen, and there- after until modified or changed, as may be prescribed by law; provided, that if said system shall for any reason become inopera- tive, the General Assembly shall have power to adopt some other system." This vasts in the Assembly an absolute right to adopt such sys- tem as may seem best and gives ample authority for the introduc- tion of the proposed plan. Since the franchise tax is assessed as of June 30, 1912, it will be competent for the General Assembly to adopt a gross earnings tax which will be assessable and col- lectable on June 30, 1913. As this tax will not be due until after date when the entire system can be changed, an assessment to be effective June 30, 1913, is, in our judgment, thoroughly legal. The Gross Earnings Tax. Thoroughly convinced by our investigation that the gross earnings tax is, in theory and in practice, the soundest and best tax that can be levied, both from the standpoint of the public and of the railroads, our problem should be how incorporate such a tax into our law. As has been pointed out, many able men regard a gross earnings lax as unconstitutional. For this reason the best method of introducing tha gross earnings system will ba not to make it mandatory, but to offer it as an attractive substitute to the rail- road companies. This can best be done by the enactment of a law providing for the taxation of railroads on the ad valorem basis, and providing further that in case any railroad desires to pay a tax on its gross earnings, in lieu of the ad valorem tax on its phy- sical properties, the same will be accepted by the State. The following plan for the ad valorem tax is submitted: 1. The State Corporation Commission and the State Tax Commissioner, sitting together, shall annually assess the property of railroads, under the following conditions: 276 Report of Tax Commission — ^Appendix. (a) Each railroad to be assessed and valued at the present cost of reconstructing its property, with such allowance for deteriora- tion as may be deemed best by the Corporation Commission and the Tax Commissioner. (b) The valuation to be made on the entire system as a unit, with allowance for intangible value, in the way of special fran- chises, connections, terminals, continuing lines, etc. (c) In making such valuation the Corporation Commission shall be empowered to employ such expert engineers or other experts as may be deemed necessary. (d) The valuation so made to be apportioned between the local taxing autharities, according to the ascertained percentage of value of the property in the taxing locality, with due regard for the value of the property actually located or habitually used there, for the value of unusual terminal facilities, etc. 2. On the valuation thus fixed, a State tax of 35 cents the hundred dollars is to be levied, applicable to all property, tangi- ble and intangible; with a local tax equal to the average of the local taxes in the counties, school districts, towns and cities through which the railroad passes. In estimating the rate of this tax, the rate for each taxing district through which the main branch, leased or spur tracks of the line passes is to be included. In practical operation this system of taxation will be as simple as that now in use and as simple as any that can be devised on the ad valorem basis. At the date of assessment as now fixed by the Corporation Commission, the railroads will have their day in court and will be given an opportunity of stating their case. The taxing body can then proceed to assess the property and to levy the tax thereon. It will decide for example that Railroad A is worth $40,000,000 as a "going" concern — its fianchise, connec- tion, traffic, real property, rolling stock, etc. consideied. The Commission will then be free to decide how this property is to be apportioned. If the railroad run through the cities of Norfolk, Petersburg, Lynchburg and Roanoke, and through twenty counties, the Commission will determine what percentage of the entire property is to be apportioned in each place, and will not be forced to detailed valuation of the property in each locality. The Commission can consider how much each locality contributes to the value of the line, how great are the terminal values there, how extensive are the properties which add Lo the value of the Report of Tax Commission— Appendix. 277 system as a growing concern. It can then levy the tax on the whole property at the average rate, deduct that part belonging to the State and apportion the remainder according to the as- certained percentages of value in each locality. Advantages of this System. While by no means as desirable as the gross earnings plan, presently to be outlined, the ad valorem system proposed here has the following decided advantages over the existing system and corrects some of its more glaring defects. First, it puts an end to the confusion incident to the attempted enforcement of a double tax on property and earnings. Only property will be taxed and in so far as its value can be ascertained it will be taxed at its full value. Second, the real estate of the railroads can be assessed at its full value. Third, in so far as intangible values can be estimated for pur- poses of taxation, they will be assessed and taxed under this system. It will be observed that no attempt has been made in this outline to define the methods by which the Corporation Commission and the Tax Commissioner shall ascertain these intangible values in assessing the railroad property. The pro- cedure has not been outlined, because there is no truly satis- factory method applicable to all cases. The combined judgment of the Commissioners making the valuation will be amply suf- ficient to assure a fair valuation in the case of every railroad. Fourth, the value of the system will be ascertained as a whole and the State will lose nothing through a valuation of the parts, as under the present system. This is not only just, but it accords with the principle of valuation laid down by the Supreme Court. The court has said: . . "But as we have already said, the railroad must be re- garded for many, indeed for most purposes, as a unit. The track of the road is but one track, from one end of it to the other, and, except in its use as one track is of little value. In this track as a whole each county through which it passes has an interest much more important than it has in the limited part lying within its boundary. Destroy by any means a few miles of this track, within an interior county, so as to cut off the connection between the two parts thus separated, and if it could not be repaired or replaced its effect upon the value of the remainder of the road is 278 Report of Tax Commission — ^Appendix. out of all proportion to the mere local value of the part destroyed. A similar effect on the value of the interior of the road would follow the destruction of that end of the road lying in Chicago or some other place where its largest traffic centers. It may well be doubted whether any better mode of determining the value of that portion of the track within any one county has been devised than to ascertain the value of the whole road; and apportion the value within the county by its relative length to the whole." Fifth, the State Corporation Commission in making the assess - ment, will be able to benefit by the expert advice of the State Tax Commissioner, to be authorized by law, and, in addition, will be allowed expert service in case it deem it wise to make a valuation through a detailed engineers' appraisal of the railroad property. Sixth, the Corporation Commission will be authorized, under liberal provisions of law, to apportion the value of railroad prop- erty according to the situs of the property but will be empowered to consider the various elements giving value to railroad property in any locality and to make allowance therefor. Seventh, by considering the rolling stock as a part of the prop- erty, the Commission will justly apportion this, according to its habitual use and will thus obviate the necessity of special enact- ment upon this vexatious subject. As the apportionment and thi rolling stock question are complicated, a detailed discussion of the merits of the plan here proposed is deferred to a later sec- tion. The system thus outlined is practically that now in use in the States of Michigan, Wisconsin, Minnesota and West Virginia. It is, in the writer's judgment, the best of the kind yet devised and its general provisions will make it even more desirable under the wise administration of the Corporation Commission. At the same time, this system is not, in theory or practice, as desirable as a system imposing an exclusive gross earnings tax. The railroads will appreciate this fact and will, in consequence, not hesitate to accept the gross earnings tax as an alternative. Moreover, the railroads are familiar with the increase in railroad taxes following the adoption of an exclusive ad valorem tax in other States and will incline even more strongly to the gross earnings tax. An evidence of the reasonableness of this view, the following table will show the increase in the valuation of railroad properties following the adoption of the ad valorem system Report of Tax Commission — Appendix. 279 in the three States which have most recently valued their railroad property. State. Old Valuation. New Valuation. Ohio (1911) $166,469,599 $573,234,249 West Virginia (1906). . . 30,043,170 176,675,980 Kansas (1908)* 77,272,445 404,281,214 The system just outlined is, to repeat, as good as any that can be devised for the taxation of railroads on the ad valorem basis. Yet it has practically all the defects that inhere in that system — defects which have already been discussed. The gross earnings plan is far preferable in every respect, and the ad valorem system is only introduced, as has been said, to form a legal basis for a contractural arrangement under the gross earnings plan. Details of Gross Earnings Plan. The following plan for the gross earnings tax is submitted: (1) On or before June 30, 1912, every railroad desiring to accept the gross earnings tax in lieu of the tax on its physical properties shall so inform the State Corporation Commission and shall, through its properly constituted authorities, bind itself to adhere to this system for a term of ten years or, should it desire to adopt the ad valorem tax before that time, to serve notice to that effect twelve months before the beginning of the new assessment year and to pay (he cost of valuation to be made if the Corporation Commission deem it necessary to employ expert engineers. (2) On June 30, of every year, beginn-'ng June 30, 1913, the company so contracting shall file with the State Corporation Commission a sworn statement of its gross transportation re- ceipts as now defined by the inter-Stats Commerce Commission, which report shall be audited, verified and approved by the Commission, subject to appeal as now provided by law. (3) The report so filed shall show the gross earnings of the en- tire system of the railroad and a tax shall be levied on a percentage thereof, equal to the percentage of the single track mileage of the ♦Includes all public service corporations. 280 Report of Tax Commission — ^Appendix, railroad in this State to tlie total single track mileage of the system. (4) On or before October 1, the railroad so assessed shall for- ward to the Auditor of Public Accounts the amount of the tax assessed against it. Of this amount the Auditor shall deposit fifty per cent, in the Treasury for the use of the Commonwealth, and shall forward the residue to the treasurers of the various coun- ties, cities and towns through which the railroad runs, apportion- ing the tax according to the plan already outlined. (See appor- tionment under ad valorem plan above). (5) The rate of the gross earnings tax shall be three per cent, where the operating expenses of the system are eighty per cent, or more, with one-twentieth of one per cent, additional for each per cent, of decrease in operating expenses, provided no rail- road shall pay more than four and one-half of its gross earnings. The Operation of This System. In practical operation, this system will work with great sim- plicity. Once the Corporation Commission has determined the percentage of railroad values assignable to each locality, the im- position of the tax is purely a mathematical process. The Com- mission need only have before it three statements showing, respectively, the gross transportation receipts (revenue from operation), the mileage of the railroad and the percentage its system operating expenses bears to the gross earnings. It can then assign to Virginia a percentage of the gross earnings, equal to the percentage the mileage in this State bears to the total mileage of the system. If the railroad be purely intra-State, this calculation may be dispensed with. The Commission can then, at a glance, compute the rate of tax according to the reported operating expenses of the system and can levy the tax on the gross earnings assignable to Virginia. Fifty per cent, of the revenue so collected will remain for the State and 50 per cent, for the locali- ties, to be apportioned in the manner outlined above. Advantages of This System. The advantages of this system are numerous and obvious. First, this tax will be levied according to the true value of the property taxed, namely, its earning capa,city. No railroad Report of Tax Commission — Appendix. 281 can escape its proper burden ; no railroad will be at a disadvantage in comparison with other systems. As the earning capacity of the railroad exactly measures the real value of all elements of the railroad, so this tax, with the differential, will exactly measure and tax these earnings. If any railroad has high operating ex- penses and in consequence low true earnings, its tax will be low ; if it has low operating expenses and its true earnings are there- fore greater, it will pay in proportion. There can be no possible injustice to any railroad.* Second, this tax will save the Commonwealth the great burden of annually assessing the railroads accepting this plan, and, in consequence, will promote simplicity in the administration of the law. This advantage will only be obvious to those who have studied the methods of the Corporation Commission and know the tremendous difficulties involved annually in assessing rail- road property. A simple arithematic9,l process takes the place of involved calculations and tedious hearings; the tax practically administers itself. Third, this system will be eminently fair to the localities, yielding them a revenue precisely in proportion to their contri- bution to the earning power of railroad property and to the value of all the elements of railroad property in their localities. It will likewise insure every locality against the imposition of an un- reasonable tax by another locality on railroad property situated within its confines. The property of the system is to be taxed at the average rate of the localities along the system and not at the rate fixed by one locality to the disadvantage of another. Fourth, this system will be eminently fair and decidedly ad- vantageous to the railroads. It operates alike on every railroad and makes the taxes of each railroad precisely proportionate to to the true earnings of that railroad. Each railroad is taxed on its own earnings, is a law unto itself and will not suffer by being grouped with other "standard" railroads. Fifth, this system will adjust itself precisely to the good years and the bad of railroads, and while making them pay a larger tax when they can afford to pay the tax, will save them from a confiscatory tax when their net earnings are small. Just in pro- portion as their true earnings decrease, their taxes will decrease. *The rate of the differential and its computation are discussed in detail below. 282 Report of Tax Commission — ^Appendix. Sixth, this system will save the tax-paying railroads the need- less labor involved in multiple tax bills. They can pay in one check, get one receipt and be assured that their account is settled in full for one year. Seventh, this system will be fair to the Commonwealth, in- creasing its revenue from the railroads directly in proportion to their earnings and not indirectly, as is the case where the present system of an earnings and a property tax is applied. The State, to be sure — and the localities — will have a smaller revenue from the railroads when the railroads' earnings are small, but this is as it should be : no taxing authority should tax save in proportion to ability to pay. Eighth, this system will yield a revenue, slightly larger than the present tax and more equitable apportioned. The Corpora- tion Commission can apportion the tax, as has been pointed out, with due regard for the welfare of each locality, and will be em- powered to apportion to each locality upon proper hearing, a tax that shall adequately represent all the value of railroad property there located. Ninth, this system will apportion all the taxes from the rail- roads, covering all their elements of value and will give to the counties their share of the tax on the railroad franchises, thus enabling them to share in a revenue now denied them. In some instances, we think it probable that this will mean an increase in the revenue derived from the railroads by the localities. The Rate and Application of the Differential. The reasons which have led the writer to recommend a differ- ential on the gross earnings tax have already been discussed and need not be enlarged upon here. While operating expenses vary from about fifty per cent, to more than one hundred per cent., the difference in true earning capacity between railroads is ob- viously great. To tax them at the same rate, regardless of their true net earnings is manifestly a hardship. What would be a very low tax for a company with large net earnings (low operating expenses), would be a most onerous tax for a company with small net earnings (high operating expenses). Moreover, as has been explained, this system is to be com- mended because it accurately adjusts itself to the condition of Report of Tax Commission — Appendix. 283 each railroad taxed and varies the tax as the earnings of the company vary. At the present time, the railroads of the Com- monwealth are enjoying an era of prosperity. Despite the in- creased wages of their employees and the greater cost of railroad material, their business has been so great that the increase in revenue has been greater than the increase in expense. Thus their operating expenses are as low as those of any group of rail- roads in the country and the profits of their stockholders have been in proportion. Yet there is no assurance that these con- ditions will continue. Once let their traffic decrease, while their operating expenses cannot be proportionately reduced, and their net earnings will sharply decline. In such a condition — and it is by no means improbable — the application of the differential in the adjustment of their tax will prove a veritable God-send. Earning less they will pay less in direct proportion, and not as at present, in indirect proportion. Now, in times of depression their property taxes remains the same and their gross earning tax alone declines ; under the proposed scheme their entire taxes will decrease precisely as their earnings decrease. As a preliminary to the application of the differential, a table has been prepared showing the application of eight differentials, at varying rates, with different flat rates and with variable points of incidence. This table is her appended, and it is needless to explain that "two per cent, flat, differential of one-sixteenth of one per cent, from ninety per cent." means a flat gross earnings tax of two per cent, which changes when operating expenses are less than ninety per cent, of gross revenue and increases at the rate of one-sixteenth of one per cent, for each whole percentage of decrease in the operating expenses. 284 Report of Tax Commission — Appendix. •%06 nioJj %X JO ST-I JO •JIP 'i'«\A %ViX COcC'OSCoo»oo»oo C000»0 OtOC^OO»Oi-HI>CO COCCOOO(NOO'^i-HI^ iOU3CDiOt-0000O5 O-HrHlNromTtHiOiOtOtOt^oOOO i-H,-Hi-(.-HT-H^,-(i-((NC^CqC^C^(NC^(N(NC^C^(N(NC^(N ooooooooooooooooooooooo ■%08 nioij (gggOOO %X JO SX-X JO -Jip %-s\^ %8 ooooooooooooo •%08 raoij (SOOQ-) %X JO OS-X JO -JIP %-«\3. %S Olooiooiooiooiooloo OOi-H'-IINC^COCO-^TttlOlOCO : : : : '. : : : : ;oooooSooooo§§ •%08 uiojj (92900) %X JO 9X-X JO -JTP *«1J %8 ■ : : : '. '. '. '. 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Especially will it be observed that in the case of two large railroads, the increase of their proposed taxes is larger than the total increase in revenue. The writer believes that the earnings of these two lines justify this increase. What now appears a heavy exaction from them will likewise operate, in less prosperous years, as a substantial relief from heavy burdens. They are now in a position to pay heavily and should pay heavily ; a few years hence they may not be so situated and will have the benefit of a deduction in their taxes. The law, we repeat, will exactly adjust itself to their earnings and is fair at all times and to all railroads. In the case of every other railroad, the deduction or increase in taxes to be paid under the new law is fully warranted by the condition of the companies and is in proportion to the real earn- ings of the property. Flat Gross Earnings Tax. Should it be deemed inadvisable to adopt the differential on the gross earnings tax, the following table is submitted, showing the revenue derivable from a flat grosss earnings tax, on the basis of 1910 earnings (lumber and mining companies excluded). Taxable gross earnings $53,056,720 Present revenue 1,776,826 Revenue from differential 2,056,720 Gross earnings tax of 3% 1,591,701 Gross earnings tax of 3M% 1,724,343 Gross earnings tax of 3.3% 1,750,871 Gross earnings tax of 3.4% 1,803,928 Gross earnings tax of 3^% 1,856,985 294 Report of Tax Commission — ^Appendix. Gross earnings tax of 3.6% 1,910,041 Gross earnings tax of 3.7% 1,963,098 Gross earnings tax of 3.8% 2,016,155 Gross earnings tax of 3.75% 1,989,627 Gross earnings tax of 3.9% 2,069,212 Gross earnings tax of 4% 2,122,268 Thus a gross earnings tax of 3.4% (three and four- tenths per cent.) will yield approximately the same revenue as that now received; while a tax of 3.9% (three and nine-tenths per cent.) will yield a revenue equal to that proposed, under the gross earn- ings plan with the differential. We do not recommend the flat tax; we unequivocally recommend the differential. The Rate of the Flat Tax on the Ad Valorem Basis. In proposing a rate of thirty-five cents the hundred dollars on the valuation of the property of such railroads as prefer the ad valorem system of taxation, with a supplemental tax equal to the average rate of taxes in the localities through which the railroad operates, the endeavor has been to fix a rate of taxation which, with a reasonable increase in the assessment, will yield a' revenue at least equal to the present revenue. A tax of thirty-five cents to produce a revenue equal to that now received, would require a valuation of $211,000,000. It is reasonable to suppose that the Corporation Commission, in assessing such railroads as choose the ad valorem plan, will take cognizance of the fact that their intangible as well as their tangible property is taxed, and, in consequence, will levy a tax on the non-physical elements at least equal to that on physical properties. Objections to this System. Study of the system here proposed reveals certain apparent defects which should here be met. These are: First, the system appears to be complicated; second, it appears to discriminate against certain railroads; third, it places the taxation of railroads entirely in the hands of the General Assembly with power to change the system whenever deemed proper; fourth, while pro- viding for the unit assessment of railroad property, it con- Report of Tax Commission— Appendix. 295 templates the division of the unit so ascertained; fifth, the apportionment is on a basis which may cause dispute, both as as to its theory and its just operation; sixth the apportionment of inter-State companies' mileage is subject to criticism. These objections will be met seriatim. (1) The System is Complicated. The differential proposed will probably be regarded as compli- cated and cumbersome. To ascertain the tax it will be necessary to consult a table and to make computations; the public will be confused by the fact that different railroads pay taxes at differ- ent rates; the system is difficult of explanations — many objec- tions of this sort might b^ raised. These seem to us to be of trifling importance. At the very worst, the system cannot be more complicated than that now in use ; at its best it is infinitely simpler. The real test of the system, these things considered, is its fundamental justice and the system meets the test. (2) Discrimination Against Railroads. It will be argued that this system discriminates against certain railroads, since it is obvious that the burden of increased taxa- tion will fall on two of the many systems operating in the State. This objection has already been met, and the writer's deliberate judgment is that the excellent condition and vast earnings of these systems will enable them to meet these taxes without justifying either a deterioration in service or an increase in rates. Where all railroads are treated alike, discrimination is impossible. Under this system all railroads are given precisely the same treat- ment and such inequality as may appear is in fact the truest equality, since it adjusts the tax to the true earnings of the rail- road. (3) The Tax Exclusively in the Hands of the Assembly. Some apprehension has been expressed that this system, placing the taxation of railroads in the hands of the legislature, may operate to "put the railroads in politics" and to endanger their legitimate interests through possible increases in taxation. It may be argued that while the proposed tax is not unreasonable, once the system of an exclusive State tax be established, the rail- 296 Report of Tax Commission — ^Appendix. roads will be at the mercy of the Assembly in every time of fi- nancial stringency. Such a charge is a reflection upon the As- sembly. As long as the power of the Assembly is practically unlimited in respect to the rate at which the assessment of private property is placed, the tax limit is farcical, and the Assembly has full authority to change the real rate of State taxation at any time. There is certainly no reason why the railroads should be protected by constitutional limitation from increases to which other property holders are thus always subject. No legitimate interest need ever fear that the Assembly of Virginia will deal unfairly with it, or increase its taxes beyond the standard set for other classes of like earning capacity. (4 and 5) The Method of Apportionment. It may be argued that this system is incongruous in that the railroads are to be assessed as a unit and then subdivided for purposes of taxation, or, in other words, that values, once unified, are to be redivided. In the same connection it will be argued by advanced students of public finance that an error has been made in proposing that the tax be apportioned where fixed values are found. Both of these objections are in part well founded. Yet careful investigation has disclosed no system more desirable, or, at least, more feasible. It is to be sure, a curious process to unify values and, then to apportionment them; but in lieu of this, what is to be done? Two substitute systems, with modifications, have been pro- posed. The first of these, the Massachusetts plan, may be dis- missed with a word. This provides that the revenue from the apportioned railroad tax be distributed among the towns and cities according to the residence of the holders of stocks and bonds in the railroads taxed. This has naturally led to a great inequality in the apportionment; some Boston suburbs with a rich, small population receive far more revenue from the railroads than do large mill towns, with great need of revenue for schools and improvements. Surely no worse or more inequitable sys- tem could be devised. The other system is that now in use in West Virginia and New Jersey. According to this, the revenue from the railroad tax is apportioned among the localities according to the percentage their Report of Tax Commission — Appendix. 297 privately owned real and personal property bears to the total of private taxable property. Thus, if the private real and personal property of Rockingham county amounted to three per cent, of the total real and personal property privately owned in all the counties and cities with railroads, Rockingham county woul receive three per cent, of the total apportionable revenue from the railroads. This system has much to commend it. It is based upon the theory that the railroads of the State are the taxable subject not of any particular locality, but of the people as a whole, and that the accidental location of railroad property in any locality should not determine the revenue that locality derives from the railroads; but that each locality should receive from the rail- roads in proportion as it contributes to them. There is certainly no better general index to this than the value of the real and per- sonal property in the locality, for tonnage is a poor guide, unless it be classified — a problem presenting very serious accounting difficulties. If, therefore, each locality receive a percentage of the railroad tax equal fo the percentage of its property to the total property, reasonable justice is meted out. It is certainly not necessary to point out how this system would operate to encourage the counties and cities to raise the valuation oftheir property to a fair standard. But sound as it is in theory, in practical operation this system will not work well in Virginia, and for two reasons: (1) it presents very disputable problems of apportionment and (2) it would seriously and, in some instances, disastrously upset county and city finance. As examples of the difficulties of apportionment, the following questions presented themselves with the first efforts to test this principle: shall the railroads be grouped together, and the rev- enue from all be apportioned in the method prescribed? Shall each railroad be considered separately and its revenue divided between the counties and cities through which the line operates, according to their values? What shall be done with those counties and cities which have a number of railroads? Shall their total value be included, or only a portion thereof? Manifestly, it was unreasonable to include the total valuation of all the cities in apportioning the taxes of all the railroads passing through them. If this were done, the city of Rich- 298 Report of Tax Commission — ^Appendix. lond, for instance, would receive almost a fourth of the total revenue from the railroads. It was necessary, therefore, to try- other expedients. The first was to divide the total valuation of a county or city having more than one railroad between the rail- roads there located, according to the mileage of each railroad. This seemed fair, for each locality would then receive a percentage of the tax equal to the percentage each locality bore to the total valuation. Thus, to take the city of Richmond as an example: The total valuation of real and personal private property was found to be $90,467,848. Within the city were located the Atlantic Coast Line railroad, with a mileage of .639; the Chesa- peake & Ohio with a mileage of 3.45 ; the Seaboard Air Line with a mileage of 2,417 ; the Southern with a mileage of 2.58 and the R. F. & P. with a mileage of .98. The R. F. & P. and the P. R. R. Connection Company was also in the city, but as it was located in no other locality, it did not figure in the computation. The total mileage was thus 10.066, which, apportioned between the railroads, gave to each a certain percentage of the city's appor- tionable value in computing the division of the tax. These are as follows: Percentage of Percentage of Apportioned Railroad. Total Mileage. Valimtion. A. C. L 06348 $ 5,742,898 C. &0 34273 31,006,045 S. A. L 24011 21,722,234 South 25630 23,186,909 R. F. & P 09735 8,807,045 Connec. Co With the valuation thus ascertained for each locality an as- signed apportioned value was given each railroad, representing, it will be seen, a percentage of the total value of the counties and cities through which the road operated, which percentage was equal to the mileage of that road in comparison with the total mileage in the counties and cities considered. On this basis, each county and city was given its percentage of the revenue. In the case of the city of Richmond, this final step was as follows: Report of Tax Commission — ^Appendix. 299 Percentage of Apportioned Valuation Railroad. to Total Apportioned Valuation. Revenue. A. C. L 03250 $5,626 C. &0 281796 63,789 S. A. L 575710 10,956 South 1783945 25,110 R. F. &P 46819 21,392 R. F. &P. Con 100.00 703 Summary Present Revenue $ 90,022 Proposed Revenue 133,576 It was found upon examination that by this plea the appor- tionment of value in counties with a number of railroads operated not only to decrease their revenue from a given road, but actually increased the revenue of some counties with comparatively low valuation. Thus by reducing the valuation of Richmond City, Augusta county and like highly assessed localities, some counties along the C. & O. had their percentage relatively increased. This plan is marked "B" in the appended table, and was rejected after a careful study of its operation. The next expedient was to give to each city and county an ap- portioned valuation, in the total of the line, proportionate to the mileage of the railroad in the county and to the valuation of real and personal property. In other words, to apportion revenue directly in ratio to mileage and apportioned value. This plan, marked "C" in the table, was also rejected as working injustice, even though to make it in any way operative, to the counties was first assigned a percentage of the apportionable total equal to the percentage of their total valuation bore to the total valuation of the whole State (counties and cities without railroads excluded) . A number of other methods of line apportionment were tried without result; and the writer was forced to the last expedient, namely, to take the total revenue assignable to the localities (50 per cent, of the total) and divide that between the counties and cities with railroads, giving to each a percentage equal to the percentage the real and personal property of private individuals 300 Report of Tax Commission — ^Appendix. in that county or city, bore to the total real and personal property of the counties and cities in question. The result of this appor- tionment, marked "A" in the following table, show this method in operation. Theoretically this system is probably the fairest that could be devised and in practice it would save the Commonwealth from the necessity of apportioning values ; but it would take much revenue from certain localities that need the funds, and, in consequence would seriously upset their financial arrangements. At a future time, when our local finances are on a more stable footing, it would be well to inaugurate this system. For the present, it cannot be recommended. With these two methods of appor- tioning revenue impossible at present, the experience of other States offered little to guide us. Nothing was left better than the system now in use here and in other States. The only change possible is the one suggested, namely, to give the Corporate Commission more latitude in its apportionment. The results will be as satisfactory as any that can be achieved at this time. Report of Tax Commission — ^Appendix. 301 Test Tables for Proposed Apportionment of Revenue from Railroad Tax. Co0NTy. Present Rev. Railroads. Revenue Appor. A. Revenue Appor. B. Revenue Appor. B. Accomac Albemarle .... Alexandria. . . Alleghany .... Amelia Amherst Appomattox . . Augusta Bath Bedford Bland Botetoiirt . . . . Brunswick. . . Buchanan . . . . Buckingham . Campbell . . . . CaroUne Carroll Charles City . Charlotte . . . . Chesterfield. Clarke Craig Culpeper .... Cumberland . Dickenson . . . Dinwiddie . . . Eliz. City.. . Essex Fairfax Fauquier — Floyd Fluvanna. . . Franklin. . . . Frederick . . . Giles Gloucester. . Goochland . . Grayson .... Greene Greensville . . 3,952.13 11,714.67 16,009.18 11,032.53 3,179.33 5,627.65 3,711.04 11,567.88 2,557.56 13,765.00 15,946.46 9,438.93 304.56 1,291.07 18,093.45 (362.54) 2,801.05 687.23 6,894.00 13,766.80 2,353.02 953.43 3,980.01 422.22 62.00 12,578.36 6,334.88 10,553.75 3,659.86 8,018.30 3,197.38 1,940.96 12,387.95 5,836.66 685.62 5,171.71 12,518 14,269 6,302 9,413 2,678 4,375 2,407 24,003 4,228 9,681 7,405 7,028 8,071 4,152 7,382 4,369 2,174 1,777 4,898 10,390 5,663 2,501 7,423 22,406 5,024 4,425 10,580 11,377 18,452 1,741 4,178 7,434 3,072 2,740 2,456 3,247 26,900 13,235 9,765 11,918 2,192 4,429 4,224 25,599 5,344 13,531 10,852 3,705 684 5,248 9,137 5,960 3,398 2,246 3,160 3,783 8,678 2,232 4,515 963 13 4,459 13,739 13,333 11,222 2,221 4,994 2,910 3,694 3,386 1,032 1,965 6,636 21,581 1,539 10,456 769 2,948 761 43,920 541 16,979 11,687 7,394 1,284 14,755 16,707 1,137 112 4,234 16,975 1,726 481 2,536 1,085 914 4,687 1,828 9,470 14,466 1,176 3,488 3,358 4,461 1,843 267 2,458 302 Report of Tax Commission — ^Appendix COTTNTY. Present Rev. Railroads. Revenue Appor. A. Revenue Appor. B. Revenue Appor. B. Halifax Hanover Henrico Henry Highland Isle of Wight James City King George . . . . King and Queen . King William Lancaster Lee Loudoun Louisa Lunenburg Madison Mathews Mecklenburg .... Middlesex Montgomery .... Nansemond Nelson New Kent Norfolk Northampton. . . Northumberland . Nottoway Orange Page Patrick Pittsylvania Powhatan Prince Edward . . . Prince George . . . Princess Ann .... Prince William . . Pulaski Rappahannock. . . Richmond Roanoke Rockbridge Rockingham Russell Scott 11,922.22 9,538.86 6,595.72 9,256.36 7,674.83 800.28 3,964.04 871.70 10,966.18 1,309.25 5,299.73 2,552.08 9,256.25 10,543.83 12,007.55 7,027.68 3,058.05 36,629.12 4,818.41 4,998.75 3,826.00 3,455.50 2,817.57 11,160.57 1,371.45 4,999.23 3,199.17 3,816.47 5,629.97 5,882.83 (9.00) 8,458.01 12,241.48 6,159.35 4,408.62 12,053 6,835 24,359 4,025 6,845 1,528 3,438 5,770 21,840 4,605 3,172 6,989 5,933 10,410 6,961 1,448 28,697 5,691 4,802 5,798 4,547 2,799 12,955 2,116 5,421 35,347 4,152 6,431 6,656 10,221 10,518 23,369 5,649 3,887 8,761 8,835 256.89 6,248 1,830 2,091 12,765 13,283 5,822 2,528 3,814 8,433 6,515 6,675 1,375 25,508 12,201 3,506 7,947 949 7,948 511 6,234 5,805 932 7,026 11,678 15,348 11,810 15,530 8,310 5,669 18,817 5,300 22,109 4,204 2,933 387 755 6,527 9,701 2,890 1,630 9,787 8,354 21,096 5,792 541 53,777 2,056 2,872 4,217' 2,325 920 19,106 1,049 3,630 1,399 4,756 4,648 4,704 13,828 12,434 29,062 5,086 4,692 Report of Tax Commission — Appendix. 303 County. Present Rev. Railroads. Revenue Appor. A. Revenue Appor. B. Revenue Appor. B. Shenandoah Smyth Southampton Spottsylvania Stafford Surry Sussex Tazewell Warwick Warren Washington Westmoreland Wise Wythe York Alexandria Bristol Buena Vista Charlottesville Clifton Forge Danville Fredericksburg Lynchburg Newport News Norfolk Petersburg. » Portsmouth Radford Richmond Roanoke Staunton Williamsburg Winchester 3,284.47 6,221.22 8,674.52 371.06 1,478.54 11,077.43 2,613.60 6,218.11 5,709.32 10,728.06 (22.07) 22,797.40 9,708.62 1,492.28 1,346.12 13,673.09 1,165.03 1,991.54 7,672.19 4,779.59 118.63 11,788.75 9,506.66 32,696.77 27,972.31 17,047.47 1,829.64 9,002.19 172,537.13 1,432.19 1,593.90 10,456 6,216 10,291 3,525 2,097 3,507 3,963 9,776 3,582 2,832 7,694 4,085 11,088 1,788 9,655 730 529 591 732 21,699 4,259 36,412 18,199 87,516 21,376 16,846 2,857 161,086 21,456 9,522 6,178 6,152 9,001 6,044 3,393 2,861 1,777 2,992 17,153 4,528 3,561 16,169 9,855 19,209 2,260 ,872 ,557 ,299 ,795 ,452 ,269 4,011 50,437 23,006 84,433 20,278 7,121 5,013 133,576 32,201 8,425 6,000 2,945 17,380 1,442 563 1,967 5,866 9,872 10,433 1,761 6,215 4,101 12,481 1,741 1,799 1,666 804 1,681 11,534 3,832 57,489 2,625 108,494 15,968 5,437 1,981 179,961 34,076 2,092 2,459 1,391 304 Report of Tax Commission — ^Appendix. 6 Apportionment of Inter-State Companies. Finally, it may be objected that under this system, the Com- monwealth will lose revenue in the apportionment of Interstate conpanies. The system proposed continues that now in use, namely to assess earnings on the basis of the percentage the single track mileage of this State bears to the entire single track mileage of the system. This is operated as follows, where X represents the earnings to be taxed in this State. Total earnings divided by total mileage equal earnings per mile. Earnings per mile multiplied by Virginia mileage equal X. It may be argued from this, that as our traffic is heavy, some other system might yield us a larger revenue. In answer to this objection it may be said that not one of the systems heretofore devised will work as easily or as satisfactorily as the one now in use. To incorporate into the law a provision for the taxation of intra-State traffic only, would, to be sure, pre- vent any possible legal difficulties; but it would also involve a vast deal of accounting on the part of the railroads with no as- surance that it would yield a larger revenue. To adopt the system used by the railroads in their operating reports would be not less dangerous. The opportunities for fraud on the part of unscrupu- lous officers and the practical impossibility of its detection would more than offset the slight apparent, advantage to the State possi- ble by such a change. Under the system of reporting referred to the railroads estimated their Virginia transportation receipts in 1910 to be $54,201,118, while their taxable transportation re- ceipts, on the mileage basis, were $53,056,720. The difference would not justify the experiment. Taxation of Lumber and Mining Companies. Investigation has disclosed the fact that the present system works hardship on a number of the small companies generally known as "lumber and mining companies." Some of the com- panies are merely departments of large mining and lumber com- panies, operating at the expense of the parent company and not receiving any allowance in fact or in fiction for transportation. The companies regard them as a part of their business and do not charge themselves with transportation over their lines. The result is that such companies do not show any gross earnings but Report of Tax Commission — ^Appendix. 305 a continual and impressive operating deficit. Other companies operating on the same principle do a small transportation busi- ness in the locality through which they pass, but would pay prac- tically nothing if taxed on this only. Consequently it is recommended that the proposed law include a section providing that in the case of lumber or mining companies, privately owned and not showing transportation receipts, the railroad be taxed as property, under the general law for ad valorem taxation; and that when any company desires to have its line taxed on the gross earnings basis, it shall credit the company with such reasonable transportation receipts as may be decided upon by the Corporation Commission as a proper tariff on freight of this class. In addition, such companies, as at present, would report actual earnings from outside transportation. Summary of Recommendations. To summarise the writer would recommend : (1) That the Assembly avail itself of its right to change the method of railroad taxation after January 1, 1913. * (2) That in so doing, the Assembly endeavor to put all regular railroads on the gross earnings plan. (3) That as a means to this end, statutes be enacted taxing the railroads as a unit on their tangible property and franchises at a rate of thirty-five cents for State purposes, plus a rate equal to the average of the local rates in the counties and cities through which the railroad operates. (4) That the tax so levied for the localities shall be apportioned among them, according to the value and use of railroad property in their respective limits, said value to be determined by the State Corporation Commission. (5) That any railroad be authorized, in lieu of this tax to pay annually to the State a percentage of its gross earnings, not less than three per cent, nor more than four and one half per cent, the rate to be determined by the percentage the operating expenses of the railroad bear to its gross earnings, with an increase of one- twentieth of one per cent, in each whole percentage of decrease in operating expenses below eighty per cent. (6) That lumber and mining companies be separately classified and taxed on the ad valorem basis ; under the owners thereof credit the account of the transportation company with such reasonable earnings as may be prescribed on that class of commodity by the Corporation Commission. 306 Report of Tax Commission — ^Appendix. APPENDIX RECONSTRUCTION AND ORIGINAL COST ACCOUNTS. Accurate figures as to the cost of railroad property in America are sadly lacking. Few railroads have kept comprehensive ac- counts ; still others have neglected these for a term of years ; others are absolutely without information of value. The rulings of the Corporation Commission require the rail- roads to file construction costs, under which item are charged all accounts for construction, equipment and general expenditures in connection therewith, with a credit allowance for depreciation, according to the accredited standards adopted by the Interstate Commerce Commission. According to this table, the total cost (original cost and betterment, less deterioration) of Virginia . railroads is as follows: Road. Cost Per Mile Atlantic Coast Line $ 33 ,482* Atlantic and Danville 27 , 527 Big Sandy & Cumberland 913 Big Stone Gap 12,339 Big Stony 33,877 C. C. &0 216,676 C. & O 104 , 132* ^. ..r 46,270 Ches-Western jq^ 294 Cumberland Valley 25,305 Danville Western 23,710 D. M. & Va 21,203 Inter-State 39 ,485 Laurel 9,376 Louisville & Nashville 45,250* Marion & Rye Valley 17,871 Mount Airy & Eastern 4,115 Nelson & Albemarle 35,671 New River, Holston, etc 17,870 N. Y. P. & N 72,895 N. and P. Belt Line 56,410 Norfolk-Souttern 43,553 Norfolk & Western 100,264 Report of Tax Commission — ^Appendix. 307 P-F-&P 26,432 Potomac 92,745 R- F- & P 89,956 R. F. & P. & P. R. R. Co 119 ,433 Richmond-Mecklenburg (Southern) 19 ,047 Roaring Fork 79 _ 223 Rosslyn Con. Co 35 , 637 S- A. L 55,708 Southern 95 657* S. S. & S '.'.'.....'.'.'.'.'.'.'.'.'.'. 5 ', 044 Tidewater & Western 6,595 Valley 64,664 Va. Air Line (C. & O) 47 ,866 Va. Ant. Coal & Iron Co 31 , 645 Virginia-Carolina 28 , 727 Virginia Carolina So 11 ,081 Virginia-Kentucky 35,094 Virginia-Southern 12,421 Vii-ginia-S. W 55,681 Virginian 160,974 Washington-Southern 219 , 619 Winchester and Potomac 13 , 363 Winchester and Strasburg 32 , 835 Wise Terminal 20 , 590 While we do not regard these figures as accurate, they are at least suggestive. Based on them, the following would be cost at the present condition of the principal railroads in the Common- wealth with the present assessed value of their property. Road. Cost on Basis of Reported Per Mile Cost. Assessed Value Exclusive of Fran- chise, 1910. Percentage Assessed value to Reported Cost. A. C. L C. &0.. $ 4,287,905 71,276,271 110,908,026 4,317,630 8,792,170 57,190,450 53,106,932 8,141,276 $ 4,014,361 23, 637, 220 t 32,942,578 2,416,977 4,769,436 15,265,641 6,774,110 1,793,425 ^ 93.62 33.61 N. & W 29.70 B. Y. P. &N Seaboard Southern Virginian Washington-So 55.97 52.24 26.69 12.75 22.02 *No record for Virginia kept; this; figures are for the entire line, tincluding Virginia Air Line. 308 Report of Tax Commission — ^Appendix. In an effort to secure more accurate information than that con- tained in these formal reports, we called on the railroads of the Commonwealth to file with us answers to an exclusive series of questions, aiming to cover practically all the items of construc- tion, equipmei;it and maintenance. The appended sections are based on their tabulated returns ; yet these must not be given too serious consideration, since it often happens, in construction, that one company will expend twice as much per mile as will another. Right of Way. The figures already given in the text of this report show how great may be the variation in the outlay for right of way. Where one company, encouraged by the locality, will be given its right of way, another may have to pay a very large sum for every mile and may also suffer from the unreasonable exactions of costly condemnation proceedings. We are loath in the circumstances, to make any estimate but would regard $2,000 the mile as a low average for this item. Engineering. This item will vary much according to circumstances. If the original reconnaissance be followed, the cost is naturally lower than where a new line be surveyed. We have not obtained esti- mates of this item from Virginia railroads, but on the basis of the Michigan appraisal would regard $800 the mile as a reasonable charge. This is higher than the Michigan figure, but the in- crease is justified by the difference in the character of the county traversed. Grades and Fills. It is needless to point out that this item varies tremendously with the character of the country covered. Indeed so great is the variation that few engineers will attempt to give an average. Such a railroad as the Louisville & Nashville, passing through an extremely mountainous country, reports that this item amounts to $25,000 themile, the Virginian, $28,000, the Inter-State, $12,490 the mile; the New River, Holston & Western, $8,509 the mile. At the other extreme a railroad like the Surry, Sussex & South- Report of Tax Commission — Appendix. 309 ampton reports the low cost of $500 the mile. Studying these returns carefully, we submit the following tentative estimate: Standard track in Tidewater $ 4,000 the mile In the Alleghany section 15,000 the mile Probable average for line crossing Virginia, East and West 5,500 the mile Bridges and Tunnels. On these items, we are unwilling to make an estimate. All will depend upon the peculiar character of the country through which any line passes; and the variations are so great as to be beyond the possibility of averaging. As maximum expenditures, the Chesapeake & Ohio spent $578,288 the mile on the Richmond Viaduct, and the Virginian spent $770,574 the mile on the Alleghany Summit Tunnel. It may be noted that the Michigan appraisal allows an average of $162 the mile for tunnels and $1,133 the mile for bridges; but these figures willl not apply to Virginia. Rails. The rail cost per mile of Virginia railroads varies much. A minimum for the narrow gauge lines, with 25 pound rails is $1,080 the mile, or $1,464 the mile with 35 lb. rail. From this sum, rail cost will mount to $4,714 the mile for the best construction on such line as the Chesapeake and Ohio. Rails cost from $28 to $39 the ton, f . o. b., at the mill, and range in weight from 25 pounds the yard to 110 pounds the yard. The average rate of new rails used on the principal lines in Virginia is about 90 lbs. This runs 141.42 tons the mile, while 75 pounds rails run 117.85 tons the mile and 100 pound rails run 157.14 tons the mile. The following table shows the per mile rail cost for the best construction on a number of Virginia railroads: A. C. L $4,274 Big Stone Gap 1,908 C. &0 4,714 D. M. & Va 3,004 Inter-State 4,158 L. &N 3,708 310 Report of Tax Commission — ^Appendix. N. Y. P. &N 2,646 Norfolk-Southern 3,080 Norfolk- Western 3,752 Seaboard 3,299 Southern 3,754 S. S. &S 1,464 Tidewater & Western 1,924 Va. -Southwestern 3,734 Virginian 3,866 An average of $3,500 the mile will be fair standard gauge rail- roads with reasonably heavy traffic. Ties. The cost of ties varies as do other items of construction but not widely in the case of companies operating a standard gauge track. $1,500 the mile is a fair average for standard gauge and $550 for narrow gauge single track. Spikes. Spikes for a standard gauge railroad will average $125 the mile; for a narrow gauge road $75 the mile. Angle Bars. A fair average per mile for angle-bars is $450 the mile. Fish plates for a narrow gauge line will average $75 the mile and angle bars for such a road will average $140 the mile. Labor Cost for Laying Ties and Rails. It is difficult to estimate the labor cost for laying a mile of ties and rails, jointed and spiked. The Atlantic Coast line, for instance, reports it can do this work for $500 the mile; the Sea- board estimates the cost to be $1,200 and the most recently built road, the Virginian, reports the labor cost as only $350. About $750 will be a reasonable average the mile. Ballasting, Including Labor. The length of the haul, not less than the character of the ballasting material, determines the cost of this item. If the bal- Report of Tax Commission — Appendix. 311 last must be bought, or laboriously handled in loading, this also adds to its cost. These considerations explain the wide variation in the reported cost of ballasting. The Louisville and Nahsville estimates a mile of rock ballast (including labor in the laying) to cost $1,375. The Virginian's ballasting of rock cost $1,725 the mile; the Seaboard reckons that this item may reach $3,000. Gravel ballasting, according to the Atlantic Coast Line, costs that company $880; the Seaboard estimates the cost to be $1,000 to $2,500; cinder ballasting is reported by the Big Stone Gap and Powell's Valley line to have cost $584 the mile, while the Inter- State estimates its cinder ballasting to have cost $528; the Vir- ginian $800; the Seaboard from $600 to $1,500. Surfacing with dirt from the right of way costs a narrow gauge line (The S. S. and S.) only $100 the mile, while a number of standard roads quote figures for the same work ranging from $300 to $650. Averaging these figures and repeating that all estimates depend upon the length of haul, loading and original cost of material, we submit the following tentative estimates: Standard Roads Rock $1,800 Gravel 1,200 Dirt 450 Cinder 800 Narrow Gauge: Dirt 150 Recent Main Line Construction. To test these figures and to see how much additional must be allowed for other items and for overhead costs, we called for statements of the last mile of main track constructed by a number of railroads. As might be supposed they vary much, but as they will probably cover the average conditions to be met with in con- struction we append them here : Atlantic Coast Line $ 28,505 Big Stone Gap & P. V 10,558 Chesapeake & Ohio 24,100 Interstate 5,215 Louisville & N 34,500 Norfolk- Southern 7,898 312 Report of Tax Commission — ^Appendix. Norfolk & Western 102,415 New River & Hoi. etc 17,603 Va. & Southwestern 60,600 Virginian 48,948 The last cited railroad states that its new line varies in cost from $3,347 to $770,574 the mile. The following interesting statement of original cost for a narrow gauge railroad, in the tidewater country, is furnished by the S. S. and S. Right of Way, it will be observed, is not in- cluded and no allowance is made for switches, blocks, etc. or overhead costs: Rails $1,080.48 Ties 528.00 Spikes 60.00 Fishplates 71.40 Track Laying 75 . 00 Ballast 100.00 Grading 500.00 Total cost $2,414.88 Summary of Road Costs. On the basis of these figures, the following is a conservative estimate for road cost, as shown in the items specified on a cross- State road. Right of Way $ 2,000 Engineering 800 Grading 7,500 Rails 7,500 Ties 1,500 Spikes 125 Angle Bars 450 Rock Ballast 1,800 Track Laying 750 Total Specified $18,425 Report of Tax Commission — ^Appendix. 313 These items, it must be remembered, are the minimum costs ot only a few of the items that make the finished railroad. Frogs, switches, interiockers, telegraph linas, legal expanses, etc., are not included. No allowance is made for stations, terminal facili- ties and the like, and equipmeni is not listed. These will often raise the per mile valuation to an average of more than double the figures given. Station Costs. Station property cannot properly be included m a per mile valuation and no averages can be giv-n. The following: cost fig- ures with thf assessed valua of the property are therefore sugges- cive only. Line. Station. Contract Cost Price. Assessed Value. A. C. L C.&O C.&O C.&O C.&O L. & N N. Y. P. &N. N. Y. P. &N. N. Y. P. &N. N. Y. P. &N. N-S N-S N-W N&W N&W N. &W N. &W S. A. L Southern T. &W T. &W. ..... Va.-S-W Va. S. -W Va. S.-W Van Van Port Norfolk, freight .... Pendelton, combination . Toano, combination. . . . Bell's Vy, combination. . Newport News, freight . . Ben Hur Hallwood New Church Bu-d'sNest Onley Butt's Head Norfolk, freight terminal Suffolk, passenger Petersburg, passenger . . . Stanley, combination. . . Buchanan Shawsville Richmond, freight Warrenton Cumberland Belona St. Charles Imboden Elverton Eggleston Ellett i 3 1 3 1 8 1 3 3 3 1 167 19 50 3 4 4 32 7 ,468.21 ,060 ,090 ,079.40 ,586.50 ,486.37 ,386 ,386 ,450 ,200 750 ,269 ,000 ,000 ,500 ,250 ,250 ,800 ,052.20 927 562 ,216 ,959 552 ,241 ,545 $1,250 300 550 500 5,000 960 2,000 1,600 1,600 1,200 200 131,600 11,400 24,000 2,000 2,400 2,400 25,000 5,560 250 250 400 400 200 500 500 314 Report of Tax Commission — ^Appendix. Equipment. — Locomotives. In estimating the value of locomotives in use on Virginia railroads, it must be borne in mind that this is a class of equip- ment in which deterioration is very rapid. An engine costing $20,000, may, by hard and constant use, deteriorate so rapidly that in 10 years' time it will be but so much scrap iron. For these reasons, the Inter-State Commerce Commission instructs rail- roads annually to deduct a percentage of value measured by the life of the locomotive. The following cost figures of locomotives now in use on Virginia lines are, therefore, of little value so far as'the present worth of the property is concerned. Report of Tax Commission — Appendix. 315 Road. A. C. L A. C. L A. C. L B. S. G. & P. V. C. &0 C. &0 C.&O C. &0 C.&O C. & O C.&O C. & O C.&O C.&O C.&O Int Int L. &N Int L. &N L. & N L. &N L. &N L.&N N. Y. P. &N.. N.Y. P. &N.. N. Y. P. &N.. N. &W N. &W N. &W N.&W N.&W N.&W N.&W N.&W N.&W N.&W N.&W N.&W N. R. H&W.. N-S Type. 10 wheel passenger 10 wheel freight New consolidation Baldwin motors 4 wheel switcher 6 wheel switcher 8 wheel switcher Mogul Shay 8 wheel passenger with trailer . 8 wheel passenger 10 wheel passenger 10 wheel passenger with trailer Consolidation Mallet Single expansion, class B4 . . . . Ditto, class C3 Class H25, freight Single expansion, class C4 Class K2, passenger Class H23, freight Class K-1, passenger Class H26, freight Class H27, freight Class H-6-b, freight Class 10-32 He, passenger Class B-8 Pacific, passenger 12 wheel freight 0-8-8-0, Mallet 2-8-8-2, Mallet Shay Frt. geared Consolidated, freight 10 wheel passenger Atlantic passenger Shifting American passenger 10 wheel freight Shifting Class 8024^D, Mogul Consolidated 1910 1910 1910 1890 1889 1906 1887 1908 1910 1907 1901 1901 1907 1909 1910 1906 1903 1910 1903 1910 1908 1907 1910 1910 1907 1907 1910 1910 1910 1910 1910 1907 1905 1904 1904 1893 1888 1885 1885 1906 1910 3 -a $15,073 14,724 15,323 2,082.25 8,270 13,485 9,225 17,207 20,400 17,560 12,570 15,000 19,177 14,700 32,250 12,905 5,000 12,240 5,569 14,393 12,868 15,089 17,100 16,876 17,898 14,985 13,963 20,842 19,960 31,031 32,450 21,402 14,523 14,738 15,026 8,500 8,750 11,350 12,222 8,000 15,075 ^ $4,750 4,750 4,750 750 4,750 4,750 4,760 4,750 4,750 4,750 4,750 4,750 4,750 4,750 4,750 4,800 4,800 4,750 4,800 4,750 4,750 4,750 4,750 4,750 4,750 4,750 4,750 4,750 4,750 10,000 10,000 4,750 4,750 4,750 4,750 4,750 4,750 4,750 4,750 3,750 4,000 316 Report of Tax Commission — ^Appendix. Road. N-S N-S N-S S. A. L. . S. A. L . . S. A. L.. S. A. L.. So So So So T-W.... T-W. ... Va.-S. W Va. S.-W Va. S. W Van Van Van Van Van Van Type. Passenger Switch 10 wheel freight 10 wheel passenger 10 wheel freight Consolidated freight 6 wheel switch Consolidated Pacific passenger Switch Mallet Consolidation (2nd hand) 10 wheel Consolidated freight 10 wheel passenger Switch Mikado freight Mikado freight Mallet freight Switch 8 wheel passenger , 10 wheel passenger >^ Pi 1907 1907 1907 1910 1909 1904 1910 1910 1910 1910 1910 1910 1910 1905 1907 1899 1909 1910 1910 1910 1906 1907 3 C Ph Cl, 10,950 9,400 11,900 16,607 14,995 13,710 13,064 19,460 20,590 13,730 30,755 3,833 7,851 16,277 15,850 10,575 19,356 21,365 29,930 15,195 12,500 17,480 c3 4,000 4,000 4,000 4,750 4,750 4,750 4,750 4,750 4,750 4,750 4,750 1,250 1,250 4,500 4,500 4,500 4,750 4,750 4,750 4,750 4,750 4,750 Passenger Cars. Passenger cars, baggage cars, express cars, mail cars and com- bination coaches vary much in cost. The following are average prices for the various classes quoted : First-class passenger coaches $ 8,000 Baggage and mail coaches 4,500 Combination 5,000 Diners 15,000 Parlors 10,000 These figures may be increased according to the company. The new passenger coaches of the Chesapeake & Ohio for example,, cost $11,176, and their new combination coaches cost $8,221; the Report of Tax Commission — ^Appendix. 317 new coaches of the A. C. L. cost $9,938 each. Much of the passenger equipment used on the narrow-gauge railroads is second hand, and their coaches cost from $500 to $813. Box Cars, Flats and Coal Cars. From the reports of the railroads, it appears that $950 is a fair average box cars, though the prices range from $59 to $1,242. Flat cars cost from $500 to $853, the average being about $600; coal cars are somewhat higher, ranging from $605 to $1,190. Statistics of Other States. The methods employed in ascertaining the reconstruction cost of railroad property in other States vary so much that compari- sons are of very little value. The following estimates for three western States are, therefore, little guide to the condition of Vir- ginia railroads. The road valued was the Chicago, St. Paul and Milwaukee: Per Mile Cost of State. Reproduction. Wisconsin $47,991 Minnesota 44,997 South Dakota 22,433 A fair index, however, to the value of all the railroads in the State of Michigan is available in a recent report.* The Michigan railroads have fewer grades and fills than have most railroads in this Commonwealth, but they are probably of better construction and own superior equipment. The following table, including the digest of the Michigan appraisal, is the estimate of "present value" fixed by competent engineers in 1902. *Riggs, the valuation of Public Service Corporation Property, transactions Amer- ican Society of Civil Engineers, Vol. Ixxii (June 1911) p. 299. 318 Report of Tax Commission — ^Appendix. Average Present Value Michigan Railroads, 1902. l3 bJO "" 00 Item. ^ ° § o Si -M -S H 4^ 3 t3 •s s -§ & Sm !(S Engineering Right-of-Way Real Estate Grading Tunnels Bridges Ties Rails Track Fastenings Frogs, switches Ballast Track Laying Fencing Crossings Interlockers Telegraph Stations Shops Shop Machinery Water Stations Fuel Stations Elevators Warehouses Docks and Wharves Miscellaneous Struct Locomotives Passenger Equipment Freight Equipment Miscellaneous Equipment. Ferries and Steamers Electric Plants Terminals Legal Expenses Interest Organization Contingencies 761 !,918 122 !,064 162 ,133 ,573 :,052 543 207 525 926 390 86 71 36 580 305 156 103 43 189 37 781 174 ,274 452 ,787 99 244 13 3,551 110 2,777 147 1,027 95 747 373 2,602 ,426 ,673 492 188 477 839 354 78 64 33 526 276 142 93 38 171 35 708 158 154 409 525 90 221 12 86 677 339 2,358 503 2,589 81 2,025 107 749 1,040 2,678 359 137 347 612 258 57 47 24 284 202 104 68 29 125 24 516 115 842 299 841 66 261 1 63 494 247 1,712 495 2,542 79 1,994 100 738 1,024 2,637 353 135 342 602 254 56 46 24 378 198 102 67 28 123 24 507 113 829 294 1,813 65 159 62 486 243 1,695 Total Cost . 28,623 259,45 18,914 18,627 Report of Tax Commission — ^Appendix. 319 Somewhat similar statistics have*been submitted from time to time, in connection with various railroad appraisals; but these are, in the main of doubtful value and are not applicable to Vir- ginia. Indeed the general observation has been that even in the most essential items of cost, construction in different States varies so greatly as to make comparisons of little value. 320 Report of Tax Commission — Appendix. CHAPTER VII. MISCELLANEOUS PUBLIC SERVICE CORPORATIONS. Telegraph and Telephone Companies. General Considerations. All that has been said in the previous chapter regarding the character of railroad property, the difficulties in the way of its taxation and the considerations which should guide any legisla- tive body in providing for its assessment, apply with equal force to the miscellaneous public service corporations operating in this State — the telephone companies, the telegraph lines, the light, heat and power companies, the car service corporations, the express companies and the steamship lines. Their tangible property is of comparatively small value , yet their earning capac- ity is large because of the privileges conferred by their franchises. Their earnings give their property its value and these earnings are the proper subject on which a tax should be levied. In the following discussion of the several classes of public service cor- porations treated, the premises laid down in the discussion of railroad taxation will be assumed and the recommendations will be shaped accordingly. Classes of Telephone and Telegraph Companies. There are 206 telephone and telegraph companies chartered in the State. Of this number the telegraph companies are in fact less than half a dozen in number ; but many of the companies are chartered as "telephone and telegraph concerns" and must be treated accordingly. Fifty-nine of these companies are classified as "mutual" and the others as "commercial." The mutual companies are co-operative associations, to the construction and Report^of Tax Commission — Appendix. 321 maintenance of which each subscriber contributes a certain amount, either proportionate to the construction involved in reaching his station or else equal to the amount contributed by all the other subscribers. In actual practice, some of the mutual companies differ little from the commercial companies, except in the partial exemption of the former from taxation. * Business of These Companies. For the fiscal year ending June 30, 1910, the telephone and tele- graph companies in the Commonwealth reported to the Corpora- tion Commission 17,590.13 miles of poles and 49.385 miles of conduits. They had 78,591.45 miles of wire in addition to one wire in each city, county and school district where they operated. Their poles and conduits were valued at $732,253 and their excess wire, above the limit mentioned above, was valued at $1,026,- 710.27. Their real and personal property, including instruments and equipment, was valued at $1,000,506; and their total prop- erty, everything included, was valued at $2,759,470. Their reported gross earnings in the State were $1,704,105 or 61.75 per cent, on the value of their property. Method of Taxation. Under the provisions of the Constitution and of the subsequent acts, as amended at the last session of Assembly (1910), the State imposes a tax of thirty-five cents on the hundred dollars' valuation of the real and personal property, tangible and intangible, of the telephone and telegraph companies. In addition, license and gross earnings taxes are imposed. The telegraph companies pay $2.00 the mile on poles and conduits and 2 per cent, on their intra-State gross earnings. The tax on telephone companies is graduated according to the character of the business done. Where (1) the gross receipts do not exceed $50,000 the year, (2) where the pole-mileage is not greater than 400, and where (3) the company is not owned or controlled by a company whose receipts are in excess of $50,000 the year, the gross earnings tax is one per cent. Where the three conditions above or any of *A mutual company is thus defined: ''purely a local mutual association, (which) does not charge othars for transmitting messages over its line or lines and is not designed to accumulate profits for the benefit of, or to pay dividends to, the stock- holders or members thereof." 322 Report of Tax Commission — Appendix. them be not fulfilled, the gross earnings tax is one per cent, to $50,000 gross receipts and two per cent, on receipts in excess thereof, with a tax of $2.00 the mile on the poles of such company. Private telephone companies are taxed as property through the local Commissioners of the Revenue and mutual companies are taxed on their property only. Revenue From This Tax. For the year ending June 30, 1910 the tax assessed by the State against the property of telephone and telegraph companies was $9,658.01. The tax on poles was $12,842.90 and the gross earn- ings tax was $27,957.60. The total taxes assessed on account of the Commonwealth were thus $50,458.51. Localities are practically without restriction in their power to tax telephone and telegraph companies ; but the taxes other than those on property imposed in the cities of the Commonwealth are practically all of two classes: first, taxes incident to the granting of franchises, and second, annual license taxes. The local taxes on the property of the companies are, of course, levied on the basis of State property taxes. Under the constitutional provisions requiring public service corporations franchises to be sold to the highest bidder, it is competent, also, for the localities to levy special taxes in the way of service required, which taxes are in effect franchise taxes. In addition, the city of Norfolk has an ordinance imposing a tax of 3 per cent, on the earnings of the telephone company operating there. In the following table, only license taxes, earnings taxes and property taxes are included. It is impossible to compute the amount of the special taxes levied under all the franchises awarded by the cities since the adoption of the new constitution. Taxes on property $20,071 . 03 Taxes on property (cities) 19,483 . 51 Licenses (town and city) 10,662 . 94 Earnings tax (Norfolk) 1,148 . 52 Total local taxes ' $51,366.00 Thus State and local taxes aggregate $101,824.51, which is 5.97 per cent, of the reported earnings of the companies. Report of Tax Commission — ^Appendix. 323 Heavy Municipal Licenses Taxes. Ere the justice of this tax be considered, it must be noted here, as in connection with insurance license taxes, that great and grave inequaUties exist in respect to local license taxes. It is certainly proper that the locality should exact a reasonable return from the telephone and telegraph companies. These companies are often in a position to earn handsomely on their investment; they have small tangible personalty, and should certainly pay for their privileges. At the same time, these license taxes should be levied with reasonable regard to the business done by the com- pany; and should certainly not be imposed in the arbitrary fashion now in use. In Appendix two of this chapter will be found a list of the local license taxes imposed in 1909 on the Southern Bell Tele- phone Company and on the Western Union Telegraph Company. These will unquestionably bear out the statement, and will demonstrate the need of State regulation of these licenses as soon as the information on which to base such regulation has been secured. Is This Tax Reasonable? The question arises, is this, a tax of $101,824.51 or 5.97 per cent, of gross earnings, a reasonable tax? In answer it is obvious that if the earnings be as reported, the tax is certainly high enough. To exact almost 6 per cent, of any company's gross earnings is at the very least to tax that company as heavily as it should be taxed. One may question, however, the accuracy of the reports filed by the companies, which show gross earnings of but $1,704,- 105. The companies are not required, as are railroads, to keep their books according to a standard system ahd are merely re- quired to report their "gross revenue." The construction of this term is left to the company's officers. Manifestly it is not fair to expect mutual companies, whose earnings are not at present taxable, to report their earnings; but excluding these companies altogether, many companies show gross earnings so small as to be explicable only on the ground of bad bookkepping methods.* This is a very important, fact in determining future modification of the law. *It is but fair, however, to say that the writer has found no evidence of any in- tentional neglect of the law or of any desire to evade its provisions. The larger telephone and telegraph companies have model systems of bookkeeping. 324 Report of Tax Commission — ^Appendix. Is This Tax on a Proper Basis? The next question that arises in considering this tax is whether or not it is levied on a proper basis. And here reference must be made to the principles laid down in the consideration of railroad taxes and to the conclusion reached there. Insofar as the tax is levied on earnings, it is a proper tax; insofar as it is levied on prop- erty it is subject, in theory and in enforcement, to serious objec- tions. A tax on earnings is from every point of view, far more desirable than a flat tax on property. Can a Gross Earnings Tax be Levied? If it be desirable to place the telephone and telegraph companies on a gross earnings basis, the question immediately before the Commission is whether or not such a tax can now be properly imposed. Legally, there is little objection, beyond the limita- tions laid down by the Supreme Court. The court has decided that in certain conditions a State tax on telegraph and telephone companies is a regulation of inter- State commerce; but the court has perhaps not gone so far in these cases as in the case of rail- roads. Thus, in W. U. Tel. Co. vs. Texas (105 U. S. 460) the court declared that no specific tax could be levied on telephone messages, regardless of whether or not they were to points with- out the State, but held that such a tax, levied on intra-State messages was constitutional. In the still more important case of W. U. Tel. Co. vs. Taggart (163 U. S. 1) the Supreme Court approved a State tax apportioning the value of a telegraph com- pany according to its wire mileage and imposing a propor- tionate tax on the intra-State part thereof, which percentage was determined by a stock and bond valuation of the company's property. Presumably, an apportioned gross earnings tax on telegraph and telephone companies would come under the prin- ciples laid down in Galveston H. and S. A. R. R., vs. Texas — the tax would have to be considered as a part of the general tax law and its extent, whether to measure the privilege conferred or to tax earnings, would have to be decided. Certainly a gross earnings tax on intra-State telephone and telegraph business is of undoubted legality at this time. But can such a tax be now levied, with due regard to the taxing authorities and to the business taxed? As long as bookkeeping Report of Tax Commission — ^Appendix. 325 methods are not standardized, it is manifestly impossible to in- troduce a differential on a gross earnings tax as applied to tele- phone and telegraph companies. The only gross earnings tax possible, therefore, is a flat tax. Such a tax should not be in excess of 4 per cent., for a higher tax is unreasonable and is not levied by any American States. Such a tax applied to the gross earnings reported in 1910 would yield but $68,164.20 or $21,848.85 less than the amount realized from the present tax. Thus, to place these taxes on a proper and reaonable basis, with the present system of reporting earnings, would involve a reduction in the tax — a reduction which the financial condition of the Common- wealth will not at this time justify. But what seems now unattainable may be possible in the course of a few years — as soon, in fact, as the real earnings of these companies be checked up. If the reported earnings prove to be the only taxable earnings, then the gross earnings tax should be applied, at not more than 4 pei cent., even though it involves finan- cial loss to the Commonwealth. If the earnings, upon examina- tion, be found, as the writer suspects, greater than those now re- ported, then a gross earnings tax can be applied at a lower rate, which will yield the same revenue. The only thing possible at present is to enact a law which will put these reports on a uniform basis, giving accurate information regarding operating expenses and produce figures which are not open to dispute. In the mean- time, the present tax can be applied with such amendment only as will make the wording unequivocal. This law, as will be seen by comparison with the digested statutes of other States, printed in Appendix one, is as good as any tax, not on the earnings basis, can be. The writer therefore, recommends: Summary of Recommendations. First, the enactment of statute requiring the Corporation Com- mission to prepare a form of report which will show, beyond ques- tion, the earnings of the telephone and telegraph companies operating in this State, together with the ratio of their operating expenses to their gross earnings ; and the enactment of a provision requiring every such company, chartered in the State to fill the report required by the Corporation Commission. While the Commission probably has power in the premises, under existing laws, a special statute may be advisable. 326 Report of Tax Commission — ^Appendix. Second, the continuance of the present law until such time as an exact acquaintance with the earnings of these companies will justify the introduction of the gross earnings principle. APPENDIX ONE. Digest of Typical Statutes of American States Affecting the Taxation of Telephone and Telegraph Companies* TELEGRAPH COMPANIES. Alabama: In addition to the property tax a privilege tax; com- panies whose lines in the State do not exceed 150 miles, $1 per mile; over 150 miles, $500, together with $1 per mile. Connecticut: 25 cents on each mile of wire, in lieu of all other taxes except on real estate. Maine: A tax on the gross receipts, graduated as follows: Gross Receipts. Rate. $l,Q00-$5,000 1^% 5,000-10,000 11^% 10,000-25,000 13^% 25,000-50,000...... 2 % And for each additione^l $25,000, }4 per cent, up to a maximum of 4 per cent. ; in lieu of all other taxes. Maryland: 2 per cent, of gross receipts from business done in the State; in addition to this the shares of stock are taxed as property. Michigan: 3 per cei;t. on gross receipts. New York: An annual franchise tax based on the amount of capital stock employed in the State, at the rate of one-fourth of a mill on each $1 for each one per cent, of dividends declared during the year; also, one-half of 1 per cent, of the gross earnings. These taxes are in addition to the taxes on local property. 'See California Tax Commission's Report, 1906. Report of Tax Commission — Appendix. 327 Pennsylvania: On capital stock, 5 mills per $1 ; on interest paid on loans, 4 mills; on the gross earnings, 8 mills; all in addition to local taxes on property. Texas : 1 cent for every full-rate message sent within the State and one-half cent of any message less than a full-rate message. Railroad messages for running trains are exempt. In addition to taxes on property. Vermont: 3 per cent, on their gross receipts in the State, or at their option 60 cents per mile of poles with one wire, 40 cents per mile for each additional wire. TELEPHONE COMPANIES. Alabama: Long distance telephone companies, whose lines do not exceed 200 miles within the State, 50 cent per mile; over 200 miles, $250, and 50 cents per mile, in addition to taxes on property. Connecticut: 70 cents on each telephone transmitter and 25 cents on each mile of wire, in lieu of all other taxes except on real estate. Delaware: 1 per cent, of the gross receipts within the State. Louisiana: A tax on the gross receipts, the rates being graded according to twenty classes, the lowest class including all whose receipts are under $15,000 for which the rate is $20, and the high- est all whose receipts are over $2,000,000 for which the rate is $6,250. Foreign telephone companies, $5 per $1,000 of gross receipts; in addition to ad valorem tax. Maryland: 2 per cent, of gross receipts from business done in the State, in addition to this the shares of stock are taxed as property. Massachusetts: Taxed on that proportion of the capital which the number of telephones used within the State bears to all in use; taxes at the average rate of the property tax throughout the State. New York: An annual franchise tax based on the amount of capital stock employed in the State, at the rate of one-fourth of a mill per $1 for each 1 per cent, of dividends declared during the year; also one-fourth of 1 per cent, of the gross earnings. These taxes are in addition to the taxes on local property. 328 Report of Tax Commission — ^Appendix. Pennsylvania: On capital stock 5 mills per $1; on interest paid on loans, 4 mills; on the gross earnings 8 mills; all in addition to local taxes on property. Vermont: 3 per cent, on gross earnings within the State, or at their option, 40 cent each on the average number of transmitters, and 30 cents per mile of wire. APPENDIX TWO. Statement of Local License and Pole License Taxes Levied in 1909 by the towns and cities of Virginia on the Southern Bell Telephone Company and the Western Union Telegraph Co. WESTERN UNION TELEGRAPH COMPANY. Alexandria 150.20 Abingdon 10. 75 Basic City 10.50 Blackstone 20.75 Boykins 3 . 25 Broadway 5. 25 Buchanan 5 . 50 Buena Vista 10. 75 Chase City 10.00 Clarksville 10.00 Chfton Forge 50. 75 Culpeper 25.50 Danville 79.50 Drake's Branch 5 . 00 Elkton 5.25 Fredericksburg 50.00 Front Roya' 5.00 Hampton 42.00 Harrisonburg 50. 75 KeysviUe 5.00 Leesburg 5 . 00 Lexington 25 . 50 Lynchburg 60. 70 Manchester 16. 13 Martinsville 35. 75 Newport News S27. 50 Norfolk 307.50 Orange 7.88 Petersburg 93. 75 Pocahontas 10. 75 Pulaski 7.50 Richmond 886.00 Rocky Mount 15.00 Shenandoah 2. 75 South Boston 10.40 Staunton 100.75 Strasburg 5. 50 Suffolk 15.50 Warrenton 15. 50 Waynesboro 5 . 50 West Point 10.00 Winchester 25. 50 Woodstock 5. 50 Wytheville 12.75 Pamplin 5. 25 Chatham 5. 75 Portsmouth 191 . 25 Farmville 10. 75 Bedford City 10.50 Total $2,387.81 Report of Tax Commission — Appendix. 329 SOUTHERN BELL TELEPHONE COMPANY. Alexandria $ Ashland 15.50 Bedford City 125.50 Boykins 3. 25 Broadway '. 5. 25 Buchanan ^ 10.50 Berryville 5. 25 Chatham 25.75 Covington 10. 50 Culpeper 10.50 Danville 150.50 Draka's Branch 6. 50 Edinburg 5. 50 Farmville 10.75 Fredericksburg 125. 25 GordonsviUe 30.25 Hampton 498.00 Holland 3.00 Lynchburg 600. 75 Louisa 10.00 Mt. Jackson 5.00 Manchester 934. 25 Martinsville 10.50 Middletown 16.80 Newport News 250.00 Norfolk .-. 500.50 Orange 5. 25 Pearisburg 5. 00 Phoebus 278.50 Portsmouth 300.75 Radford Richmond 200.00 Strasburg 5. 50 Suffolk 51.50 Waverly Williamsburg 60.50 Winchester 221 . 15 Windosr 5.00 Woodstock 5.50 Total $4,590.70 330 Report of Tax Commission — ^Appendix. STEAMBOAT COMPANIES. Extent of the Business. According to the reports filed with the State Corporation Com- mission for the year ending June 30, 1910, there are 18 steamboat and steamship companies operating in the Commonwealth, with a course of 1,431.80 in the waters of the Commonwealth. Their steamships are assessed at $545,900, their wharves and buildings at $549,112 and their real and personal property, not otherwise classfied, at $156,167.00, with miscellaneous property to the value of $2,612. Their total property is thus assessed at $1,253,791. Their reported earnings, during the year ending June 30, 1910^ were $624,088.94, or 49.77 per cent, of the value of their property The Taxation of Steamboat Companies. Under the amended act of 1908, the steamboat companies pay taxes on their real and personal property, as assessed by the Cor- portation Commission, at 35 cent on the hundred dollars' valua- tion; and also pay an annual license tax for "the privilege of doing business between points in this State" equal to "one-half of one per cent, of the gross receipts of such company." Revenue from this Tax. For the year ending June 30, 1910, the steamboat companies were assessed by the Commonwealth with taxes as follows : Taxes on real and personal property $4,388 . 27 Tax on earnings 3,120.42 Total tax $7,508 . 69 Local taxes levied on steamboat companies were as follows : City of Norfolk $11,209.60 City of Richmond ._. 3,271 . 13 Other localities 3,822.11 Total local taxes $18,302 . 84 Thus the total taxes paid by these companies are: Total State, property and license taxes $7,508.69 Total local taxes 18,302 . 84 Total all taxes $25,811.53 Report of Tax Commission — Appendix. 331 On the basis of the earnings reported, this tax is 4.13 per cent, of the earnings — a reasonable tax. Are Earnings as Reported? The question arises here, however, as in connection with the telephone companies — are the true earnings as reported? Do steamship companies in the Commonwealth receive only $624,088 for the services they render? The writer has endeavored to secure accurate information on this point, but his investigations have not disclosed faulty or defec- tive methods of book-keeping. He is inclined, therefore, to be- lieve the small showing of earnings is to be attributed to the fact that the greater .part of the earnings of the steamship companies are inter-State and consequently are not taxable. Thus, for instance, the York River line of the Chesapeake Steamship Com- pany, which does a fairly large business between the York River and Baltimore can only be taxed on the traffic between West Point and landings along the York River. This is only a very small fraction of its business. The same is the case with all the larger companies operating in Virginia waters ; intra-State earn- ings, now taxable, represent but a small part of their total earn- ings. ' Inter-State Earnings Not Taxable. According to any principles of equity, the Commonwealth and the localities are clearly entitled to some tax on the inter-State business of the steaqiship companies. Much of this business originates in the Commonwealth, much is the gift of the Common- wealth through the franchises of the companies. A proportionate tax on these earnings is certainly due the State. Unfortunately, however, in this as in so many questions affect- ing inter-State Commerce, the Supreme Court has so stretched the exclusive power of congress in the "regulation" of inter-State commerce as to exempt altogether the inter-State business of steamship companies from State taxation. Even an apportioned tax, similar to that employed in the case of inter-State railroads, has been declared illegal. The original ground taken by the court in Phila. and So. vs. Penna. (122 U. S., 376) has been maintained. Not only is a gross earnings tax applied to inter- 332 Report of Tax Commission — ^Appendix. State steamship business unconstitutional in the eyes of the court ; but the dictum has been laid down that the failure of congress to exercise the right of taxing inter-State water-carriers meant that they should not be taxed at all. (Morgan vs. Parham, 16 Wall., 471; Roberts vs. Charlevoix Twp., 60 Mich. 197, etc. See also Pullman Co. vs. Twombly, 29 Fed., 658; B. and O. vs. Maryland, 21 Wall., 456; Hays vs. Pacific Mail Co., 17 How., 596.) The only exception to this general principle is that boats used habitually within the waters of a State, as feeders to inter- State carriers, or for local transportation only are subject to taxation within the State, even though they belong to a foreign corporation. (O. D. S. S. Co. vs. Va., 198 U. S., 299). The hands of this Commonwealth and of every other American State are thus tied. No gross earnings tax affecting inter-State commerce has yet been devised which has been so worded as to be approved by the Supreme Court. There would seem to be no reason to believe that such a law will ever be approved and con- sequently no system can be recommended whereby Virginia's part of this traffic can be taxed. In this situation there is little to be gained by placing the taxa- tion of these companies on a gross intra- State earnings basis. Such a tax to yield as much revenue as is now received would not be equitably distributed among the companies. Some of the lines of most importance to the development of the State — those which serve remote and slightly developed territory — would pay the greater part of the tax and those companies which can best afford to pay would, because of their small intra-State and great inter-State business, be almost exempted from taxation. Summary of Recommendations. Investigation indicates that the present law is as satisfactory as any that can be devised, under the rulings of the Supreme Court. The writer therefore recommends the continuance of the present law, unchanged, except for verbal amendments to make the meaning of the law clear insofar as it aims to levy the same rate of tax on tangible and intangible personalty. Report of Tax Commission — Appendix. 333 EXPRESS COMPANIES. Extent of Business. There are but three express companies registered in Virginia, two of which are affiHated and under the same general manage- ment. These three companies, however, operate on all the rail- road systems and on most of the steamship lines in the Com- monwealth, though one of the three, the United States Express Company, operates only on the rail and steam lines controlled by the Baltimore & Ohio railroad. The total mileage of these com- panies in the Commonwealth is 4,436.77. No reports of their earnings in the State are available. Taxation of Express Companies. The standard State property tax of 35 cents on the hundred dollars' valuation is imposed by statute upon the express com- panies. In addition, the amended act of March 10, 1910, imposes a license tax of six dollars the mile on the companies for every mile operated by them in the State. They are likewise subject to local property and license taxes. Revenue from this Tax. On the basis of reports filed for the year ending June 30, 1910, the express companies were assessed with real and personal prop- erty to the value of $85,042 and with license taxes for 4,436.77 miles of line operated. The State taxes were assessed at: Property taxes $ 297 . 63 License taxes 26,620.62 Total State taxes $26,918.25 Local license and property taxes are estimated as follows: Property taxes $1,063.02 License taxes 6,456 . 25 Total local taxes 7,519.27 Thus the total taxes paid by the express companies aggregate $34,437.52. 334 Report of Tax Commission — Appendix. Is this Tax Reasonable? In the absence of reports as to the earnings of the express com- panies in the State, it is impossible to ascertain what percentage of their Virginia earnings is paid in taxes. Judging, however, by the great earnings of these companies and by the dividends paid, the writer is of opinion that the present tax is extremely low, in view of the privileges enjoyed by the companies. Their property is, of course, a very small item; yet that their business and hence their franchise is very valuable is shown by the promptness with which these companies invade new territory. Wherever a rail- road or steamship line goes, there they go. Is This Tax on a Proper Basis? The question next arises, is this tax on a proper basis? Should the State tax these companies in any other manner? Ah exami- nation of the decisions of the court shows that the Supreme Court has been liberal in its construction of the States' power and right to tax these concerns. In Pacific Express Co. vs. Siebert (142 U. S., 339) the Supreme Court has held that it was legal for a State to impose a different rate of taxation on such companies from that imposed on railroads carrying the same class of matter, thus recognizing the proper right of the State to treat the express companies as sui generis. In the later case of Adams Express Company vs. Ohio State Auditor, (165 U. S., 194) the court held that, by a proper apportionment, the capital and contracts of the express companies could be taxed. In other words, the court appreciated the fact that only through the taxation of intangible properties could the real value of express companies be taxed. Following these decisions, the States have introduced a number of plans of taxing the express companies. These may be classi- fied as (1) earnings taxes, (2) taxes on capital and (3) specific license taxes. In sixteen States the express companies are taxed on their earnings with or without additional taxes on their prop- erty, the rates varying from 1 per cent, to 6 per cent, on intra- state gross earnings. In some of the States, Maine, for example, the companies are taxed on a part of their inter-State business, originating or ending in the taxing States but not on business in transit. Massachusetts, New York, North Carolina, Pennsyl- vania and Wisconsin tax the companies on their capital. A Report of Tax Commission — ^Appendix. 335 number of the Southern States, together with North Dakota, have license taxes, either a flat tax (Alabama and Florida) or taxes proportionate to the station-population. Virginia appears to be the only State now levying a tax on train-mileage. The Best System. Of these systems the best is unquestionably the earnings plan. None other is so well calculated to levy a tax proportionate to the real value of the business taxed, that is, its earning capacity. For the present, however, it is impossible to introduce this system in Virginia. The companies do not keep their earnings by States and accordingly, cannot furnish information on which to adjust an earnings tax. Accordingly it is believed that the State should for the present, continue the existing system of taxation, with but two modifica- tions. The first of these is an increase in the amount of ad valorem tax. The writer regards $7.50 the mile operated as a reasonable tax, and recommends its adoption. Such a tax will yield an additional annual revenue to the State of $6,655.16. In addition, to give the Assembly accurate information on which to adjust an earnings tax at a later time, the express com- panies should be required annually to report : First, the revenue from express service performed by them between points in Virginia. Second, a proper percentage of the revenue chargeable on ship- ments from this State to other States or from other States to Virginia. On the bais of this information, it will be possible for the Assembly of 1914 to inaugurate a gross earnings tax. Finally, law should be enacted which will tax the express business done by a company on different lines over the same route. As matters stand to-day, an express company operating between Norfolk and Old Point, for instance, pays only one license tax, though it may run on a number of steamboat companies. In the same way the company operating on James River pays only one license, though it operates on the Old Dominion Company's boats and on the boats of the Virginia Navigation Company. As these are in effect, different services, it is recommended that they be taxed accordingly. 336 Report of Tax Commission — ^Appendix. Summary of Recommendations: To summarise the writer recommends: First, the continuance of the present system until more infor- mation regarding earnings can be had, with a charge of $7.50 the mile for each mile operated by express companies. Second, the imposition of the regular license tax on any com- pany operating over the same route on the lines of different railroad or steamboat companies. Third, the enactment of law requiring express companies to file report of their inter-State and intra-State business from and after June 30, 1912. CAR SERVICE COMPANIES. The Extent of the Business. The taxes levied on car service corporations are limited at pres- ent to the Pullman company. This corporation operates on twelve railroads in the Commonwealth. Under the law it is not required to make any report as to its holdings or to report its earnings. There is, in consequence, no accurate information as to the number of cars operated in the State or as to the revenue from the business. Present Taxation of Car Companies. Under the law as amended March 12, 1908, "each sleeping car, parlor car, and dining car company doing business between points in this State" pays a tax of $2 the mile operated as a license tax. Under payment of this tax, they are exempt from all other State taxes. Their personal property, which is inconsequential, is subject to taxation locally. The car- mileage of the Pullman company is 2,706.79 and the license tax levied thereon in 1910 was 15,433.58. In the absence of statements as to the earnings of this com- pany in Virginia, it is impossible to state how far this tax repre- sents a proper return for the privileges conferred. Comparison with the taxes of other States, however, leads to the belief that the tax is low and that the Commonwealth is not receiving an Report of Tax Commission — ^Appendix. 337 adequate return for the opportunity given the company to trans- act business. The California Commission, in investigating the the subject, estimated that the earnings of the Pullman Company ■ in that State amounted to at least $1,021,875 in 1906 and stated its belief that a tax of $40,000 the year (four per cent, on earnings) was reasonable. Granting that business of the Pullman company in this State is at present but SO per cent, of what it was in Califor- nia in 1906, a tax of 4 per cent, on gross earnings of half-a-million would be $20,000, or almost four times the amount now paid by these companies. Methods of Taxation. It must be admitted that the taxation of these companies is not in a satisfactory condition in any of the State and that the revenue from this source is nowhere as large as it should be. This is best explained by the fact that business of these companies is very largely inter-State and consequently almost beyond the power of State taxation. Gross earnings tax imposed on them have been less satisfactory than in the case of most public service corpora- tions ; and even the tax on their capital, imposed in Massachusetts, Pennsylvania and a few other States, has not been productive. The Best Method. Economists are not convinced, however, from the experience of some States that exception should be made in the case of these companies and that they should be assessed on some other basis than that of gross earnings. Indeed, it seems that were state- ments of their earnings required by law, information would be at hand on which proper taxes could be levied and collected. For this reason, the writer renews here the recommendation made in connection with the express companies — that the car service companies be called upon to report their gross earnings in this State and also to report a proper percentage of their inter- State business. On the basis of the information thus obtained, it will be possible to levy a just gross earnings tax, and thereby obtain an adequate revenue from these privileges. The writer believes, likewise, that the license tax may now be increased on these companies without prejudice to their legitimate 338 Report of Tax Commission — ^Appendix. interests. A tax of $3.00 the mile will certainly not be a hardship and will be more in proportion to the taxes levied on these com- panies by other States. Other Car Companies. All the dining and parlor cars now operated in this State are operated by the railroads and are taxed under the railroad fran- chises. They are, of course, exempted from the provisions of the law under discussion. There remain, however, the car service companies operated by the various refrigerating companies, by the great packing con- cerns, etc. Some of these have regular runs and should contribute something to the State for the privileges they enjoy. A tax on their property should certainly be imposed. This tax will not yield a large revenue, but it will be a step towards the equal- ization of taxes between common carriers. Such a property tax would likewise be legal. Summary of Recommendations. To summarise, the writer recommends: First, that passenger car services companies be taxed for the present the rate of $3.00 the mile operated. Second, that these companies be required annually to report their intra-State earnings from transportation and a percentage of their inter-State gross earnings. Third, that the Corporation Commission require annual re- ports of all companies, not directly engaged in transportation under the laws of this State, or of the other States, which report shall show the property habitually used in this State. The property so reported should be taxed. ELECTRIC RAILWAYS. Extent of the Business. According to reports filed with the State Corporation Com- mission for the fiscal year ending June 30, 1910, the electric rail- way business in Virginia is conducted by 22 companies, some of which control more than one line. The mileage operated is Report of Tax Commission — Appendix. 339 483.97 and the number of cars employed, with electrical equip- ment is 672. In addition the companies own 277 cars of all classes without electrical equipment. They have $22,211,650 of common and $5,425,000 of preferred stock outstanding, with an outstanding funded debt amounting to $34,405,100. The average rate of interest on this debt is 5.03 per cent, and of $1,684,997.74 interest accrued during the year, $1,347,306.51 was paid. These lines cost an aggregate of $57,919,151.61 or an average of $166,152.65 the mile, equipped. Sixteen of the opera- ting companies report a net surplus of $736,830.41 on the year's operations and six companies report a net deficit of $137,661.65. Their total revenue from transportation was $3,984,942.76 or aver- age total earnings (including outside operations) of $11,306.42 the mile. Their average ratio of operating expenses to gross earnings was 60.85. During the year these companies transported 99,059,062 passengers. Taxation of These Companies. These companies are taxed as are standard railroads. They pay 35 cents on the hundred dollars valuation of their real and personal property, roadbed included, and in addition pay one per cent, on their gross transportation receipts. They are likewise subject to local taxes on their property and to such taxes as are imposed by contract in the granting of their franchises. In some instances these include taxes which are, in effect, taxes on the earnings of the company. State taxes levied on the basis of business done during the year ending June 30, 1910 were as follows: Taxes on property $24,724 . 48 Taxes on earnings 38,975 . 29 Total State taxes $63,699 . 77 Local taxes cannot be accurately reported, but from the best evidence available, as verified by different computations, they are $238,442.33, making the aggregate of all taxes, State and local, $302,142 . 10. This is 7.58 per cent, of gross earnings. 340 Report of Tax Commission — ^Appendix. Is This Tax Reasonable? There can be no question but that a tax averaging almost 8 per cent, of gross earnings is unreasonable. The average ag- gregate taxes on electric car companies are, therefore, too high. But the responsibility for these taxes rests not cfn the Com- monwealth and not on the cities, but on the companies themselves. The heaviest taxes are those imposed under the municipal fran- chises, which, it is needless to say, are not forced upon the compan- ies, but which are accepted by them as a condition precedent to their operation. Every company which operates under a fran- chise imposing ^ local gross earnings tax does so because, ere it began operations, it decided it could pay these taxes and make money. It is manifestly impossible and unreasonable to expect the municipalities to modify the conditions under which these fran- chises were awarded'; and it is, therefore impossible to materially change the system where it most vitally affects the companies. On the other hand the State is now enacting no more than a reasonable tax from these companies in return for their privileges and cannot be expected to reduce its taxes. Any change in the tax, therefore, must be a change in method rather than in amount. And this is a comparatively minor niatter. Were the State to impose a flat gross earnings tax, or a gross earnings tax with a differential, the property of those com- panies whose franchises require a local ad valorem tax, would still have to be valued ; and nothing would be gained. Thus a State tax of 1.6 per cent, of gross earnings would yield practically the revenue now received by the State ($63,759.07); but this would involve serious complications to the localities. Some of them would be forced to make separate valuations of physical property, which valuations might be of doubtful legality in view of the constitutional requirement that the assessment for State and local taxes shall be on the same basis. ■ Mature consideration of these and like difficulties leads to the relief that for the present no change should be made in the method of assessing street railways. Report of Tax Commission — ^Appendix. 341 CHAPTER VIII. LICENSES. General Considerations. License taxes are based upon the sound principle that the in- dividual should pay for any special privilege conferred on him by the locality. The right of barter is inherent to the property right, and cannot be alienated or taxed ; but the right of exchange through any medium of value is a taxable right. There is no justice in taxing the farmer for selling the products of his fields, for this is simple barter; but if the farmer barters his products for a stock of merchantable goods and exchanges these for money, he should pay for the privilege. That the privilege of exchange is a valuable one fltnd is the gift of the community cannot of course be questioned. A merchant might have a stock of goods for which he had m^de valuable con- sideration ; but if he were forced to offer these for exchange in a desert, he could not hope to make a profit. If, on the other hand, the community permits him to sell his goods where the people congregate, as in a city or at a much-traveled cross-roads, the community confers on him a privilege which often yields large returns. For the purposes of discussion, licenses may be divided into four classes, namely, mercantile licenses, special privileged li- censes, policed licenses and vocational licenses. By a close classification, policed licenses are a subdivision of genetal mercan- tile licenses, but custom has thrown about them such necessary limitations as to make them a class in themselves. A mercantile license may thus be defined as a license for the privilege of trans- acting any business with a stock in trade, provided that business does not endanger the public good and does not require special police protection or involve special police activity on the part of 342 Report of Tax Commission — ^Appendix. the authority granting the privilege. A policed license is a license for the privilege of transacting any business with a stock in hand, where the business either endangers the public good, or requires special police protection or involves special police activities. The license given liquor-dealers or pawnbrokers is typical of this class. A special privileged license is one under the terms of which the community grants to any. individual the right to do certain things which are denied to unlicensed individuals. Such a li- cense does not require police protection or a stock in hand, but as it confers a benefit, it demands a return. Sux;h a license, for example, is the hunter's license conferred under Virginia statute. A vocational license is a license for the privilege of transacting business of a definite character where the privileged person has definite mental equipment or practical experience but does not carry a stock or exchange actual products. Such a license is that of the physician, the lawyer or the dentist. Modern Views of Licenses. Economists are much divided in their views as to the justice of license taxes. Granting the valuable nature of the privilege con- ferred in the case of mercantile, policed and special privileged licenses, there is no valid reason why a tax should not be imposed. But as there has long been a movement towards the simplifica- tion of tax laws, it has been felt by many that the privilege could best be taxed through the taxation of the property. Thus, for iexample, the single taxers have argued that it is far better to tax the individual on the use of the land where he does business than to tax him on the business done. This view is strongly contested by the multiple taxers, who contend that it is both unjust and ' unwise to single out the land for taxation while other valuable properties and privileges are exempted. Most economists are agreed, however, that vocational license taxes are unwise. They regard the right to exercise a mental vocation as the right of barter; the man owns and personally creates that which he offers for sale, and it is unjust to tax him thereon. Thus, it is argued, the ability which a lawyer acquires ' by long experience and close training is distinctly his own, and for it he owes the community little. He should not be taxed on his mental equipment. Report of Tax Commission — ^Appendix. 343 The Taxation of Licenses. Disagreeing as to the justice of license taxes, economists are likewise divided as to the best method of imposing these taxes. It is generally agreed that there is no scientific principle on which a policed license tax can be levied ; the only standard is that of the profit made by the holder and the expense and danger to which the community is subjected because of the business. As the profit is often incommensurate with the nuisance created by policed business, and as the profit alone can be estimated, some arbitrary figure must be fixed. But when it comes to the proper basis for taxing mercantile, special privileged and vocational licenses, economists are of many minds. The end in view, of course, is the taxation of the business according to the value of the privilege. This can only be com- puted from the revenue, hence the real issue is, how best to tax the revenue from the business. Generally speaking, three meth- ods have been devised. These are, the taxation of the sales, the taxation of the purchases and the taxation of the capital. Each of these needs a word of explanation. The Taxation of Sales. Those who advocate the levy of license taxes on the basis of sales, defend their views very simply : There is only one true stand- ard of what a man can earn from his business — the sales. To tax his purchases is absurd, they contend, because this presupposes that he sells everything he buys. To tax his capital is unwise, because while one man invests his capital three time a year in the purchase of goods, another may not "turn over" his capital in a year. If the merchant be taxed on his sales, his income — the revenue from his business — is taxed. Fundamentally sound in theory, this principle is subject to at least two practical objections. These are, the difference in the margin of profit on goods sold and, second, the difficulty of. getting accurate reports of sales. To tax the sales of all holders of mercantile licenses presupposes that each man make the same profit on the business done. This is manifestly unreasonable. A wholesale grocer, for instance, may sell $100,000 of goods the year and will make a profit of but 2 per cent., or $2,000. A clothier, a furniture dealer or a jeweler. 344 Report of Tax Commission — ^Appendix. selling but $50,000 may make a profit of 20 per cent., or $10,000. To impose a flat tax without classification will obviously be to discriminate against the grocer. The only method by which this difficulty can be met is to classify the licenses according to the margin of profit in the business. The second objection — that of securing accurate reports of sales, is of great importance. The amount of his sales is the last thing a business man wishes to tell; to avoid telling it, he will resort, in many cases, to subterfuge and sometimes to direct trickery. It is, to be sure, difficult enough to ascertain what a merchant buys; it is much more difficult to ascertain what he sells. Indeed, so great is the force of this objection that it may truly be said that it has never operated successfully. The Taxation of Purchases. Those who favor the levy of license taxes on the basis of pur- chases, found their advocacy of this system on the objection to sales-taxes just mentioned. Since it is impossible to ascertain sales, they argue, the only other reasonable basis is that of pur- chases. Every merchant keeps his inventories, which, when examined, will give a true statement of his purchases. This is a clear advantage, but it is offset by an obvious objection. Unless licenses be classified, a tax on purchases will be unjust to the merchant who carries a large stock and sells on a low margin of profit, and will favor the merchant who makes a large margin of profit on smaller purchases. Nor is it always possible to secure a true statement of purchases, especially where the assessment of licenses is entirely within the hands of local Commissioners without supervision. Some Commissioners who must depend upon local support for their retention in office, will not alienate supporters and lose friends by a strict construction of the law. These two objections 'to the assessment of licenses on the basis of purchases have been met with more or less success in two ways. To equalize the license tax between the merchant who sells a large amount of goods on a small margin of profit and the merchant who sells a small amount of goods on a large margin of profit, it is customary to reduce the rate of the license as the amount of pur- chases increases. While this meets the desired end in a measure. Report of Tax Commission — ^Appendix. 345 it obviously does not apply to those cases where a man does a large business with a large margin of profit. Nor does it equalize the tax between two merchants with the same purchases and a dif- ferent margin of profit. To meet the objection that Commissioners will not examine invoices of purchases, it has been customary to give to some cen- tral supervisory power authority in the premises and to authorize them to enforce the law under penalty. Taxation of Capital. The third method of assessing licenses, on the basis of capital invested, is open to objection in that it has all the defects of the other systems referred to and, in addition, may often lead to double taxation. To tax a merchant on his capital and then to tax him on the same basis for the privilege of using his capital in business is doubtful justice. Experience has shown that an exemp- tion of capital from other taxes when it is made the basis of license taxes does not work equitably. Certain it is that a flat tax on capital, especially of large corporations, when imposed regardless of the business done, is about the most inequitable of all systems of license taxation. Summary of Theory. To summarise, all theories of license taxation have serious defects and none has yet been devised that will work equitably in all cases. A system of license taxes based on capital is less desirable than a system based on purchases or sales; but either of the latter, with a proper classification of business and strict supervision, works with reasonable success. Defects of The Virginia System. Judged by this standard, our Virginia schedule is about as good as that of any State, save for its defects in these two respects: the various kinds of business taxed should be classified and the work of the Commissioners making the assessment should be closely scrutinized by a central administrative body. The ques- tion is, how best to accomplish these reforms. The question of administration can be disposed of in a word. Manifestly, the Tax Commissioner, to be authorized by law, is 346 Report of Tax Commission — ^Appendix. the proper person to undertake this important work of supervi- sion, especially since he is to have general charge of the work of assessment. The classification of licenses is, however, a much more difficult task. Properly to classify licenses in order to tax them at a rate proportionate to the margin of profit in the business, will require a long and careful study of all the business now authorized under general mercantile licenses. It should not be undertaken hastily and should not be made a subject of legislation until it has been very carefully investigated by the Tax Commissioner. The writer feels that no recommendations for immediate action should be made until such an investigation is possible. SPECIFIC LICENSES. Investigation of the specific licenses included in the General Tax Law shows that a number of schedules need modification. In practically every instance, these are in the direction of increases, and but few of the schedules, if any, are at present too high. The following recommended changes affect all those schedules which, in the writer's judgment, need revision at this time. Dealers in Options. Dealers in options or "futures" under the present law, pay a tax of $200 the annum. It is recommended that this be increased to $300 the annum. Generally speaking this is not a business that commends itself to the community. The man who takes out a license of this character does so to accept orders for the future delivery of grain, staple products, etc., at an agreed rate. In most instances, these transactions are speculations pure and simple, with no intent on the part of buyer or seller to actually transfer the property sold. For these reasons, persons engaging in it should pay heavily for the privilege, if it be not better to prohibit such speculative enterprises altogether and to place the owners of such licenses on a footing with stockbrokers. , Stock Brokers. The present license tax on stock brokers, in cities and towns of less than 10,000 inhabitants, is $150 the year, and in larger cities, Report of Tax Commission — Appendix. 347 $250 the year. Even where there is no moral question involved, it is obvious that this business is at present bearing a very small burden for the privileges it enjoys. The writer recommends that the license in towns and cities of less than 10,000 inhabitants be increased to $250, and in larger towns to $350. Pawnbrokers. The present license of pawnbrokers is $250 the year, for which sum such individuals are authorized by law to exact usury on pledged articles at the rate of 10 per cent, the month where the loan is under $25, at the rate of 5 per cent, the month where the loan is from $25 to $100 and at 3 per cent, the month where the loan exceeds $100. There can be no question but that this is a very inconsiderable return for a very great privilege of very doubtful benefit to the people. There are occasions, of course, when the pawnbroker may be a necessary evil ; but conditions are not conceivable where the law is justified in allowing him to exact in interest the face value of a small loan in 12 months' time. Moreover, the pawnbroker is often a "fence" in the worst sense of the word. While some pawnbrokers honestly co- operate with the police and refuse to be party to the sale of stolen goods, the condition of affairs recently disclosed by Rich- mond police is more general. Here the police discovered that a negro was pawning at a number of shops new clothing, fresh from the store, in such quantities as inevitably to attract the suspicion of any sincere tradesman. If the pawnbroker is to survive, he should at least be under strict police surveillance. As this requires an outlay of public funds, he should be made to pay accordingly. The writer ear- nestly recommends a flat State license of $500 the year as a more commensurate return for the nuisance of this business. A marked reduction in the rate of interest allowed pawnbrokers should also be made. Virginia is one of a comparatively few States that give the sanction of law to rates which require $24.00 the year interest on a $20.00 loan ; and the sooner the State is removed from this category the better. The writer would recommend that the present rate of allowed interest be cut exactly in half and that the pawnbroker be not allowed to charge more than 60 per cent, the year under any conditions. 348 Report of Tax Commission — ^Appendix. It may be argued that to double the tax and to divide the in- terest rate in half will be to drive many pawnbrokers from the business. The writer believes that this will be the case and regards it as an added advantage. The pawnbroker who has at stake a business involving so great an outlay for a license will be more careful in his observance of the law. None can afford to enter the business who is not prepared to be careful and mindful of the law. Money Lenders. The license tax now required of this class is sufficient in itself; but it should be supplemented by additional protection for those who are forced to deal with the money-lender. In addition to the provision that any usury charged shall be credited on the princi- pal, the State should stipulate that any money-lender exacting usury shall, upon conviction, be subject to a fine of not less than $100. This will not altogether prevent usury, but it will certainly make the money lenders more cautious. While this is a matter of criminal legislation and as such not within the purview of this report, it is mentioned here since there is a penalty attached to this section of the tax law. Mercantile Agencies. The present tax on mercantile agencies is a "blanket" tax — in other words, it authorizes the company paying the tax to do business wherever it pleases in the Commonwealth. Thus, on payment of a tax of $250, any company is empowered to open offices and to report credits, etc., in any city of the Common- wealth. This is a very large privilege for a small fee. As these mercantile agencies are often most helpful to business men, and as the profit in the business is not large, the State should not bur- den them. But a tax of $250 for a company operating in not more than two cities and a tax of $500 for a company operating in more than this number of cities will not be unreasonable. It is recommended accordingly. Public Performances. The present section in the tax law for the assessment of licenses on theatrical performances, etc., strangely enough fixes the rate Report of Tax Commission — ^Appendix. 349 of the license according to the size of the city where the perfor- mance is held. There would seem to be absolutely no reason for this. The size of the town, of course, plays some part in the number of spectators any theatrical proprietor may expect to seat ; but the immediate factor is the size of the hall in which the performance is to be held. Manifestly a theatre with a seating capacity of 250 in a large city cannot be reasonably expected to pay more than a theatre with a seating capacity of 1,000 in a smaller town. Yet such is the presumption of the law. The writer would accordingly recommend that the scale be adjusted according to the size of the hall as follows: Seating. License One License Performance. One Week. Under 500 $1.50 $5.00 500 to 750 3.00 10.00 750 to 1,000 4.00 15.00 1 ,000 and upwards 6 . 00 20 . 00 Professional Baseball Gaines. The present law on public performance exempts baseball and football games. As the latter are never played except between amateurs, there would seem to be valid reason for this exemp- tion, but aS' baseball is an organized industry, with a large profit in many instances, there would seem to be no reason why its promoters should have an advantage over other persons engaged in holding public performances. At baseball games in the larger cities of the Commonwealth, the gross receipts often reach $500 the game; and it has been stated on authority that the net pro- ceeds of the season in some Virginia cities have been well in excess of $5,000. This business is privileged; it derives its profits from the community and should contribute something to the public burden. The writer therefore recommends that the law regard- ing the license of public performances be made to apply to base- ball games, except those played by persons not organized into professional leagues or receiving a fixed compensation for their services. 350 Report of Tax Commission — ^Appendix. Vocational License Taxes. In recent years there has been a marked agitation for the re- moval of vocational license taxes, which agitation has been chiefly fostered by the Medical Society of Virginia. This organization seeks to have removed the present physicians' license tax. The arguments advanced in behalf of the removal of this tax are as follows: (1) Vocational taxes in general are unfair in principle and outworn in practice. (2) Practically all States have re- moved these taxes because of their fundamental injustice. (3) The physicians should not be taxed when they are required by law to co-operate with the health authorities of the Common- wealth in the reporting of certain diseases. (4) The physician, more than any other professional man is called upon to perform free service and is, to this extent, a public benefactor. The writer believes that the first of these arguments is well founded. He agrees with the large school of economises which holds that a man should not be taxed on his mental attainments or on his ability to make a living because of the education he has received. At the same time, this is an open question and one upon which there is wide disagreement. The second argument advanced in behalf of the removal of the tax is a simple statement of fact and admits of no dispute. To the third and fourth arguments, however, objection may well be taken. It is true that the Commonwealth requires the physician promptly to report cases of communicable disease; but this is properly a demand on the individual, in effect, to perform police duties — a demand to which the average individual, in other matters, is always subject. There is no more valid reason in exempting the physician from caxation because he reports disease than there is in exempting the merchant from a license tax because he reports to the police violence wichin his own establishment. Nor is it beyond dispute that physicians perform more free service than do other professional men. The lawyer, the dentist, the public official, the journalist, the clergyman — indeed all men in prominent positions, are called upon frequently for services from which they can expect no return. In the case of the law- yer at least, it is probable that he gives as much free advice as the physician and, to this extent, is a public benefactor. Report of Tax Commission — Appendix. 351 To summarise the argument, if the physician's license tax is to be abolished, it must be because it is a vocational tax and not because it is a physician's tax. The writer believes that all vocational license taxes should be removed as soon as the finances of the Commonwealth will justify this action. For the present it is obvious that the Commonwealth cannot dispense with the $44,000 now derived from this source. Venders of Liniment. For $25 the year, any person is authorized to vend "any medicine, salve, liniment or compound of like kind," provided of course it be not a drug whose sale is entrusted to druggists only. This is a dangerous provision of law. It authorizes quackc of every conceivable stripe to foist upon the ignorant remedies which do not cure and preventives that do not prevent. It en- ables any person to blend medicines into a compound and to per- suade the unlettered that this is some sovereign cure for their ills. It would be far better to deny the right to sell drugs to all save licensed pharmacists and, in some instances, to merchants. But if the law is to remain, these venders should be compelled to pay a license tax more in proportion to their unusual privileges. A tax of $100 the year will accomplish this end and is recommended accordingly. Clairvoyants, Gypsies, etc. The present tax on gypsies, "pretending to tell fortunes," is $200 the annum, not prorated, and is levied on "each com- pany." This law has not been sufficient to keep from the cities and larger towns individual clairvoyants, palmists, astrologers, or mediums, who deceived the gullible. With but few exceptions they are persons of bad character who frequently give the police trouble. They are now outlawed in most States and should not be permitted to practice their arts in the Commonwealth. Ac- cordingly the writer recommends a tax of $500 the annum, not prorated on every such individual; and would suggest that the law be so amended as to exempt persons telling fortunes at private entertainments and the like. 352 Report of Tax Commission — ^Appendix. Investment Companies. Virginia, like the other American States, has suffered in recent years from the activities of "promoters" who sell stock of doubtful character to unsuspecting persons. At present many of these concerns cannot be reached by law, either for regulation or taxa- tion. The writer believes that they should be subject to both and recommends the adoption of a law similar to that enacted by the Kansas Legislature at its last session. (Kansas Acts, 1911, p. 210). This provides for the examination of such concerns and their license before they are authorized to sell stock in the State. As Mr. Speaker Richard Evelyn Byrd has signified his intention of introducing an act of this nature at the forthcoming session of Assembly, it is not deemed necessary to dwell on the subject further in this connection. Sewing Machines Agents and Companies. Complaint has been made that the present system of licensing sewing machine companies and their agents works injustice to the localities. It is argued that the exemption of these concerns from local taxation is a hardship to the localities, especially to those which are distributing-points for the companies operating in. the State. So far as the State is concerned, the present sewing machine tax law is a model of its kind. Easily enforced, readily operative and devoid of needless mechanism, the law yields a reasonable revenue and is undoubtedly acceptable to the sewing machine companies. Yet it seems unreasonable to prohibit the localities from all taxes. It would seem only fair, in the circumstances, to allow the cities and towns to impose a small tax on the individual agents, or on the company. This tax, however, must be strictly limited or it will undo the present good features of the law and will subject sewing machine companies to the same grievances against which insurance companies and banks protest. Drinking Cup Vending Machines. Since the vending machine tax law became effective, manufac- turers of aseptic drinking cups have placed their products in machines. It has been decided that they must take out a license for each machine. Manifestly it was not the intent of the Report of Tax Commission — ^Appendix. 353 law to penalizes movement that looks to the abolition of that great agent for the transmission of disease, the common drinking cup. As the manufacturers of these cups sell them at a very low figure and make little on the devices, it seems wise to exempt these machines as an ally of the public health. Such exemption is therefore recommended. Summary of Recommendations. 1 . That the proposed Tax Commissioner have general supervi- sion over the issuance of licenses. 2. That as soon as proper investigation can be made, the Commonwealth classify the various kinds of business now licensed under general mercantile licenses and tax them accord- ing to the margin of profit in the class. 3. That the license for dealers in options be increased to $300. 4. That the stock brokers' license be increased from $150 and $250 to $250 and $350. 5. That the pawnbrokers' license be made $500 and the in- terest rate allowed be reduced 50 per cent. 6. That money lenders be subject to a fine of $100 for usury, in addition to the penalties now authorized by law. 7. That mercantile agencies pay $250 to operate in two cities and $500 to operate in more than this number of cities. 8. That the license for public performances be graded accord- ing to the size of the hall, and that professional baseball games be regarded as public performances. 9. That vocational license taxes be removed as soon as the fin- ances of the Commonwealth will justify. 10. That the license tax on venders of medicine be made $100. 1 1 . That clairvoyants, etc., be taxed $500 the year, not prorated and that this license be levied against each member of any traveling company of gypsies. 12. That the Kansas "investment company" act be made law in Virginia. 13. That the localities be empowered to levy a limited tax on sewing machine companies or their agents. 14. That drinking cup vending machines be exempted from taxation. 354 Report of Tax Commission — Appendix. CHAPTER IX. UNCLASSIFIED RECOMMENDATIONS. General Introduction. In addition to the recommendations made in the previous chapters, investigation has been made, more or less in detail, of the other tax laws operating in the Commonwealth. ' In many instances, examination has shown that these laws are about as good as they can be made. It has not been thought necessary to burden this report with a detailed review of such laws, and silence on these subjects is to be construed as approval of existing laws, or, at least of conviction that changes are not urgently needed. There remains, however, a number of tax schedules which need revision. Some of these are important, and changes in them are of genuine interest to the people; others are of more or less limited application and their reform is more a matter of justice than of necessity. There are in addition, a few matters of administration which come within the field of tax reform. None of these is of vital importance and their correction may not properly be a subject for recommendation by the writer; but as they are, in some instances unusual and anomalous, it has seemed to the writer that they deserve attention. CHARTERS AND FRANCHISES. One of the most beneficial features of the new constitution has been the provision for the assessment of franchise taxes and of registration fees. From the first, these laws have yielded a sub- stantial revenue, which has increased with the vigilance of col- lection. Since the constitution was adopted, however, and since the scale of fees was fixed, a number of States have introduced like laws into their codes, and, in some cases, have established a scale Report of Tax Commission — ^Appendix. 355 of fees below those assessed in Virginia. It may thus happen that a corporation can get its franchise in another State and can register in Virginia more cheaply than it can pay the charges im- posed on domestic corporations. Some instances are reported where Virginia corporations have secured their charters in Dela- ware and have then paid entrance fees as foreign corporations. Manifestly this is unfair to Virginia corporations and, in effect, is a discrimination against them. It would seem reasonable, therefore, to readjust our scale of franchise and registration fees in order to make the charges on domestic corporations no greater than the franchise fees in other States plus the registration fees for foreign corporations. But two questions will at once arise in this connection: can the Commonwealth at present afford to reduce the scale of fees, and can the Commonwealth hope to formally compete with other States in this matter? To the first of these questions there can be but one answer. The finances of the Commonwealth will not justify a reduction at present. The second question the writer would likewise answer in the negative. If Virginia reduces her class of registration fees, other States, better able to do so, will reduce their own still further. An unfortunate competition may thus bg established. Nor can the State afford to take this action with due regard for the interests of other taxable property. It is certainly true that half a loaf is better than no bread, and that the State had better levy a low tax on a certain class of property than have that property go into other States; but in so doing, the Commonwealth should not establish gross inequali- ties between the taxation of different classes of property. The Commonwealth, in the writer's judgment, should not at present modify her scale of fees, but should rely upon the excellence of her laws and the simplicity of her system of registration to at- tract foreign corporations. THE TAXATION OF INCOMES. General Considerations. The first constitutional provision for the taxation of incomes in Virginia was contained in section 25 of the Constitution of 1851. This authorized a tax on "incomes, salaries and licenses;" but provided that no tax should be "levied on property from which 356 Report of Tax Commission — ^Appendix. any income so taxed is derived, or on capital invested in the trade or business in respect to which the license so taxed is issued." This section was made the basis of statute in 1853, when an in- come tax, graduated to $1,000, was imposed.* This tax, changed from time to time, has remained a part of the statute law and is now in force. By an act of 1908 the exemption was raised to $1,000, at which figure it now stands. While the revenue from this act has varied much, according to the rate at which imposed and the point below which incomes were exempt, the trend has steadily been upward. In 1910 this tax yielded $129,000. Is the Income Tax Sound in Theory? In considering this law, the first question that arises is natu- rally, does this tax rest upon a proper basis — is it sound in theory? Economists and statesmen give practically a unanimous answer: from every point of view, an income tax is one of the best taxes that can be levied. It is levied on the true basis of earnings; it requires every citizen to give in proportion to his ability to pay; it exactly gauges that ability. Indeed, there are many who con- tend that a proper income tax, justly levied and equitably assessed is the best possible tax not only for individuals but for corpora- tions. Upon an extension of the income tax is based the gross earnings tax, the net earnings tax and practically all the taxes on dividends, however defined. Is the Tax Properly Assessed? But if the tax be sound in theory, is it equitably and properly assessed? Does the citizen who pays his income tax have the assurance that every other citizen is paying on the same basis, in the same manner, and at the same rate? Investigation shows that such is not the case. While the income tax imposed, yields a revenue of considerable amount, it yields little compared to its real value. Thus, for instance, we find that in the following counties there is no citizen who receives any taxable income in excess of $1,000 the year: Bland, Cumber- land, Floyd, Goochland, Greene, King George, Mathews, Pow- hatan, Spotsylvania, Stafford and Westmoreland. In other *Acts 1852-53, p. 20; 1855-56, p. 11; 1859-60, c. 3. Report of Tax Commission — ^Appendix. 357 words, in 11 counties, with a population of 93,332 no citizen is presumed to make more than $83.33 the month. Manifestly, such a presumption is unwarranted. In the following four counties there is not an aggregate taxable income, all citizens included, of $1,000: Carroll, Craig, Frederick and Middlesex. In each of these 32 counties there is not an aggregate taxable income, all citizens included, of $10,000: Alexandria, Amelia, Appomattox, Buckingham, Carohne, Charles City, Dickenson, Essex, Fluvanna, Franklin, Giles, Gloucester, Highland, James City, King and Queen, Lancaster, Lee, Louisa, Madison, New Kent, Northampton, Page, Patrick, Prince George, Princess Anne, Rappahannock, Richmond, Scott, Shenandoah, Warren, Warwick and York. While many of these counties are agricultural communities, it is certainly not reasonable to suppose that their citizenship has been unable to earn a larger income than that listed for taxation. In the cities, as might reasonably be supposed, there is a much better showing, but one by no means equitable. The following table will show the income tax reported in the various cities of the Commonwealth for 1910, with the taxable income extended. Cities. Alexandria. . . Bristol Buena Vista . . . Charlottesville . Clifton Forge . . Danville Fredericksburg. Lynchburg. . . Newport News. Norfolk Petersburg. . . . Portsmouth Radford Richmond Roanoke Income Tax. Aggregate Incomes Taxed. $ 240.00 $ 24,000.00 109.66 10,966.00 170.10 17,010.00 1,125.66 112,566.00 155.70 15,570.00 5,688.19 568,819.00 333.17 33,317.00 12,613.45 1,261,345.00 1,443.40 144,340.00 21,948.41 2,194,841.00 3,147.93 314,793.00 1,155.95 115,595.00 232.10 23,210.00 48,206.45 4,820,645.00 3,424.64 342,464.00 1,514.16 151,416.00 207.52 20,752.00 949.58 94,958.00 358 Report of Tax Commission — Appendix. Staunton Williamsburg Winchester It can be freely admitted that the character of the population in our various Virginia cities will cause wide variations in in- comes taxable there. It is unfair, for example, in this connection, to compare Clifton Forge, Newport News, Roanoke, Portsmouth and Radford with Danville, Lynchburg, Norfolk and Richmond. The former group of cities has a much larger percentage of work- men to its total population than have the latter cities. But with all due allowance for these conditions, they will not account for the wide variations shown in such cities as Charlottesville and Bristol, Lynchburg and Roanoke. The conclusion is inevitable that the law is more loosely enforced in some cities than in others. To ascertain the extent to which the income tax is evaded, the writer, on behalf of the Commission, sent circulars to a few of the many hundred manufacturing companies of the States, in which they were asked to state how much they paid annually to their employees, above $1,000 the year for each individual. The replies of 82 companies shown an excess taxable pay-roll of $2,011,918.00 — about 20 per cent, of the total returned in all the cities of the Commonwealth. Nor were these firms and com- panies selected because of their size. Only two large concerns, and none of the railroads, were included. Figures on the same subject might be cited indefinitely; but their purport is the same. Manifestly, necessarily, the income tax is not yielding to the Commonwealth the revenue it should. Causes of this Failure of the Law. In seeking for the causes of this failure in the enforcement of the income tax, three have been found responsible. The first of these is the laxity of administration. The income tax is the heaviest tax that a large percentage of the population pays. Salaried men, persons with invested capital, those whose business does not require an expensive plant and all who are not land- owners, feel the pressure of this tax. Moreover, the rate of this tax is heavier in proportion than any other State tax on private individuals. The owner of personalty or realty pays to the State. Report of Tax Commission — ^Appendix. 359 .0035 on his holdings; the salaried man pays .01 on his income over $1,000 the year. The onerous character of this tax has caused those who must pay it to exert decided pressure on Com- missioners of the Revenue ; and the latter, dependent on the people for their re-election, have in some instances, not insisted on this tax. The second reason*for the poor return from this tax is that the legal offsets are widely and unreasonably construed. The law at present provides that from income shall be deducted "all losses sustained during the year." In defining losses, the writer has been informed that some Commissioners of the Revenue have construed servants' hire, employees' wages, etc., to be "losses." Manifestly, such carelessness can produce only one result — loss to the Commonwealth and injustice to honest tax-payers. The third reason for the failure of this tax is the absence of any system for the reporting of incomes. Experience has shown that it not safe to trust entirely to the statement of the tax-payer , but to verify this statement in some manner. Thus have sprung up the French system of assessing against a man an income pro- portionate to the probable cost of maintaining his domestic menage, and the English system which provides that the income tax due the Crown be deducted from the employees' or officers' wages before they are paid. There is nothing of the kind in Virginia. The Commissioner must trust to the taxpayer's state- ment and even where he has reason to believe that the return is too low, he has no legal means of raising the figures to their proper standard. When these three reasons are combined, there is little wonder that Virginia does not get from her income tax any thing like its legitimate value. Remedies for Present Conditions. These evils are common to most income taxes and are so gen- erally understood as to prejudice many against an income tax by the State. Indeed, it is often declared that the only authority in America which can levy and enforce an income tax is the Federal Government. The writer has been unable to find any reason for this view. He rather believes that an income tax, properly worded and administered can be enforced with good 360 Report of Tax Commission — Appendix. results. If remedies be applied to our Virginia law, there is no reason why the justice of this tax, appealing to all men, should not make it one of our most fruitful sources of revenue. The reasons already given for the failure of the tax will indicate the steps to be taken in improving it. These are, first, uniform construction of the "losses" which may be deducted, second, close and constant supervision over the work of assessment, and third, some report of taxable incomes. The first and second of these remedies will naturally come through the activities of the central commission recommended in another chapter of this report, and need not be made the sub- ject of specific legislation. The Commissioner who has general supervision over the work of Commissioners of the Revenue is the proper person to direct the assessment of the income tax; and the same Commission which is to formulate general rules and regulations for the taxation of personal and real property, should formulate like rules covering "losses." The third remedy is the most difficult of application. The spirit of our people opposes inquisitorial methods of taxation, and our citizens bitterly resent the enforcement of any law which is regarded as an infringement of the individual's right to his property. An income tax levied as is that of England would bring upon the legislators the wrath of their constituents and — what is a real deterrent — would defeat the ends of the law. The American States have, therefore, been forced to levy their income taxes by methods which will be less obnoxious though less successful. Examination shows that the most effective of these is, to require reports by all employers of all wages and salaries paid all individuals in any way connected with the business. The records so made are sealed and, in consequence, will not expose business secrets. At the same time, they will disclose the essential items. This system seems the best that can be devised, in view of existing conditions, and is recommended accordingly. In practical operation, this system would work as follows: Early in January of each year, the Auditor of Public Accounts would furnish to every firm, corporation, copartnership or individual licensed, registered, chartered or otherwise doing busi- ness in Virginia, a blank form on which the proper officer or other person would file a sworn statement of the total amount of all salaries, wages, fees, commissions and other remuneration paid Report of Tax Commission — ^Appendix. 361 every principal, partner, officer, agent, employee or other per- son, by such corporation, etc., in excess of $1,000 the year to each person. This statement shall likewise show the legal residence of every such individual. On or before February, these state- ments would be returned to the State Tax Commissioner, who would certify them to the Commissioner of the Revenue for the district where the persons listed were subject to taxation. The statements so filed would then be prima facie evidence of an assessment in that amount against the person listed. By reaching employer and employee alike, and by requiring this statement to be sworn by all persons doing business in any capacity in Virginia, the Commonwealth would re-establish jus- tice in the administration of this tax and could reasonably expect a proper return of the income tax. Summary of Recommendations on Income Taxes. To summarise, the writer would recommend the compulsory report of all salaries, etc., paid in the Commonwealth; second, the supervision of the assessment of the income tax by the Tax Commissioner and the adoption, by the State Tax Commission, of uniform regulations for the construction of the "losses" de- ductable in computing taxable income. TAXATION OF FIDUCIARIES. In the discussion of the taxation of intangible personalty, reference was made to the present methods of assessing fiduciary accounts and choses in action. It was then stated that the assess- ment of this property through Examiners of Record had been most satisfactory and that all of this property was now on the books. The writer also observed, in that connection, that this property, thanks to the better methods of assessment, was now paying a much larger tax in proportion to its value than was other intangible personalty. To this chapter was deferred a discussion of the method now in use. To dispute the splendid services rendered by the Examiners of Record is impossible. By the aid of an admirable law, these officers have had access to property which has heretofore escaped taxation in large measure; and they have returned to the books 362 Report of Tax Commission — ^Appendix. millions of dollars that had been stricken off. Few indeed have been the complaints made against the work of these examiners; and most of these complaints have come from interested and partisan persons. Whatever agency may be employed for the proper conduct of this work, the method of assessment now in use must be continued, the records must be examined and proper lists thereof must be compiled. But the writer believes that the Examiners of Record have about completed their career of usefulness to the Commonwealth. They have certainly located all delinquent fiduciaries now on the books, have brought all accounts to date and have been of the greatest assistance in bringing the intangible assessment to its present condition. They have done more. They have educated the trustees of fiduciary property in their duty as tax-payers and, in so doing, have accomplished the chief purpose of their creation. The average tax-payer who controls a fiduciary estate now knows that this estate will be taxed; he is prepared for the tax and makes his calculations accordingly in investing funds for which he is responsible. It is safe to say that with reasonable vigilance on the part of future assessment officers, the fiduciary accounts may be kept up-to-date without the employment of special ex- aminers. If the Commissioners of the Revenue be under strict supervision and be required annually to file a sworn statement that they have examined all records containing fiduciary accounts, it seems to the writer that they will be able to produce as good results as the examiners. There may, of course, be dispute as to whether the Com- missioners of the Revenue will be as diligent as the examiners. The writer can see no reason to suppose that they will not. Allowing them the same commission on this class of property as on other classes, it will be found, in the writer's judgment, that they will assess this property at least as thoroughly as other property. Certain it is they would have no reason for doing otherwise. A final consideration is that of expense. It is never wise to be parsimonious in paying for the assessment or collection of taxes. A cheap man does cheap work. At the same time the State should see to it that while paying enough to secure a proper dis- charge of important duties, the public should not be .called on to pay officers in excess of the real value of service performed. The Examiners of Record come within the latter class. They are Report of Tax Commission — Appendix. 363 certainly paid more than they are worth at this time, costing the State $23,363.37 for the year ending September 30, 1910. The Commonwealth can save much of this expense without injury to the public service. THE TAXATION OF MINERAL LANDS. Operation of the Present Law. The mineral tax law passed at the last session of Assembly has not been in operation long enough to warrant a conclusive dis- cussion of its merits. The writer believes that a tax on output is the only reasonable and scientific tax on mineral property, because no other tax can really measure the value of the property ; but this consideration apart, it is already obvious that the new law has accomplished much good. Much mineral land, to be sure, has been transferred from the land books and, while swelling the mineral valuation, has decreased the land valuation for that locality; but there has been a general and healthy increase in the valuation of this property. At the same time, even the brief operation of the law has shown certain obvious defects which demand correction. Without approving the principle of the mineral tax, therefore, the writer would suggest the following changes in the existing statute, in advising which he has the support of the Mineral Assessor. Regular Assessment by Mineral Assessor. The present law provides that in every year save that of the general quintennial land assessment, mineral property shall be assessed jointly by the Mineral Assessor and the Commissioner of the Revenue for the district where the land is located. In the fifth year, the statute provides that the assessment be made by the land assessor for the district. Obviously this curious provision was due to an oversight at the time the law was enacted. To bring expert judgment to bear on an assessment, to raise it to a proper figure, to equalize all mineral assessmxcnts and then to place the assessment in the hands of a local, untrained assessor is the height of administrative folly. The assessment should always be made in the same manner and the law should be amended accordingly. 364 Report of Tax Commission — ^Appendix. Settlement of Disagreements. The present law provides that in case of disagreement between the Mineral Assessor and the Commissioner of the Revenue for the district, the judgment of the Commissioner shall be final. In other words, after employing an expert in assessment, the State makes him purely an advisor, and leaves to a local officer, re- sponsible only to the locality and dependent upon local influence, the final decision in the assessment of mineral property. It is easy to explain on this ground alone, why some of the assessments are not at the market value: the advice of the Mineral Assessor has not been taken. Surely the State should remedy this and should reverse the procedure by providing that in case of dis- agreement between the Assessor and the Commissioner, the judgment of the former shall be final. He is certainly more competent, in a vast majority of instances, and, with a knowledge of the assessment in other localities, can equalize assessment much better than can a local officer. Proper appeal can, of course, he allowed by statute to the property-owner, thus protecting him against any possible injustice. This appeal, in the writer's judgment, should lie to the Circuit Court.* Due Notice Should be Given. The present law does not provide for notice to the Mineral Assessor, through the Corporation Commission, in cases where property-owners have appealed to the courts. It has thus happened that many persons have been able to have their assess- ments lowered before the Mineral Assessor knew of an appeal. Manifestly the law should be amended to require that notice of appeal be served on the Corporation Commission before the appeal from the assessment be heard. Summary of Recommendations. To summarise, the writer believes that pending a final decision as to whether or not there should be a tax on output rather than *Tbe. Mineral Assessor thinks that appeal should He to the Corporation Com- mission and argues in behalf of this, that the process will be simplified and much time be saved. The writer cannot agree on this point. He believed that while theie would doubtless be some saving of time to have appeals lie to the Corporation Com- mission, it is unwise to exempt property holders of this clas.i from the operation of general laws. As all appeals from assessments, except those of Public Service Cor- porations, lie directly to the Court, appeals in these cases should so lie. Report of Tax Commission — Appendix. 365 on mineral lands, the law should be changed to provide, (1) that the assessment in regular assessment years be made by the Min- eral Assessor and Commissioner of the Revenue as in other years ; (2) that the judgment of the Mineral Assessor be final, in cases of disagreement between him and the Commissioners of the Revenue, in making assessments ; and (3) that notice of an appeal from any mineral assessment be duly served on the Corporation Commis- sioner before such appeal be heard. FISH AND GAME LAWS. Pending the probable enactment of revolutionary laws in the regulation of the oyster and fishing industry, it is unwise at this time to upset these industries by legislation which may be only temporary. At the same time, there is one tax law which re- quires immediate amendment. This is the law regulating the tax on the manufacturers of fish, oil, etc. The law requires that these manufacturers pay a license of $10 where their sales be not in excess of $2,000 the year, and one-half of one per cent, where they exceed this amount (Pollard's Code, section 2098). Some of the fish factories operating in the State make dividends which are reported to reach 60 per cent, the year; all of them enjoy very ' great privileges. They are empowered by law to use nets in the open waters of the Chesapeake and to catch menhaden fish by schools. Waiving altogether the much-mooted question as to whether or not their activities have reduced the number of food fish, it is perfectly manifest that their privileges are most valuable and that they should pay accordingly. The writer recommends that a tax of 1 per cent, on sales be adopted in place of the present tax. This will yield a revenue more commensurate with the privileges conferred by the Commonwealth. ADMINISTRATIVE REFORMS. General Considerations. The writer questions whether the act creating the Tax Commis- sion contemplated a report on the methods by which the revenue of the Commonwealth is disbursed. Administrative matters would seem to belong to another field of investigation and conse- 366 Report of Tax Commission — ^Appendix. quently might not properly be discussed here. At the same time, some of these are questions of taxation and all of them affect more or less directly the revenue of the Commonwealth. For this reason, the writer has appended a brief discussion of a few ad- ministrative subjects, in which reform is much needed. These are, a uniform system of bookkeeping, a uniform system of warrants, the payment of all taxes into the treasury and the disbursements thereof by specific appropriation, the consolida- tion of the Auditor's offices and some reform in respect to the fee system. Each of these may be briefly considered in order. Uniform System of Bookkeeping. The investigation of our tax laws has required a more or less • intimate study of the workings of our local Treasurers' offices. Much information which was necessary for the Commission could only be had from the local Treasurers, and much data was avail- able in their offices only. The writer must confess that he has been distressed and alarmed at the conditions disclosed from the reports of some local Treasurers. Is is often impossible to as- certain some of the simplest facts regarding the collection of the public revenue. This is to be attributed primarily to the absence of any uniform system of bookkeeping. The best results can certainly not be achieved until the Commonwealth has established and enforced a system which will guarantee uniformity and accuracy while insuring proper custody of the people's money. This much is due the tax-payers of Virginia; no less will suffice.* Uniform System of Warrants. The writer has likewise been struck with the wide diversity in the systems of warrants used in disbursing the public funds. Some of these are simply "orders to pay" and show only in the roughest way the nature of the expenditure involved. They are, in effect, checks and not warrants. So varying are the methods employed that the Auditor is Auditor in name only ; in disbursing public funds, he is little more than a paying teller. *It may not be improper in this connection to commend especially the system of bookkeeping devised by George B. Keezell, Treasurer of Rockingham County. The writer examined and checked up this system in detail. With a few simple modifica- tions it can be made a model for the entire State. It includes a daily balance of all accounts, an absolute system of checks and has commendable simplicity. Report of Tax Commission — ^Appendix. 367 Too great care cannot be shown in giving the public absolute assurance of a frank, honest and business-like management of the revenue they contribute to the support of Government. The Commonwealth surely cannot be less business-like than any other million dollar corporation. A change in the style of warrants is a simple means to a proper end. The Auditor should audit ac- counts and should have on file in his office not only written evi- dence of disbursements but documentary evidence as to the nature and reasonableness of these expenditures. Payment of All Expenditures by Specific Appropriation. Another anomaly in our present system of administration is that of appropriating to certain Departments the revenue from specific taxes and authorizing the heads of such Departments, within certain limits, to expend these funds at their discretion. This system cannot be defended. It is unbusinesslike in the extreme. Every department of Government should have a specific appropriation, where the expenditures are fixed. Where the expenditures iriust vary, a contingent fund, properly audited, should be made available. An imperium in imperio has no place in a modern Government. Nor is it possible successfully to defend this system on the ground that it "costs the State nothing." The fertilizer tax, the insurance tax, the bank examination tax and the hotel inspection tax are paid by the people of Virginia, and are as much a part of the general revenue as the property or the land tax. They come from the same source and should be treated in the same manner. Uniformity is essential to sane administration. The Consolidation of the Auditors' Offices. Virginia has another administrative anomaly in the present Second Auditor's Office. This office handles the public debt and the school fund of the Commonwealth and,- within these limita- tions, has the same machinery as the office of the Auditor of Public Accounts. Few States have found any use for such an office, and Virginia, in the writer's judgment, gains nothing by it. All accounts should be audited, of course, but it stands to reason that they can be audited in one office as well as in two. By so doing the Commonwealth would be able to save part of the ex- penses of the present Second Auditor's office. 368 Report of Tax Commission — ^Appendix. Reform of the Fee System. The fees paid officers of Government are taxes. Whether levied against litigants, against applicants for license or against persons guilty of crime, they are taxes and must be paid by the people. As such they should be regulated, adjusted, changed or abolished accordingly as they operate justly or unjustly. There are two radical views on the subject. At one extreme are those who contend that the fee system is an unmitigated evil. They claim that officers paid by fees receive remuneration for their services in excess of their value to the Commonwealth. The system is expensive, they contend, unscientific and breeds in- equality among public servants. The system should be abolished, root and branch, and a more equitable system established in its place. At the other extreme are the champions of the fee system. These are wont to argue that the officers paid by fees cost the State nothing; that the system is by no means as lucrative to office-holders as is supposed; and that to substitute salaries for fees will be to place a great burden on the people. The truth is between these extremes. Unquestionably there are officers whose fees are excessive. Undoubtedly it is poor gov- ernment to pay the clerk of a court more than a judge or to give the sergeant of a jail more salary than the municipality pays the mayor of the town. Yet the number of persons who receive excessive fees is small. Generally speaking they are the Clerks of busy courts, the Treasurers of large cities and counties, the City Sergeants of a few communities and a few Commissioners of the Revenue. There are scores, indeed, hundreds of public officers whose fees are no larger than is reasonable. In addition, there are numbers of officers paid fees the amount of which is unknown to the public, whose professional standing would keep them from holding public office were it known that their fees are as small as in reality they are. Such men, for example, are the Common- wealth's attornies. If these be the facts in the case, the writer thinks they suggest the proper line of reform — to properly adjust the scale of fees and to devise a method which will reduce the fees of over-paid officers to a reasonable basis. To accomplish the former end will take time and close study; to achieve the latter end is a very simple Report of Tax Commission — Appendix. 369 matter. Years ago the Federal Court was confronted with the same problem; other States have faced it, and all have found that a limitation on the fees receivable in any office was sufficient to correct the grosser evils of the system. The plan which ex- perience has shown to be the cheapest, the safest and, in some respects, the best, is the enactment and enforcement of law pro- viding that all fees received by a given officer in excess of a certain amount shall revert to the Treasury. Every officer is required to keep his fee book in proper shape ; as soon as he receives a fee he enters it in place and thus charges that amount against himself. These books are audited annually, or semi-annually, and if it be found that any officer receives a sum in excess of the legal maxi- mum, he is required to return the excess amount to the State treasury. If a standard form of receipts be devised, or if it be stipulated that fees collected be deposited with other public funds and credit be received therefor, this system will reduce to a reas- onable sum the fees paid by the people to the officers whose remuneration -is now excessive. It must not be forgotten, however, that in adjusting the limit of fees, or in ultimately adopting a salary basis, the Common- wealth cannot afford to be parsimonipus. It is an easy matter to get cheap men to assess and collect the public revenue. But the results will be unsatisfactory. If the State wants the best re- sults, it must get the best men to enforce her revenue laws. She cannot get the best men without paying them liberally. Nowhere is this more true than in paying Commissioners of the Revenue and Treasurers. The nature of the work entrusted to these men requires that they be above suspicion, incorruptable, fearless and vigilant. The State cannot keep the men she now has in this service without paying them well; she cannot attract the men she needs unless she pays them liberally. To conclude, the writer would recommend, (1) the limitation of fees to be reserved by an officer and the payment of the surplus into the Treasury; (2) the reclassification of fees and their modi- fication as soon as careful investigation shall have disclosed a proper basis for legislation.