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 The assessment of public service corpora 
 
 3 1924 013 929 900 
 
THE ASSESSMENT OF 
 PUBLIC SERVICE CORPORATIONS 
 
 BY 
 
 ALFRED E. HOLCOMB 
 
 PAPER READ AT THE FIFTH ANNUAL CONFERENCE HELD UNDER THE 
 
 AUSPICES OF THE INTERNATIONAL TAX ASSOCIATION, AT 
 
 RICHMOND, VA., SEPTEMBER 5-8, 191 1 
 
Cornell University 
 Library 
 
 The original of tiiis book is in 
 tine Cornell University Library. 
 
 There are no known copyright restrictions in 
 the United States on the use of the text. 
 
 http://www.archive.org/details/cu31924013929900 
 
A. E. HoXoomb, 
 
 15 Dey Street, 
 
 Hew York, H. Y. 
 
 THE ASSESSMENT OF 
 PUBLIC SERVICE CORPORATIONS 
 
 BY 
 
 ALFRED E. HOLCOMB 
 
 PAPER READ AT THE FIFTH ANNUAL CONFERENCE HELD UNDER THE 
 
 AUSPICES OF THE INTERNATIONAL TAX ASSOCIATION, AT 
 
 RICHMOND. VA., SEPTEMBER 5-8. 191 1 
 
THE ASSESSMENT OF 
 PUBLIC SERVICE CORPORATIONS. 
 
 The assessment of public service corporations has 
 seemed to be a matter of peculiar difficulty. It has been, 
 at any rate, treated as such from the start, until it has 
 rather come to be admitted as something impossible of 
 settlement, and to be left in the class of economic ques- 
 tions which are not really to be settled, but rather to be 
 dismissed as unsettled, and to some extent, insolvable. 
 This characterization may or may not be strictly 
 accurate in particular cases, but it perhaps represents 
 pretty fairly the feeling that exists generally, and will at 
 least serve the purpose of the writer as a starting point. 
 
 Under the conditions above suggested, the question 
 might be treated as the purely theoretical one of how 
 these corporations might properly be assessed, looked at 
 from the economic standpoint; and how, if you please, 
 they should be assessed in order to make the burden 
 upon them, "equal and uniform," as the expression is, 
 with the burden upon other forms of property. Again, 
 the question might be discussed by the assumption of 
 some particular method as being capable of application 
 so as to reach fair and just results. This discussion 
 would consist of the array of all the advantages claimed 
 for the particular method, and the emphasizing of those 
 advantages; the statement of the objections and the 
 
minimizing of those objections. In other words, the 
 treatment would thus be a form of special pleading, re- 
 sulting in a conclusion based upon facts, some of which 
 might be undisputed, but many of which would surely be 
 in dispute. Such a conclusion might quite naturally 
 satisfy the mind of the pleader in the particular case, 
 and might be quite valuable and suggestive to others 
 dealing with similar conditions. 
 
 These two methods have thus a very important value 
 in any survey of the subject, and they are the methods 
 which have been usually employed in the discussion of 
 this subject. 
 
 Looking through the various volumes of the (pro- 
 ceedings of these conferences, I am at once ready to say, 
 for myself, that I should be willing to follow absolutely 
 the conclusions reached by the economists, administra- 
 tors and students because they appeal to me as being 
 based upon sound reasoning, and to be fortified by a 
 convincing array of undisputed facts. 
 
 When we come to observe, however, what actually 
 takes place in our Legislatures and in Congress, and 
 what have been the recommendations of Special Tax 
 Commissions whose members have, in many instances, 
 attended these conferences, we must, I think, be forced 
 to the conclusion that the question of the taxation of 
 public service corporations has not been brought much 
 nearer a solution through the influence of the discus- 
 sions which have been had before these conferences. We 
 find the most recent statutes embodying provisions 
 which are totally at variance with the best theoretical 
 and official thought on the subject, and we find Commis- 
 sions making recommendations directly opposed to the 
 well thought out, logical, and practical conclusions of 
 these experts. 
 
This is so, not only as to the taxation of public service 
 corporations, but also as to the taxation of property 
 generally, and is, in my judgment, inevitable in dealing 
 with a question of this character. Taxation has come 
 to be, whether we like it or not, but one phase of a much 
 broader question — the question of the proper relation of 
 citizen to citizen, and of citizen to the state — so that 
 the taxation of public service corporations is but one 
 phase of the broader subject of public control of 
 private enterprise in corporate form. 
 
 We may say that it is unwise to mingle taxation 
 with regulation, but whether unwise or not, it is inevit- 
 able as a matter of practical experience, witness the 
 notable example of the Federal Corporation Tax which 
 was supported and advocated as a regulatory measure. 
 
 This much has been said by way of introduction, and 
 in justification of the writer's conviction formed from a 
 rather intimate study of the form and administration 
 of tax laws, that very little help is to be derived from a 
 theoretical discussion of the question. Even had I the 
 ability to discuss the question from this standpoint, I 
 would consider it unimportant to do so. I would, how- 
 ever, earnestly recommend to those in attendance a re- 
 view of the able papers heretofore presented, and from 
 which I have personally derived great profit. 
 
 Taxation an Administbativb Question. 
 
 My purpose is to rather emphasize the so-called prac- 
 tical side of the question, by which is meant the sit- 
 uation as it actually is presented in daily experience, 
 and my aim is to attempt to make some very simple 
 and homely suggestions which would appear to me to 
 lead to a minimizing of the difficulties in the present 
 
methods of administration of the lawiS for the taxation 
 of public service corporations. 
 
 It seems proper, therefore, that some of the difficul- 
 ties which are met with, be reviewed ; and an attempt be 
 made to see whether they may not be overcome without 
 radical and startling changes in the substantive law. 
 
 Change in Attitude Needed. 
 
 We come at once, therefore, to consider what appears 
 to the writer to constitute the chief stumbling block 
 in the way of more rational treatment of the assessment 
 of public service corporations, namely, the attitude 
 towards the subject on the part of the corporations 
 themselves, the public, and administrative officers. As 
 indicated at the beginning, the question has come to be 
 considered one not quite difficult enough to demand 
 absolute settlement, and yet not quite simple enough to 
 be neglected, and so we have gone struggling along 
 through the mazes and mysteries of verbiage in statute, 
 decision and argument, with very little constructive 
 work looking towards a settlement. 
 
 This failure to really grasp the subject comes natur- 
 ally from certain difficulties inherent in the subject mat- 
 ter, and certain circumstances which necessarily tend to 
 produce the situation described. A corporation is, of 
 course, simply a collection of individuals united for the 
 purpose of carrying on an enterprise. This, of itself, 
 would not seem to constitute any very great cause of 
 difference in the attitude of the public towards the 
 property of this collection of individuals, but in reality 
 it does affect the attitude very emphatically, and here 
 we see the illustration of the close relation of taxation to 
 regulation, mentioned above. 
 
The difference in situation of the public service 
 corporation and the ordinary property owner is still 
 more marked, because the very conditions under which 
 it exists imply absolute supervision of its affairs, afford- 
 ing the possibility of the most searching analysis by the 
 assessing officers and by the State, through laws which 
 may be passed for the control of the corporation. The 
 result of this will at once suggest that the public service 
 corporation has very little interest in the many theories 
 with regard to the assessment of personal property, 
 including the adoption of means to provide for a more 
 drastic assessment, or the opposite. Its property is 
 absolutely fixed, it cannot be withdrawn or concealed; 
 neither can the corporation cease doing business until 
 possibly it goes into bankruptcy. Entirely different 
 conditions, therefore, surround the public service cor- 
 poration than surround the ordinary property owner. 
 This results in the absolute freedom to adopt means for 
 its assessment which, while not absolutely prohibited, 
 would be deemed impracticable in the assessment of 
 property of the individual. 
 
 In a great degree, the situation which surrounds the 
 individual surrounds also the ordinary business corpo- 
 ration, and the partnership, not so much because of the 
 inability to reach the property through the application 
 of drastic laws, but more in this case, on account of 
 competitive conditions requiring, in the nature of things, 
 more or less secrecy, and the sentiment of the com- 
 munity which will not permit treatment of the ordinary 
 business corporation in a way similar to the treatment 
 of the public service corporation. 
 
 This suggests at once what, to the writer, constitutes 
 the most important recommendation which he can make 
 for the consideration of this Conference, and one which 
 
is intended to form the principle theme of this paper, 
 in the hope that it may, in a very small way, serve to 
 direct attention to a point which his experience has led 
 him to believe stands in the way of better conditions, 
 better corporations, better officials, better laws, and bet- 
 ter administration of existing laws. This recommenda- 
 tion is for a voluntary change, both by the corporations 
 and by administrative officers, in their attitude towards 
 the questions involved in the assessment of the property 
 of public service corporations. 
 
 It may seem a very trite suggestion, and not to require 
 serious consideration, but it is the firm conviction of 
 the writer that no one cause has been so preventive of 
 the solution of the tax question as it affects public serv- 
 ice corporations than the practice which has obtained 
 in the past and which prevails also at the present time, 
 of an almost absolute failure on the part of the in- 
 terested parties to actually discuss together the vital 
 issues, and thus reach conclusions based upon a free 
 interchange of ideas. 
 
 Assessment not a Law Suit. 
 
 In the past a most wonderful situation has existed, 
 and to a great extent it still exists. The corporation, 
 for instance, makes a very elaborate report covering all 
 phases of its activities, including minute statements of 
 its physical property and of its financial operations. 
 This report is placed on file, and the next step is the 
 assessment. Sometimes, as a preliminary, the corpora- 
 tion is asked to submit such argument as it may desire 
 in connection with the assessment; but more often the 
 assessment is made in the first instance, and a time is 
 
 8 
 
fixed for a hearing, which is in the nature of a review. 
 At the hearing, whether before or after the assessment, 
 the assessing body appears in the role of a Court; sitting, 
 perhaps, behind a railing, sometimes upon a raised plat- 
 form, nearly always with the most solemn atmosphere. 
 The corporation, which must necessarily in the nature of 
 the case, be represented by one individual, appears to 
 submit statements about every phase of its activity, in- 
 volving the most technical matters, which are perhaps 
 only within the knowledge of certain experts in that 
 branch. In every case the representative must traverse 
 the entire field lof corporate activity, including the 
 theories of regulation, taxation, sociology, political 
 economy, ethics, and other branches of learning. The 
 stage thus set produces the most ridiculous scene. 
 Usually no sound comes from behind the railing, nio 
 indication of any consent to, or dissent from, the multi- 
 tude of conclusions which must be hastily drawn from 
 facts perhaps appearing in the report, and perhaps pre- 
 sented by the representative from his general knowledge 
 of the conditions with which he is dealing. 
 
 Under these circumstances, there can never be said 
 to be any satisfactory result reached. Certainly it 
 would be difiSiCult to conceive of a situation less cal- 
 culated to reach a fair result. Of course, there are excep- 
 tions, and important exceptions to this procedure. A 
 notable exception is in the State of New York, where 
 the miost painstaking and patient attempt is made to 
 really discuss the questions at issue. The difSculty 
 here, however, is that, owing to the obscurity of the law, 
 there is really no common ground upon which any dis- 
 cussion of any value can be had. I mention this simply 
 because this very free and full discussion of certain 
 phases of physical conditions, for instance, often brings 
 
 9 
 
out points which would otherwise be obscui/e, and which 
 would lead to more or less arbitrary action if they were 
 not explained in this way. 
 
 My very earnest suggestion is that this situation 
 should be entirely changed, that the attitude should be 
 one of free and full discussion with the members of the 
 assessing bodies who should, on their part, set forth 
 perhaps their tentative conclusions as they appear from 
 the facts which have been submitted. In this way some 
 more satisfactory condition would be reached, certainly 
 there would be very much more likelihood of an assess- 
 ment being made which would be found on both sides 
 to be fair. 
 
 This suggestion is not one which needs legislative 
 action, in fact, it would be better, as stated above, that it 
 should be voluntary, preferably by a formal vote of the 
 Board, or Commission, as the case might be, placing 
 upon the record of its proceedings a rule that the repre- 
 sentative of the corporation should be entitled to know 
 the basis upon which a decision is reached. 
 
 I realize at once that this suggestion will meet with 
 opposition, and that it will be said to furnish ground for 
 litigation, and the vacating of assessments upon techni- 
 cal grounds. I can only say that I do not believe that 
 this will turn out to be the case. In my judgment, any 
 law entitled to respect, ought to be able to stand the 
 test of administration in the manner indicated, certainly 
 any assessment ought to stand the test of discussion. 
 Furthermore, as a practical matter, experience with 
 actual cases leads me to think that there is more satis- 
 faction and less litigation when methods are certain and 
 known, than when they are secret and uncertain. I do 
 not wish to be understood as stating anything but my 
 own personal view of the matter, based upon my own 
 
 10 
 
experience with actual situations, and submit it for 
 discussion. 
 
 The suggestion just made, however, finds its comple- 
 ment in the further and important suggestion that the 
 corporations should themselves make some changes in 
 their attitude towards the question. Possibly, they have 
 been seriously at fault in the past, and some of them 
 may be seriously at fault at present; and this may be 
 one of the reasons for the attitude of administrative offi- 
 cers above alluded to. It is unnecessary, however, to 
 dwell upon past practices, because the consequences only 
 are of importance in this discussion. It is more my pur- 
 pose to suggest the possibility of a reason why these 
 practices have existed, why they still exist to some ex- 
 tent, and how the evils resulting from such practices 
 may be remedied. 
 
 In the first place, it has been the practice to treat the 
 question of the taxation of the corporation as a legal 
 question, and the whole situation has been set up with 
 that end in view. The laws have been, of course, to a 
 great extent, drawn by lawyers whose attempts have 
 been to enact into law certain complicated theories or 
 principles which have been enunciated by the Courts in 
 passing upon particular cases. These principles when 
 thus actually placed upon a statute book, never seem to 
 work out into results which make for simplicity and con- 
 sequent justice and satisfaction. This is quite natural, 
 because it is very difficult to legislate for general 
 conditions, using the facts of a particular condition. 
 
 The officials who have to do with the assessment, on 
 both sides, those on the boards and those connected 
 with the corporations, have been mainly lawyers, and 
 too often they have been content to treat the questions 
 not as they would business questions, but as they would 
 
 11 
 
questions arising in the trial of a law-suit. I am sorry 
 to say that even at the present time this tendency still 
 exists. It is, of course, not at all my intention to make 
 the broad assumption that assessments can be better 
 made by persons who have not had a legal training, but 
 only to say that the accentuation of the attitude of the 
 advocate has prevented the free interchange of discus- 
 sion about the particular facts of an assessment, and has 
 set up opposing sides, as it were, in a matter about 
 which there ought to be no such attitude. 
 
 Another result flowing from this treatment of the 
 matter has been that the presentation of the facts by the 
 corporations has been to a certain degree complicated 
 and technical. It has been done, usually, by persons 
 having no first-hand knowledge of the facts with which 
 they were dealing, but necessarily having such knowl- 
 edge as had been imparted to them by the operating 
 officials. Of course, this is partly to be expected in deal- 
 ing with a question which has been itself so complicated 
 by the statutes. 
 
 All the circumstances in the case have rather been 
 treated as not exactly facts to be investigated, but as 
 facts to be accumulated on the one side or the other, on 
 the theory that the side having the greatest array of 
 facts, in point of numbers, would be the winning side. 
 The emphasis upon this phase of the question has mini- 
 mized all other phases. Too often also the facts and cir- 
 cumstances are put together in a very slip-shod and 
 slovenly way, unnecessarily confusing to the assessing 
 officers. It has been my experience, over and over again, 
 to have shown to me in the reports of corporations, 
 points which were impossible of explanation, conflicting 
 one with another, and all leading to no rational con- 
 clusion. My suggestion therefore, is that very much 
 
 12 
 
more care should be given by the corporations to their 
 reports, and upon the manner in which these reports are 
 submitted, and less emphasis upon the medium through 
 which they are submitted, and the elaborate arguments 
 in that regard. 
 
 Responsibility foe Assessment Should not be DivmBD. 
 
 Another difficulty which exists is due to the division 
 of responsibility for an assessment. This is not a com- 
 mon difficulty, but yet it occurs in some very important 
 localities. This division shows itself in various ways, 
 sometimes by action of the assessing Board itself, and at 
 other times by reason of some statute. We are con- 
 cerned just at present with the first phase, and refer to 
 the practice in some States of admitting to the discus- 
 sion the representatives of local political sub-divisions. 
 This practice doubtless comes very naturally, because of 
 the feeling that these localities are, in a sense, interested 
 in the discussion, because oftentimes the total assessment 
 made by the Board is pro-rated around throughout the 
 localities, each receiving a share. In practice, however, 
 it results in a very unsatisfactory condition, and is 
 believed to be incorrect in principle. 
 
 The report upon which an assessment is made is 
 usually elaborate, and requires the careful study of a 
 corps of experts employed by the Commission. It 
 seems absurd, therefore, to call into any discussion in- 
 dividuals who have no knowledge whatever of the report 
 or of the many peculiarities set forth in it. Their in- 
 terest is purely to obtain the greatest amount of valua- 
 tion for their locality. It results in emphasizing the 
 contest side of an assessment, a side which should, by all 
 means, be minimized. 
 
 13 
 
In New York State such a state of affairs exists that 
 when an assessment is finally made, it has come to be a 
 matter of course that it shall be contested in the Courts. 
 Upon this contest the locality in which a particular part 
 of the corporation's property may be located, is allowed 
 to "intervene" as it is called — a better word would be 
 to "interfere." From that point the proceeding is car- 
 ried on by the legal representative of the locality, who 
 has no interest in the assessment, as such, but whose 
 only interest is, as stated above, in securing the largest 
 share as his particular fragment of the total. This liti- 
 gation continues along lines quite superficial, and often- 
 times months elapse during which preliminary motions 
 are made and argued, which have nothing to do with the 
 real merits of the case. This situation was recently 
 characterized by one of the Justices of the Supreme 
 Court of New Ylork, as a "playing for points." He took 
 occasion to condemn this, saying : 
 
 "The enforcement of the Tax Law through 
 the courts is not the playing of a game for 
 points but an honest effort on the part of the 
 state to secure to taxing districts a fair valua- 
 tion." 
 I would go further, and say that the administration of 
 Tax Laws by Commissions and corporations, as well 
 as by the Courts, too often takes on the character of 
 playing a game for points, instead of being a serious 
 attempt by both parties to arrive at fair and reasonable 
 results. 
 
 Another phase of this difficulty arises through pro- 
 visions of the statutes in certain States requiring cer- 
 tain action by local officials intended as an aid to a 
 centralized board; it is also manifested in most aggra- 
 vated form, by the provision for some Appellate Board 
 
 14 
 
with authority to supervise the action of the Board mak- 
 ing the assessment in the first instance, and to actually 
 nullify that action. This Appellate Board usually con- 
 sists of State oflttcials having, of course, numerous other 
 duties. It seems unnecessary to suggest that a situation 
 whereby the action of a Board, taken after elaborate in- 
 vestigation, may be overturned by another Board hear- 
 ing the matter oftentimes in a very superficial wayj 
 will result in a lessening of responsibility, and con- 
 sequently in dignity on the part of the assessing ofl&cers, 
 and in a reduction in efficiency. 
 
 It is submitted with confidence, that whenever the 
 assessment of a corporation's property is turned over 
 to a Board, it is to be within their exclusive jurisdiction 
 to bring it to a conclusion, and there should be no in- 
 terference from any locality, or, supervision by other 
 administrative body. 
 
 The situation above outlined does not exist to any 
 great extent throughout the several States, but there 
 are two or three States in which there are certain pro- 
 visions in the statutes which will ordinarily result in 
 the difficulties which are above alluded to. The case of 
 New York is mentioned because it illustrates on a very 
 large scale the chaotic state which may be reached 
 where these practices are allowed. 
 
 Confusion from Nomenclature. 
 
 Another difficulty may be characterized as due to the 
 emphasis of nomenclature in dealing with tax laws. It 
 commonly finds expression in the use of certain names 
 or phrases which have come to be regarded as designa- 
 tions of new species of property, thus we have the ex- 
 pressions : general franchise, special franchise, franchise 
 
 15 
 
to be, franchise to do, organization tax, intangible prop- 
 erty, non-physical property, going concern value, good- 
 will, and latterly, following the Supreme Court, we lay 
 stress on the word excise. We do not intend to imply 
 that the above expressions are not properly representa- 
 tive of certain phases of values or useful in ascertaining 
 such values, we simply are seeking to condemn the use 
 of mere terminology to justify new taxes on the theory 
 apparently, that some new species of property is thus 
 discovered. The addition of one species of tax after 
 another, using a different name each time, tends to con- 
 fuse the issue and to make it difficult to determine 
 whether or not a given class of corporations is paying its 
 just amount of taxes. You constantly hear such expres- 
 sions as that this or that imposition is merely a fee for 
 a privilege, and is not a tax. This attitude is usually re- 
 sorted to to prevent condemnation by a Court of a tax as 
 unequal. In other words, we see here the attempt to 
 justify a tax as legal without regard to its inherent 
 justice as a measure of the amount which a corpora- 
 tion ought to contribute towards the expenses of the 
 government. 
 
 In any real and vital sense all these exactions bearing 
 these mysterious names are just as much taxes as the 
 tax upon the plant of the company. There is no way 
 by which they can be really treated as other than taxes, 
 and yet we have gone on throughout the States, adding 
 one tax to another, until the burden in some State is far 
 beyond any reasonable amount. This situation is doubt- 
 less due to the inadequacy of original laws for the tax- 
 ation of the property of corporations, and to the very lax 
 methods which have obtained as to such taxes. In seek- 
 ing to overcome that difficulty, we have devised these 
 new definitions thinking that by all these exactions the 
 
 16 
 
company could be really forced to pay adequate taxes on 
 its property. The trouble is that the situation has 
 gotten away from us, and much of the present difficulty 
 in the adjustment of corporate taxation is due to the 
 imposition of various taxes, which are, and must be, 
 treated by the corporations as a part of their general 
 tax burden, and by every one else as not taxes at all. 
 
 This difficulty may be overcome by a general scrutiny 
 of the entire tax system of the State, and by the recog- 
 nition on the part of assessing officers that in any 
 inquiry into valuations leading to assessment of taxes, 
 the entire situation should be considered. In many 
 cases the laws should be, of course, simplified, and the 
 aim should be to sift the matter down to a point where 
 both parties are dealing with the same question from 
 the same standpoint, with definitions not in dispute. 
 This point may be reached by reducing ^he number of 
 separate and distinct taxes to the minimum, with the 
 ideal situation, of course, — one assessment and one tax. 
 
 Minor Difficulties. 
 
 In the above remarks are contained what are deemed 
 to be the important difficulties in the way of efficient 
 administration of existing laws, and of securing results 
 which are reasonably satisfactory. I omit extended 
 reference to difficulties which, while they are serious, 
 are believed to come more from hasty legislation than 
 from deliberate intention. Certainly they are not due 
 to faulty administration. I refer to such difficulties as 
 occur from the attempt to place upon local township 
 or county assessors the work of assessing a state or 
 country wide plant, like a railroad, telephone or tele- 
 graph system. This is a relic of old conditions. It 
 
 17 
 
should not be overlooked, however, that this system ob- 
 tains in some of the older States, New York, for instance, 
 and that in the very latest report by a Special Tax Com- 
 mission, that of Rhode Island, local assessment is rec- 
 ommended for these public service corporations. It is 
 difficult to understand how such a recommendation 
 could be made, and we assume that it must be due to 
 limitations placed upon this Commission in the law for 
 its establishment. 
 
 A isomewhat serious difficulty arises in those States 
 where the assessment is made by a central body, but for 
 purposes of apportionment, the most elaborate details 
 are required as to the extent of physical property in the 
 various localities. A consideration of the effects of such 
 provisions leads to some general observations on the 
 expense to the corporation which is involved, in the 
 mere clerical labor of complying with a complicated law, 
 and to the statement that such expense would appear to 
 be absolutely wasted money, providing it be possible, 
 and we think it certainly is, to avoid such expense and 
 preserve, at the same time, an efficient administration. 
 Thus it is difficult to see why it is thought necessary to 
 pro rate values throughout minute sub-divisions of a 
 State, when a distribution of a part of the tax itself 
 which might be collected by the State, could easily be 
 made so as to meet all reasonable requirements. 
 
 This same observation might be made as to the impor- 
 tance of reckoning the incidental expense to the corpora- 
 tion, — ^wasted money, which might better go to the State 
 as taxes — in various schemes advanced. It might, for 
 instance, be made to the suggestion for a State or Fed- 
 eral Income Tax, justified on the theory that it may be 
 collected — as they say — "at source." Let someone stop 
 and think what it really means to a large corporation to 
 
 18 
 
be made the tax collector for several States, and of the 
 vast amount of detail involved in such a scheme ! It is 
 not exactly understood why such a proposal can be made 
 as a matter of course, and in utter disregard of the 
 expense to the corporation, and yet it is apparently so 
 treated in some quarters. 
 
 Pkogeess is Being Made. 
 
 These minor and more or less incidental difficulties 
 might be multiplied, but we assume that they are but 
 temporary. In reality we are slowly progressing, very 
 slowly, it is true, but yet certainly. Of the six States 
 which Prof. Plehn stated in his paper read at our first 
 Conference, had not at that time passed the first mile 
 post, only one — Nebraska — now remains; so we should 
 take some encouragement. The compelling force of cus- 
 tom, and the difficulties in the way of securing attention 
 by the general public to adequate tax laws, is quite ap- 
 parent, I am sure, to all present, so that the mere ref- 
 erence to some progress may be refreshing. 
 
 Geoss Earnings Method Suggested. 
 
 Having been convinced that our present difficulties 
 arise more from administrative inefficiency, by which I 
 mean not only administration by the State but also and 
 as well, by the corporation — lack of real effort to meet 
 the question fairly and squarely — I have not deemed it 
 important to make any suggestion as to the theory of the 
 taxation of public service corporations. I could not, 
 of course, if I wished, devise any theory which would be 
 satisfactory. My inclinations are all towards the sim- 
 plification of the law, whatever the theory upon which it 
 
 19 
 
may be enacted. It has, however, seemed to me, on the 
 whole, that the taxation of public service corporations 
 upon the basis of earnings would be the most satis- 
 factory basis. I say this with some hesitation, because 
 of the many elements of uncertainty which exist to 
 disarrange any one plan. As I have above stated, I be- 
 lieve that the administration of the law is the all im- 
 portant thing. A bad or complicated law, with good 
 administration, may work out results more satisfactory 
 than the most scientifically devised law placed in the 
 hands of incapable or inefficient administrators. Hav- 
 ing said this, I am perhaps justified in indicating my 
 own personal view that the gross earnings system is, on 
 the whole, the most likely to be satisfactory. Theoreti- 
 cally, the net earnings basis would be better still, and 
 yet there are difficulties with that basis which do not 
 exist in the case of gross earnings. 
 
 Others far more competent to write upon this matter, 
 have set forth in detail the advantages of this sys- 
 tem, and in the appendix to this paper I have compiled 
 the results of investigation of the matter by Commis- 
 sions, and have added a brief memorandum on certain 
 legal points involved. Let me, however, state emphati- 
 cally, that my advocacy of this system is not at all due 
 to its advantages because it may be, in a way, named a 
 mathematical rule. We hear, more or less, even in this 
 Association, of the mathematical rule for the assessment 
 of public service corporations. Let me say, at once, that 
 I have no sympathy with that method if it means that an 
 assessment of a public service corporation, or any other 
 piece of property, can be made without the exercise of 
 good, sound business judgment. It is because I think 
 that the taxation of a corporation upon a consideration 
 of its earnings involves the exercise of judgment in the 
 
 20 
 
greatest degree, that I favor it. The idea that by the 
 adoption of a certain rate upon certain earnings we 
 avoid the exercise of judgment as to what a corporation 
 ought to pay in taxes, is, to my mind, unsound. My 
 idea is that, in the taxation of property in general, and 
 especially in the taxation of public service property, the 
 assessors should go about it just as a business man would 
 go about the same thing, if he were seeking to purchase 
 the property. He would make some sort of an examina- 
 tion of the general condition of the physical plant, it is 
 true, but such an examination would not be an elaborate 
 one. He would use certain well known average units of 
 value, which, through the long course of any given busi- 
 ness become standardized, and he would thus reach an 
 approximate value by the use of these average units. 
 When lie had done this, he would take the most impor- 
 tant step in his investigation, namely, he would investi- 
 gate very thoroughly the yearly income of the property, 
 during the period immediately preceding. He would 
 study this income in all its aspects, as well as the ex- 
 penses, and it would be almost entirely upon a con- 
 sideration of the average income in the past, and upon a 
 consideration of the income which might be anticipated 
 by more improved methods, that his judgment would be 
 made as to the price which he would pay for the prop- 
 erty. This, in brief, constitutes to my mind, the com- 
 pelling reason why the tax upon the gross earnings con- 
 stitutes the most rational system of taxation. 
 
 But there are certain advantages that flow from it 
 which are too important to be overlooked. In the first 
 place, when viewed in this way, the great waste of time 
 and money, occurring from the annual elaborate con- 
 sideration of the extent of the property throughout the 
 area in which it is located, is avoided; and the argu- 
 
 21 
 
ments and re-arguments, hearings and re-hearings, all in 
 elaboration of matters which are, to say the least, most 
 elusive, are also avoided. The annual friction which is 
 likely to occur, and oftentimes prevent the reaching of 
 substantially accurate results, is avoided. In fine, you 
 eliminate to a great extent, the chief difficulty to the 
 fair, reasonable and business-like settlement of a busi- 
 ness problem. The mere preparation of a report such 
 as, for instance, is required this year in Ohio, is some- 
 thing which I suppose would be difficult for many in 
 this room to appreciate, and when this is followed by the 
 arguments of representatives of the corporations, the 
 repetition of those arguments, over and over again, with 
 more elaboration, throughout the long dreary period of 
 the Board hearings, to my mind at- least, a most ridicu- 
 lous situation is presented. 
 
 Of course, it is obvious that we have the difficulty 
 upon the gross earnings theory of deciding upon a rate 
 which to apply to the earnings, but this difficulty is per- 
 haps more theoretical than real. We shall have to admit 
 that in reaching this rate we must obtain an approxima- 
 tion of the valuation of the plant, and we must assume 
 a fair average rate at which ordinary real and personal 
 property is assessed. Having admitted this, however, 
 it by no means involves the admission that we are doing 
 the very thing that we wish to avoid. Even if it were 
 necessary to admit that the most elaborate examination 
 of the corporation should be made by a Special Commis- 
 sion appointed by the Legislature simply in order to 
 reach a rate to be placed upon the gross earnings, it 
 would still, to my mind, be very much to the advantage 
 of all concerned, if, after having reached that rate by 
 such elaborate valuation we should thereafter apply it to 
 gross earnings to reach the annual tax. 
 
 22 
 
I say this because the matter of the valuation of the 
 property of a public service' corporation is one of the 
 most intricate propositions imaginable, it involves the 
 time of a very great many experts, and by the time it is 
 completed, in many instances, it is obsolete. I repeat 
 then, that the fixing of a rate, even if it is to be by an 
 elaborate investigation, would not render the method 
 unsatisfactory. But it is not necessary to make such 
 an elaborate investigation. As indicated above, a suffi- 
 ciently accurate valuation of the property of a public 
 service corporation can be very readily reached, with the 
 co-operation of the officials of that corporation, that is, 
 one that would be sufficiently accurate to enable a fair 
 rate to be struck. 
 
 Objection to the tax upon gross earnings is made 
 on the ground that it causes a separation, and places 
 corporate property in a specific class. As to this, I 
 would say that it is so placed by law and social con- 
 ditions, and no one can prevent such segregation. Cer- 
 tainly the annual squabbles over valuations seem to me 
 to most certainly emphasize and accentuate the classifi- 
 cation objected to. 
 
 In view of the repeated decisions of the United States 
 Supreme Court and the existence and administration of 
 laws in various States which effectively reach earnings 
 from interstate commerce, it would not seem necessary 
 to discuss the purely legal objection made to the system 
 of taxation by reference to earnings, that it may be un- 
 constitutional if applied to interstate earnings. This 
 objection is succinctly met by Prof. Plehn, who says, in 
 his paper read at the first conference : 
 
 "Unless there is a deliberate attempt to limit by means 
 of taxation the free interchange of products between the 
 several States, the ISiupreme Court of the United States has 
 
 23 
 
never once interferred with the States as to the choice of 
 the form of taxation for corporations engaged in interstate 
 traffic." 
 
 My study of the subject leads me to endorse absolutely 
 that statement. In other words, the taxing power is one 
 thing, regulation is another distinct thing, and where 
 a State tax law can fairly be said to be intended in good 
 faith as an attempt to tax the corporation on account of 
 its property, the form which the statute takes is imma- 
 terial. As stated above, I have included in the appendix 
 to this paper, some notes on the legal side of this ques- 
 tion. 
 
 Conclusion. 
 
 I have thus stated my views upon certain phases of 
 the question of the taxation of public service corpora- 
 tons, and may now very briefly repeat the thoughts 
 which lie uppermost in my mind. 
 
 Under existing laws, the need is for more emphasis up- 
 on the administrative side of the question, a somewhat 
 radical change in the attitude with which the problem 
 is approached both by assessing ofiScers and by cor- 
 porate representatives, more confidence and co-opera- 
 tion between the interested parties, abandonment of 
 the idea that taxation is a contest, or a law-suit; greater 
 responsibility in the officers whose duty it is to place 
 the burdens of taxation and consequent increase in 
 their dignity. 
 
 It is believed that attention to these very simple and 
 very homely suggestions will do more towards the settle- 
 ment of this troublesome question than may be thought, 
 certainly more than elaborate discussion of theories of 
 taxation and intricate legislation, looking towards the 
 enforcement of such theories. 
 
 24 
 
APPENDIX 
 
 EXTEACTS PROM REPORTS OF TAX COMMISSIONS, WRIT- 
 INGS OF ECONOMISTS AND PROM OTHER SOURCES, 
 UPON THE SUBJECT OF THE TAXATION OF PUBLIC 
 SERVICE CORPORATIONS BY THE GROSS EARN- 
 INGS METHOD, WITH NOTES ON THE CON- 
 STITUTIONALITY OP SUCH A METHOD. 
 
 NOTE 
 The italics in the following extracts are the compiler's. 
 
EoonoMioe. — Hadiat, 1901. 
 
 Page 450: "Adam Smith, in a passage frequently quoted lays 
 down four criteria of a good tax system; equity, certainty, con- 
 venience of time of payment and avoidance of unnecessary cost of 
 collection, direct or indirect. If all these things can be com- 
 bined, the tax is obviously a good one. But what if they cannot 
 all be combined? What if the first two requirements (which are 
 the most fundamental general principles, the third and fourth be- 
 ing largely matters of administrative detail) be found to con- 
 flict with one another? What shall we do if the pursuit of equity 
 demands sacrifice of certainty and if all the methods of taxation 
 which promise a sure return seem to leave some men untouched 
 who can best afford to pay? By placing equity first Smith gives 
 countenance to the popular view that we should make this not only 
 our ideal of taxation but our guiding principle in framing tax 
 laws. As an ideal It is undoubtedly right; as a guiding principle 
 it will be found to defeat the realization of that Ideal. 
 
 It should be said In justification of Smith that the distinction 
 between ideals and guiding principles in taxation which has since 
 become so conspicuous was in his day only just beginning to take 
 shape. In ancient times certainty and equity went band in 
 hand. • * • 
 
 But from the time of Adam Smith downward there has been an 
 increasing divergence from this state of things. * * * The at- 
 tempt to secure equal contribution by a general income tax or a 
 general property tax may result in exempting the dishonest and 
 burdening the honest in making a tax system whose burdens are 
 wholly out of proportion to the financial results. Under these 
 circumstances the tax legislator now has to choose between making 
 equality or certainty his primary end rather than to keep both in 
 view as co-ordinate aims. In the light of experience in modern 
 industrial communities there can scarcely be any doubt as to the 
 proper choice. Certainty is the fundamentally important object 
 without which all attempts at equality prove Illusory. With an 
 uncertain tax no systematic improvement can be hoped for. With 
 a certain tax many evils which exist at the outset tend to dimin- 
 ish as time goes on. Uncertainty may result either from failure 
 to discover the objects which should be taxed; or from doubt as 
 to their value. • • * (p. 456) The second source of uncertainty 
 arises from doubt as to the actual value of the property or trans- 
 actions assessed. It is always very difficult to determine the 
 actual net earnings of a business. The gross earnings are com- 
 paratively easy to ascertain: * * * The conception of net in- 
 
 27 
 
come, simple as it appears, is really very diflScult to apply in 
 practice and involves so much possible litigation that many states 
 prefer to substitute a low tax on the gross earnings of corpora- 
 tions for a somewhat higher tax on their net earnings. The lat- 
 ter would be the more equitiible; for a tax on gross earnings 
 bears hard on a corporation which is doing large business at 
 low rates and a small margin of profit. But the superior cer- 
 tainty of the tax on gross earnings outweighs its theoretical dis- 
 advantages." 
 
 Essays in Taxation. — Semoman, 1896. 
 
 "Conclusions 
 
 Page 262. From the preceding survey it appears that the United 
 States are slowly advancing to a more rational and harmonious 
 system. The tendency of legislation and of judicial interpretation 
 in the most progressive states Is toward the following plan, which, 
 although not yet completely realized in all its features in any one 
 state, is in accord with sound economic principles: 
 
 1. Corporations should be taxed separately and on different prin- 
 ciples from individuals. 
 
 2. Corporations should be taxed locally on their real estate 
 only. 
 
 3. Corporations should be taxed for state purposes on their 
 earnings, or on their capital and loans. 
 
 4. Only so much of total earnings or capital should be taxed as 
 is actually received or employed within the state. In the case 
 of transportation companies, a convenient and fairly accurate 
 test is mileage. 
 
 5. Where capital and loans are taxed, the residence of the 
 shareholder or bondholder should be immaterial. 
 
 6. There should be no distinction between domestic and foreign 
 corporations. Each should be taxed for its business done or 
 capital employed within the state. 
 
 7. If corporations are taxed on their property, property beyond 
 the state should be exempt. 
 
 8. If corporations are taxed on their capital stock, they should 
 not be taxed again on their property. 
 
 9. Where the corporate stock or property is taxed, the share- 
 holder should be exempt. If corporate loans are taxed, the 
 bondholder should be exempt. 
 
 10. Where the corporation and the shareholder or bondholder 
 are residents of different states, the tax should be divided 
 between the states by interstate agreements. 
 
 28 
 
11. An additional tax should be levied on corporations ■which 
 have through natural, legal or economic forces become monop- 
 olistic enterprises." 
 
 Taxation in Amebican States and Cities. — ^Ely, 1888. 
 
 Page 324. "It is advantageous in taxing corporations of a quasi- 
 public nature to tax them in proportion to gross revenues as steam 
 railroads are taxed in Wisconsin, Maryland, Vermont and else- 
 where. It is never desirable to tax any corporation on net revenue 
 as it leads to fraud. * » * The taxation of gross revenue is sim- 
 ple and easy and amounts to a tax on the value of the property. 
 * * * The percentage of tax on gross revenues should be high 
 enough to tax all the property invested properly, and the stocks 
 and bonds should be exempted from taxation. As real estate can 
 best be treated by local authorities, so state officials can best 
 deal with corporations like railroads operated by steam, tele- 
 graphs, telephones, sleeping ear companies, and express companies, 
 and these ought to be handed over to the state to be taxed for 
 state purposes only. This would simplify administration wonder- 
 fully, and put an end to a vast amount of litigation and corrup- 
 tion." 
 
 ■Minnesota Supbeme Cotjbt. 
 
 That the difficulties inherent in the ad valorem system which 
 were sought to be overcome by the gross earnings tax, are appre- 
 ciated by the Minnesota Supreme Court, appears evident from the 
 following quotation from the recent opinion of that Court in the 
 case of SItate vs. Twin City Teilephone Company, 116 N. W., 835 
 (1908) : At p. 836 the court says: 
 
 "The subject of taxation of corporations in this state has 
 been very prominent in the public mind for many years. Efforts 
 in various forms have frequently been made through legisla- 
 tive enactments to devise means by which to compel them to 
 contribute to the public revenues in harmony with their ability 
 to pay as disclosed by the volume of business trans- 
 acted or their discoverable property assets. The constitutional 
 mandate of equality and uniformity has restricted legislation 
 in this line for the most part to a system known as the prop- 
 erty tax, the practical defects of which, as applied to corpora- 
 tions, are obvious. iSeligman on Taxation, 61. These defects, 
 particularly the difficulty of reaching property owned by cor- 
 porations doing business in and through the different counties 
 
 29 
 
of the atate, the uiiBatisfactory results of taxing it whereTer 
 foand, giving rise, as was often the case, to litigation involving 
 questions of taxable situs, the Inequality of assessments made 
 by the numerous assessors, and the failure of this method to 
 place upon the corporations an equitable proportion of the pub- 
 lic burden, prompted the Legislature to devise as to them a new 
 form of taxation. To accomplish this greater latitude than 
 that given by the equality provision of the Constitution was 
 deemed necessary, and the amendment in question was pro- 
 posed to the people and by them adopted." * * * 
 
 Rbpoet of the Honoeaky CoMMissiOH Appointed by the Govebnob 
 
 or Ohio to Investigate the Tax System of Ohio and 
 
 Recommend Impeovements Thereon. 1908. 
 
 Page 38. "As to public service corporations in particular, it [The 
 General Assembly] may, of course, extend the Nichols law without 
 an amendment of the constitution; but after such amendment the 
 legislature may well determine to adopt the more modern and gen- 
 erally approved method of taxing such corporations by a percentage 
 of their gross receipts, substituting this for all other taxes, either 
 upon property or privilege. 
 
 Such a tax is now most universally accepted as preferable to 
 any method of property valuations. In a recent and comprehen- 
 sive study of this subject, as found in the reports of the Ontario 
 Commission of 1905, and the California Commission of 1906, the 
 gross earnings tax is commended as the true method of taxing 
 public service corporations. Of course, such a tax upon gross 
 receipts should be so devised as to bear a fair relation to actual 
 earnings and should be large enough to secure a sufficient return 
 from the corporations affected to supplant all other state or local 
 charges upon them. * * • 
 
 These taxes, whether upon moneys, credits, stocks and bonds, 
 or upon corporation property or franchises, may be collected either 
 by the state or local authorities. If collected by the state, a part 
 may be retained for state purposes and a part paid to the counties 
 for local purposes." 
 
 FiEST Biennial Repoet op the State Board of Tax Commissioners 
 OF THE State of Washington, l^OB. 
 
 At page 7'2, under the title "Public Service Properties," occurs 
 
 the following relative to the Gross Earnings Method of Taxation: 
 
 "Very much can be said in its favor. It is easily ascer- 
 
 30 
 
tained; it does not hamper or impose burdens upon a concern 
 until it Is on an operating basis; it adjusts itself to varying 
 economical conditions, fluctuating with, the increase or dimuni- 
 tion of business, thus following the rise and fall of property 
 values; it affords a sure and stable revenue to the state; it is 
 collected at a minimum expense; it becomes a fixed charge 
 upon the public service properties that can always be taken 
 into consideration in the determination of business affairs; it 
 is uniform in a great measure and not subject to the whim 
 or caprice of local assessors and taxing officials, or to the in- 
 fluence too frequently brought to bear in corporate behalf." 
 
 Repoet of the Pboceedings of the Eighteenth Annual Convention 
 
 OF the National Association of Railway Commissionees 
 
 Hexd at Washington, D. C, April 25, 1906. 
 
 Mr. Gates of Connecticut, in making the Report of the Committee 
 on Railroad Taxes and Plans for ascertaining fair valuation of 
 Railroad Property, says (page 36): 
 
 "Now, my investigation and study of the matter have brought 
 me personally to believe In only two methods of taxation: 
 Either a tax on the gross earnings at a flxed rate or a tax 
 based on the value of the property by what is known as the 
 stock and bond method. Have that value fixed by a single 
 competent board within your state. « * * The market value 
 of stocks and bonds is the best gauge, in my judgment, that 
 you can get of the value of railroad property. "We have found 
 it to work admirably. The road into which the money is put, 
 if the country is prosperous, is prosperous; if business falls 
 oft it goes down. The franchise is not worth so much. As 
 the franchise becomes valuable, business better, earnings greater, 
 up goes the value of your stock; and the tendency for the last 
 six or eight years has been very uniformly upward. And right 
 in that point is where you measure the value to the railroad 
 company of what the people of the state have granted to them 
 in the way of franchises. Nearly the same is true of a tax 
 ■on gross earnings of a railroad company." * « * 
 
 During the discussion which follows occurs the following: 
 "Mr. Brown of Pennsylvania, (p. 38) I would like to ask 
 the chairman what inequalities he can find in the plan of taxing 
 corporations with reference to their gross receipts and where 
 is there any scheme so free from unjust and double taxation 
 Us that which provides for the taxation of railroad corpora- 
 tions on their gross receipts? 
 
 31 
 
Mr. Gates of Connecticut: I think that that Is the most feasible 
 method of taxation. I do not want to throw down our own 
 method of taxation, which is on the stock and bond valuation, 
 and where we accomplish practically the same results, as I 
 have shown, as that by the gross tax or tax on the gross 
 receipts." 
 At page 44, in this same connection, Mr. Brown says: 
 
 "Now, when you solve the problem, as it seems to me it must 
 sooner or later be solved in this country, as to the most equita- 
 ble way of determining the proper basis upon which to predi- 
 cate a, uniform classification, it is perhaps on a system of gross 
 receipts. We are so rapidly ^approaching a period when the 
 greater consolidation of transportation companies will be ef- 
 fected, that a uniform system seems certainly more to be de- 
 sired, and when we know that all these public corporations are 
 required to make annual reports to the state and to the nation 
 upon their gross receipts and fix the figures which show the 
 total receipts from all sources, it seems to me that then we 
 have the surest basis because those who are the auditors or 
 the comptrollers of these corporations know whether they can 
 successfully misrepresent facts without fear of detection. I 
 believe it is almost impossible for a railroad company to indi- 
 cate figures which show the gross receipts without being in 
 great danger of having the wrong detected." 
 
 Repobt of the Commission on Revende and Taxation of the State 
 OF Caufoenia, 1906. 
 
 Page 91: "Gross earnings taxes recommended. 
 
 The commission recommends that the taxes to be levied on pub- 
 lic service corporations shall be in proportion to gross 'earn- 
 ings." • • • 
 
 Page 92: "It is not claimed that the gross earnings tax will be 
 absolutely just and equitable in its effect upon each corporation 
 In each of the different classes. No tax system has ever been 
 devised which is strictly just. But it is claimed that in certain 
 cases such a tax would result in a far closer approximation to jus- 
 tice and equality than any other tax which this State could select. 
 The burden of taxa:tion imposed thereby will vary from year to 
 year as the fund out of which the taxes must be paid varies. A 
 careful examination of the effect of the taxes, at the rates pro- 
 posed upon the individual corporations shows that the differences 
 are practically unimportant." * * • 
 
 "Taxation is of necessity largely a matter of expediency and prac- 
 
 32 
 
tlcal considerations naturally outweigh theoretical ones. The ad- 
 TiaYitages of a gross earnings tax on public service corporations are 
 largely practical. They are: (1) Certainty and, ease of aaminis- 
 tration. Gross earnings can be concealed or misrepresented only 
 by outright and easily detected fraud. Unlike property values or 
 net earnings they are not affected by differences of opinion' and 
 depend on nobody's judgment or discretion. They are often a mat- 
 ter of published record. After the gross earnings are determined 
 the rest is a matter of mere arithmetical computation. (2)" They 
 follow the capacity of the taxed subject to pay. (3) They enter 
 every year in the same proportion into the accounts and can be 
 computed in advance. (4) They are less likely to be shifted from 
 the tax payer to some one else than any other tax. (5) In the 
 words o'f the Ontario Commission: 
 
 "One of the most important advantages of the gross earnings 
 tax Is that it does away with the difficulty about the taxation 
 of franchises." 
 Page 15'5: "The Ontario Commission on Railway Taxation, which 
 rendered a report in ISOS, * * * sums up as follows: 
 
 'Since, then, it is impossible to equitably tax private prop- 
 erty and corporate property on th« same basis there is no neo 
 essary injustice or inequality in taxing them upon different 
 principles or hy different public authorities. In fact, it is the 
 attempt to tax them both upon the same principle which works 
 injustice and inequality, and it is only by taxing them upon 
 different principles suited to each form of property that it is 
 possible to attain or approximate justice and equality.' 
 The last of the three systems; namely, taxation of the property 
 on the basis of earnings, has the marked advantage of simplicity 
 and ease of administration and close adjustment to the ability of 
 the corporations to pay." 
 
 Page 159: "Railroad ofl5cials, as a rule, are strongly in favor 
 of the gross earnings tax. Their chief reasons are its simplicity, 
 the ease of administration, and, above all, the fact that it always 
 enters in the same proportion into their accounts, so that its effect 
 upon their business is always uniform. It is natural for railroad 
 officials to look upon taxes as an expense incident to business done. 
 If a road does more business this year than last, it buys more coal, 
 pays more wages, and, under this plan would pay more taxes. En- 
 tering in this manner into their accounts, it is not a disturbing nor 
 an arbitrary entry requiring explanations, as would an increase in 
 taxation in face of a decrease in business. Furthermore, the tax 
 varies from year to year in direct proportion to the fund out of 
 which it must be paid. The tax is, therefore, always in propor- 
 
 33 
 
tion to the road's ability to pay. 
 
 That the railroads themselves favor this plan la no evidence that 
 it is one adverse to the public interests. Simplicity, ease, and 
 cheapness of administration, and certainty of returns, are ad- 
 vantages to the government as well as to the tax payer. Steadi- 
 ness in growth in revenue is another advantage. The revenue 
 derived from a gross earnings tax will grow with the growth of 
 the community, and will in the long run keep pace therewith. 
 In this respect it affords a decided advantage over the property 
 tax. The assessment of property tends to become stationary or to 
 advance at a constantly decreasing rate. Only some radical change 
 In the law or in the administration thereof can counteract this 
 tendency." 
 
 Page 160: "Tendency of property tax to become stationary and 
 of gross earnings tax to advance in yield. 
 
 There is a marked crystallization to be noted in the assessment 
 of property for purposes of taxation. An assessment once made 
 on a given parcel of property is usually regarded as more or less 
 final, and is changed only as additions are made in the way of 
 new property or new construction. This is universally true, ex- 
 cept in rapidly growing communities, where attention is constantly 
 directed to the changing values. It is particularly true of railroad 
 property. A board of assessors having once fixed the value is prone 
 to consider that as very nearly final, and to increase it only at long 
 intervals or as new lines are built or new equipment added. Unless 
 there is some radical change in the law or in the administration, the 
 valuation made in one year is the chief consideration in fixing the 
 value the next year." 
 
 Page 164: "Gross earnings are definite facta. 
 
 To determine the value of a piece of property requires judg- 
 ment, and opinions thereon may differ. But the gross earnings of 
 a railroad constitute a definite fact; their sum does not vary with 
 differences of opinion. * * • 
 
 The objection is sometimes raised against a gross earnings tax 
 that it would fluctuate violently from year to year and that these 
 fluctuations would not coincide with the needs of the government. 
 It has been pointed out that the needs of the government are as 
 great in years of industrial depression as at any other time and 
 that in those years the gross earnings fall off and hence the reve- 
 nue would decline. 
 
 It is an almost complete answer to this argument to point out that 
 in years of depression when the resources of all the people are 
 lessened, and all are forced to economize, it would be a fitting 
 thing and a wise policy for the government alao to reduce its 
 
 34 
 
expenditures. 
 
 But as a matter of fact the gross earnings tax will show a very 
 high degree of steadiness as well as showing a more rapid rate of 
 growth, in the long run, than is usually shown by the property 
 tax. The decrease in dull years is not large as compared with the 
 increase in good years." * * * 
 
 [The greatest fluctuation in the gross earnings of all rail- 
 roads in the United States, in any year from 1889 to 1904, a 
 period long enough to cover good years and bad years, is 
 shown in a table to have been only 18%.] 
 
 Page 184: "The true present value of a street-car property de- 
 pends solely, as does thai of a mine, on what can be taken out — 
 on the gross yield, less operating expenses, and depreciation. The 
 only Item ascertainable with any degree of certainty is the gross 
 receipts; all others are variable and uncertain, being subjects of 
 'judgment' open to 'difference of opinion,' etc. 
 
 The gross earnings tax is, therefore, suggested by the very fact 
 that any other sort of tax is uncertain and indeterminate in appli- 
 cation and operation, and must directly or indirectly refer back to 
 the earnings. It has, moreover, in this case [street railroads] as 
 elsewhere, all its usual advantages of certainty and ease of admin- 
 istration, of steady yield and steady growth, of satisfaction to the 
 public and to the companies. It is notable that whenever cities, 
 instead of selling street-car franchises outright, for a cash down 
 payment, lease or rent them for a term of years, they almost uni- 
 versally prefer a percentage of the gross earnings as the annual 
 rental charge, to a fixed annual payment. The reasons which in- 
 cline both parties, the companies and the cities to regard this as 
 the fairest and most satisfactory form of the bargain, apply with 
 full force to the question of taxation." 
 
 Page 194: "The propriety of a gross earnings tax in this case 
 [express companies] is so obvious that it requires no argument or 
 demonstration. All the states which have departed from the crude 
 general property tax for express companies, and they are twenty- 
 eight in number, with two exceptions, apply either the gross earn- 
 ings tax or a license tax, nineteen apply the gross earnings tax, 
 and in several other cases the license tax Is graduated according to 
 gross earnings." 
 
 Page '213: "All of these considerations strengthen rather than 
 weaken in any way the arguments in favor of the gross earnings 
 tax as against an ad valorem tax on the property, for this class 
 of corporations. It is the only way in which the government can 
 count with certainty on sharing in the rapidly growing earnings 
 of such companies." 
 
 35 
 
Repoet op Ontabio CJommission on Railway Taxation — 1905. 
 
 Page 16: "When such States as Michigan and Wisconsin, which 
 had previously taxed the railroads on the gross earnings basis, 
 reached the conviction that the railroads were not paying as they 
 might be made to pay, we find that, instead of simply raising the 
 rate of the existing tax from, say four to, say five or six per cent., 
 they found It expedient to change the basis of taxation. This was 
 obviously done because they knew that the raising of the rate would 
 meet with the opposition of the railroads and would probably result 
 In the tax law being declared unconstitutional, thereby paralyzing 
 a large section of the revenue of the State until a new method of 
 taxation should be adopted. Yet, as already Indicated, and as an 
 examination of its operation will show, the so-called ad valorem 
 system of these and other states is really a roundabout method of 
 getting at earnings once more on a higher rate of taxation.'" 
 
 Page 23: "Finding, then, that the gross earnings tax would 
 cause no substantial Inequality in the case of the roads operating 
 in Ontario, and that, as regards equality, there is little to choose 
 between taxing on the gross and on the net earnings basis, the 
 choice between these might very well be determined on the ground 
 of facility and certainty in ascertaining what is gross and what is 
 net revenue. But there is very little difficulty in determining what 
 is gross revenue, while there is endless difficulty and dispute in 
 determining what is net revenue, especially where it is to the inter- 
 ests of the companies to minimize net revenue in order to escape 
 taxation. Hence, there would seem to ibe no hesitation in selecting 
 gross revenue as the simplest and most direct, and, considering all 
 the roads, the most equitable basis of taxation. * * * 
 
 The essential fairness of taking earnings as a basis for the tax- 
 ation of corporations is based on the general principle that the taxes 
 vary with the capacity ^of the company to pay them, whereas taxation 
 on the basis of general property results in all manner of inequality. 
 The amount of tangible property required by the various corpora- 
 tions has, in the first place, no necessary relation to their relative 
 earning power, and, in the second pla<;e, bears no accurate relation 
 to the earning power of the same company at different periods. 
 The capital stock tax has something of the same defect in addition 
 to those already mentioned, yet it has a certain amount of flexi- 
 bility. Only the tax on earnings follows automatically the capacity 
 of the corporation to pay, and while even it has Its inequalities, 
 yet it is very much more equitable than any other practical system." 
 
 Page 25: "As we have seen, the flexibility of the gross earnings 
 system enables it to follow the capacity of the corporation to pay 
 
 36 
 
taxes, and justice requires, more completely in the case of cor- 
 porations which have only a legal and economic existence, than in 
 the case of private individuals, who are seldom taxed to the full 
 measure of their capacity, that taxation should follow the relative 
 earning power of these enterprises." * *• » 
 
 "Apart from its merits as a simple, practicable and flexible form 
 of taxation, the tax on gross receipts has this further great ad- 
 vantage over other forms of taxation, that all the facts and all the 
 processes connected with its operation are matters of public record. 
 Thus, the railroads, on the one hand, and the government and the 
 public, on the other, may know exactly the basis of valuation, the 
 rate of the tax, and the relative contributions of the taxpayers in 
 proportion to their business. Under other systems of taxation, 
 where the basis of valuation depends more or less absolutely upon 
 the opinion of one or two assessors, who cannot be quite certain 
 of their own estimates, either individually or collectively, it is 
 obvioiis that the most unusual power, without any adequate check, 
 is placed in the hands of one or two men. In previous days, where 
 the assessor had many small properties to estimate, and where the 
 value of each man's property was fairly well known to his neigh- 
 bors and to the public, this system presented few difficulties and 
 no serious evils. But under modern conditions one need hardly 
 suggest that where railroads and other corporations, the value of 
 whose property is hardly known to themselves, are required to con- 
 tribute millions of dollars in taxes without any knowledge as to 
 how their own or their rivals' assessments are made up, and 
 where the public are necessarily in even more complete ignorance, 
 the opportunity and temptation is very great to bring influences 
 to bear upon the Government for the appointment of favorable 
 assessors, or upon the assessors themselves for a favorable valua- 
 tion. It is not in the interest of pure politics or sound finance, 
 and it is certainly not fair either to the railroads, the assessment 
 boards, or the general public, to maintain a system of taxation 
 which places such enormous interests as the valuation of many 
 millions of corporate property at the mercy of the private opinion 
 of one or two men. The unsatisfactory character of such a system 
 is fully recognized alike in the United States and in Britain." 
 
 Page 26: "One of the most important advantages of the gross 
 earnings tax Is that it does away_ with the difficulty about the 
 taxation of franchises. Probably no aspect of modern economic 
 wealth has given rise to such elaborate and confused discussion 
 and even outlandish theorizing as the so-called "franchise" values. 
 Without attempting to follow the lines of popular discussion on the 
 subject, it may be sufficient here to indicate briefly that there are 
 
 37 
 
two distinct senses in which the term "franchise" is used to In- 
 dicate a property of economic value. It is the confusion of these 
 two economic phases, with the occasional introduction of purely 
 legal aspects of franchises which has contributed so much to the 
 darkening of counsel on the subject." 
 
 Page 103: "Governor Van Sant is an ardent advocate of tax re- 
 form, which he is confident will yet be adopted by the people of 
 Minnesota. He also favors the increased rate upon gros^ earnings 
 of railways. He strongly supports, however, the existing method 
 of taxing railways on their gross earnings. The State Auditor 
 also supported the system. As he put it: 
 
 'We believe in this State that the gross earnings system is 
 
 a very satisfactory method of taxing the railways'; and again: 
 
 'Our people are especially well satisfied with the system of 
 
 taxation on gross earnings, because they think it is the fairest 
 
 way, all things considered. ' " 
 
 Page 206: "In New York the Ontario Commission had an 
 Interview with Mr. Thomas F. Woodlock of the Wall Street Journal, 
 author of 'The Anatomy of a Railroad Report' and a recognized 
 authority on financial and railroad matters. Mr. Woodlock strongly 
 favored the system of taxing railroads on their gross earnings, 
 as the fairest practicable method for all parties. His position may 
 be gathered from the following extracts from the interview: 
 
 'Without pretending to be an expert, I have always felt that 
 the safest, fairest and easiest way of taxing railroads was on 
 earnings, either gross or net. Now there are objections to 
 taxing gross.and there are objections to taxing net: in fact, 
 there are objections to any scheme you can think of. 
 An advantage in the case of gross earnings is that the 
 auditor of the company makes the assessment, in other 
 words, you cannot charge expenses for wholesale betterments, 
 etc. On the other hand, if you tax gross earnings it may hap- 
 pen that one railroad is compelled to operate at 75% of ex- 
 penses, another at 50% and so on. But on the whole, it seems 
 to me that the gross earnings system has the preponderance 
 of suitability for this purpose, because the gross earnings are 
 easily ascertained. ' " 
 Page 207: "At Baltimore the Ontario Commission interviewed 
 Mr. Hugh L. Bond, second Vice-President of the Baltimore and 
 Ohio Railway, who spoke very frankly and interestingly of the 
 various methods of taxation encountered by their railroad, and of 
 what he considered to be the most reasonable system of railroad 
 taxation. As a result of his wide experience he had reached the 
 conviction that the gross earnings' system was the fairest for all 
 
 38 
 
parties." 
 
 Page 209: On the whole, I [Mr. Bond] think the most equitable 
 basis for the taxation of railroads is the gross receipts basis." 
 
 Report of the United SfTAXEs Industeial Ck>MMissiON of 1901. 
 
 Vol. IX, Page 1022: "The income tax principle lies at the bot- 
 tom of the transportation tax systems of a number of the States, 
 where various taxes on receipts and earnings have been established. 
 Tax on gross receipts. — ^This is the tax on transportation com- 
 panies recommended by the railway tax committee in 1880, as 
 well as by the Maryland Tax Commission of 1886 and the Maine 
 Tax Commission of 1889. The New Yorli Committee remarks that 
 The requisite of a correct system of railroad, as of other 
 taxation, is that it should, in so far as it is possible, be simple, 
 fixed, proportionate, easily ascertainable, and susceptible of 
 ready levy.' 
 The committee recommends the tax on gross receipts as 
 
 'perfectly simple • * * thoroughly proportionate, * * * and 
 can by no possibility be evaded.' 
 A little farther on in the report the systems of Michigan and 
 Wisconsin were characterized as 
 
 'most intelligent and in conformity with correct principles.' 
 The Maine Tax Commission likewise recommends the tax on gross 
 receipts as a method 
 
 'doubtless as fair as any, for by that method the levy is gradu- 
 ated to the amount of business the road Is doing.' 
 "The report of the Maryland Tax Commission of 1886 concerned 
 itself largely with railroad taxation. The Commission recommended 
 a graded license fee on gross earnings. In a supplementary minor- 
 ity report the following remarks were made: 
 
 'The plan recommended by the other members of the Com- 
 mission is, perhaps, as good as any, which is in entire harmony 
 with our existing system of taxation, and deserves the care- 
 ful consideration of the legislature. If it is decided, however, 
 to inaugurate a new system, experience points to the Wisconsin 
 method as preferable. The roads are thereby exempt from local 
 taxation, and a license fee for the operation is charged, varying 
 according to the gross earnings per mile. The license fees are 
 expected to defray the entire expenses of the State government, 
 and this plan is being followed elsewhere and everywhere with 
 the same satisfactory results. It is simpler than the assessment 
 by local authorities as well as State authorities, and the rail- 
 roads are almost too powerful to be handled by the local author- 
 
Ities, who are likely to be worsted in their contests with vast 
 corporations.' " [This report was signed by Prof. Richard T. 
 Ely.] 
 
 Extract fbom Refobt of the New Hampshiee Tax Commission 
 
 OF 1908. 
 
 Page 107: "Whatever the cost of a railroad, the amount of, money 
 it is able to earn is probably the most important element affecting 
 Its value. This was recognized in Michigan, where, after an ap- 
 praisal of the physical property of the railroads in the state, at a 
 cost of $60,000, a valuation was placed on the non-physical elements 
 or intangible assets of the railroads, which was added to the valua- 
 tion of the physical property. This additional valuation of the non- 
 physical elements or intangible assets represented the value of the 
 franchise and was arrived at by capitalizing the net earnings of 
 the road at a selected percentage and deducting from the 
 valuation thus arrived at the valuation of the physical prop- 
 erty. In other words, by this process the capitalization of the net 
 earnings of a railroad at a selected percentage was made for the 
 purpose of getting at its true value. By deducting the cost of pro- 
 duction, from the true value so found, where it exceeds the cost of 
 production, the value of the non-physical elements is ascertained, 
 which, added to the value of the physical property, gives the value of 
 the system as a whole. "Where the cost of production exceeds the 
 true value, the difference is deducted from the cost of production in 
 order to get at the true value. The great expenditure of time and 
 money necessary to make an appraisal of the physical property of 
 railroads seems unnecessary when the earning power Is the real 
 basis on which the value of such railroads is fixed." 
 
 Views of Me. William S. White of the Maine Tax Commission 
 
 OF 1908. 
 
 Page 64: "While agreeing with the majority of the Commission 
 that the tax on Kailroads, both iSteam and Mectric, and on ot&er 
 Public Service Corporations is to be continued in some form in this 
 State, I emphatically dissent from the method of taxation proposed 
 by the majority of my associates, and I feel constrained to accept 
 and approve the principles of the income tax in Its application to 
 this particular class of property and urge and advise that the tax 
 on these Corporations be based on their earnings, as is now the 
 practice in this State, except that the income after deducting oper- 
 ating expenses, maintenance and cost of capital be made the basis 
 
 40 
 
instead of the gross income as is now tlie rule. * * * 
 
 Page 67: To that part of the Report which dells with the general 
 property tax of Public Service Corporations I must except: From 
 my point of view there is no general property for purpose of taxa- 
 tion other than that already described in our present tax laws for 
 purpose of municipal taxation. The right of way possesses no value 
 as property independent of a franchise, and if the cars, locomotives, 
 and other equipment are taxable as other property, they should be 
 taxed where the corporation is domiciled and for local purposes 
 and at the local rate. 
 
 It would not seem to me that the taxation of cars, locomotives, 
 and other equipment of a like nature, of railroads either steam or 
 electric should in fairness be taxed locally at the domicile of the 
 corporation. Neither in fairness should the right of way, road bed, 
 rails, and other physical investment be apportioned for taxation 
 among the towns through which the road may pass. 
 
 The benefits accruing to these communities from the facilities pro- 
 vided by railroads and other public service corporations should be 
 sufficient recompense for their presence. They may be used and 
 operated more without the domicile than within. Neither would 
 the ends of justice in taxation be more fairly met by a divisible 
 taxable right of all the physical property among the towns through 
 which the corporation operates. A railroad, telephone, or telegraph 
 company, electric light and power company may have its lines run- 
 ning through many miles of a sparsely settled community while its 
 busmess is derived from communities bearing but small mileage 
 of its lines. 
 
 The business of our larger public service corporations is not local 
 in its character but is gathered from the Industries throughout large 
 areas of the State. Hence, I maintain that the physical property 
 of public service corporations performing service as wide spread as 
 that of steam and electric railroads, telegraph and telephone com- 
 panies, parlor and sleeping car companies and express companies be 
 considered as subject for State taxation. * * * 
 
 Page 70: My conclusions lead me to urge the adoption of a net 
 income tax on the operations of Steam and Electric Railroads, Tele- 
 graph and Telephone Companies." 
 
 Repobt of the Minnesota Tax Commission. 
 
 1908. 
 
 Chapter VI. 
 
 Gboss Eabnings Taxes. 
 
 Status of Gross Eabnings Tax in Minnesota. 
 
 Page 81: "The Minnesota law provides two general methods of 
 
 41 
 
taxing corporations and their property. One is by the taxation of 
 gross earnings at given rates and the other by an ad valorem 
 assessment of the properties of the companies. Nearly all the 
 state-wide public utility companies now pay the state on the basis 
 of their gross earnings, but the domestic corporations engaged in 
 manufacture and business enterprise, together with the municipal 
 public utility companies — telephone companies excepted — are taxed 
 under the general property tax. 
 
 The gross earnings tax is based on the supposition that taxes 
 vary as the ability of the company to pay them, while the tax on 
 property owned is based on the idea that a relation exists between 
 the amount of property owned and the income received. There is, 
 however, no necessary relation between property and income, for 
 both are continually changing and shifting, regardless of each 
 other. The people of Minnesota, because of the ease with which 
 the gross earnings tax is collected and administered, have come 
 to regard it as the most satisfactory part of their tax system. It 
 is the same in the matter of the rate from year to year; it varies 
 with the capacity of companies to pay, and cannot be shifted easily 
 from company to consumer. These are arguments, but briefly stated 
 here, on which the tax stands as a part of the Minnesota fiscal 
 system." 
 
 Plage 86: "Attitude of United States Supreme Court. 
 
 The gross earnings system of taxation is firmly imbedded in Min- 
 nesota law, nor is it likely to be disturbed by interference on the 
 part of the federal courts, since the decision in the case of Maine 
 vs. Grand Trunk Hailroad, 142 U. S. 217, recognized the right of the 
 states to utilize such a method of taxation. As a matter of history 
 and law, the supreme court of the United States has not materially 
 interfered with the states as to the form of the tax to be levied upon 
 inter-state commerce corporations; the interference has arisen en- 
 tirely in connection with the question of the burden of the tax. 
 There is, then, no good reason why the Minnesota system of gross 
 earnings taxes should not be continued so long as there is satisfac- 
 tion with the method and the results." * * * 
 
 Page 94: "The argument for the substitution of a gross earn- 
 ings tax In lieu of the general property tax in dealing with public 
 utility corporations is much the same as that given above in 
 connection with the taxation of state-wide public utility companies. 
 The intricate plants and extended values of the same make it difficult 
 to value them accurately even for taxation purposes. The assessment 
 when made becomes fixed and prevents the community from 
 sharing In the increased earnings of the company. Under a gross 
 earnings tax the company knows what to plan upon, is no longer 
 
 42 
 
forced to interfere with assessors in order to get what it conceives to 
 be justice, and consequently keeps out of the political field, with a 
 resultant betterment of political conditions all around. There is a 
 gain to the community in ease of collection and administration, 
 and one to the company in knowing what to expect." * * * 
 
 Page 95: "The Extension of the Gross Earnings Tax System. 
 
 The gross earnings tax, with the modification of It to make it 
 complete and t real fiscal system, is outlined below. The details 
 of the legislation necessary to round out the present laws on gross 
 earnings cannot be presented in a report. The suggestion as to 
 method and general principle has been made ahove. 
 
 Table showing a summary of the existing gross earnings tax 
 system in Minnesota and suggested changes. 
 
 BufBlness 
 
 Existent 
 System 
 
 To Whom 
 Hate Paid 
 
 Proposed 
 System 
 
 Railroads 
 Telegraph 
 
 Gross earnings 
 General property 
 
 4% State 
 
 Aver- State 
 
 age 
 
 3% State 
 
 Aver- State 
 
 Continued 
 Gross earnings 
 
 Telephone 
 Sleeping Cars 
 
 Gross earnings 
 Optional 
 
 Continued 
 Gross earnings 
 
 Freight lines 
 Express 
 Insurance 
 Electric light 
 and power 
 Street railways 
 Gas companies 
 
 Gross earnings 
 Gross earnings 
 Gross premiums 
 
 age 
 
 4% State 
 6% State 
 2% State 
 
 Continued 
 Continued 
 Continued 
 
 General property 
 General property 
 General property 
 
 Local State & Local Gross earnings 
 Local State & Local Gross earnings 
 Local State & Local Gross earnings 
 
 Recommendations. 
 
 Page 223 : "2u Extension of the Uross Earnings Tax. 
 
 The principle of the gross earnings tax has commended itself to 
 the people of the state through an experience of nearly forty years. 
 It seems desirable that this principle, which has been applied to 
 railroads, telephone, express and freight line companies with satis- 
 factory results, should also be extended to the public utility com- 
 panies of the state. The advantages of such a method of taxation 
 are set forth in the chapter on gross earnings. Chapter VI, part 
 II, and the discussion need not be repeated here other than to say 
 that it has the favorable recommendation of the tax commission.' 
 
 EXTBACT FBOM RePOET OF COMMITTEE ON RAILROAD TAXES AND PLANS 
 
 FOB Ascertaining the Fair Valuation of Railroad Property. 
 
 Made at 
 
 TwENTT-FiEST Annual Convention op the National Association 
 
 OF Railway Commissioners, Held at Washington, D. C. 
 
 iNovember 18, 1909. 
 
 "It would seem that a gross earnings tax presents as fair a 
 
 43 
 
way to equitably tax railroad companies in accordance with their 
 fair earning power (which is an index as to value) as any plan 
 yet adopted. This, if the earnings and accounting is carefully 
 checked, will place the companies on the same basis in the several 
 states and at once remove all the difficulties found in the ad valorem 
 plan of assessing the properties." 
 
 Gtjy EjDwabd Snidbe, on Taxation of the Gboss Receipts or 
 Railways in Wisconsin. 
 
 Publications of American Eiconomic Association, November, 1906. 
 Third Series, Vol. VII, No. 4. 
 
 Page 48: "The experience in Wisconsin and other states shows 
 that the chief characteri^ic of the executive officials in our state 
 and local governments is official inertia. Accepting a public trust 
 implies the acceptance of official traditions, habits, and precedents. 
 To violate this rule brings down upon the culprit the wrath of the 
 unseen forces. Public opinion, when aroused, may be the impetus 
 to renewed action, or an exceptional official may vigorously fulfill 
 his duty, but the official life is short, and the public sleeps or for- 
 gets; the unseen forces never do either. 
 
 It is most important that the customs and habits of the people, 
 the customs and habits of officialdom be considered when the law 
 is framed. The movement of the machinery depends upon the 
 officials; the officials on the other hand conform necessarily to a. 
 large degree to the machinery. The machinery may lack the 
 motive power and can not operate of itself, btu it is most important 
 that it be constructed as nearly perfect as possible, so that it may 
 run with the least friction. iSlince inertia is the rule of official 
 life, the law should be explicit in all its provisions; its terms should 
 be defined and its machinery self-operative so far as is possible. 
 
 The peculiar fitness of the tax on gross earnings is to be found 
 in the assessment feature. Under the law taxing gross receipts, 
 the discretionary power of the state officials is not great, and the 
 taxable value of the railways is determined in accordance with a 
 definite rule. 
 
 The strength of this method of taxing railway property is best 
 shown by comparison with those systems which give great dis- 
 cretionary power to the state officials. The abuses, injustice, and 
 corruption engendered among our officials and in the body politic 
 under the latter system are immeasurably greater than the possible 
 loss of a few dollars through the perjury of the railway officials." 
 
 44 
 
Repobt of Minnesota Tax Commission 
 1910. 
 The Gboss Eabnings Tax. 
 
 This is a fixed rate determined by the legislature and imposed 
 upon the annual gross receipts of corporations. So far as it is 
 employed in this state, it includes only such public utility corpora- 
 tions as are engaged in business state-wide in scope and quasi- 
 public in character. »' * * 
 
 The history of the birth, growth and operation of the gross 
 earnings system in this state, with a comprehensive discussion 
 of its merits and defects and many suggestions, particularly as 
 to the proper rate of taxation, can be found in Chapter VI of the 
 first (1908) biennial report of this commission. We do not deem 
 it necessary to reiterate what is there said upon this subject. The 
 comparison there made of the actual result of the gross earnings tax 
 on railroads and what would have been the result of a general 
 property tax upon the valuations of the same roads is worthy of 
 careful consideration. 
 
 The gross earnings tax is the antithesis of the general property 
 ad valorem tax. While it is somewhat in the nature of an income 
 tax upon gross incomes, it altogether ignores the value of the prop- 
 erty and the profits of the corporation. It discards all pretense 
 of equity or equality with any other system of taxation. It Is 
 not a tax upon property at all, nor upon the profits arising from 
 the use of property. It is essentially a business tax, a license to 
 carry on the business for which the corporation is organized; and 
 the amount of the tax is mathematically determined by the amount 
 of business done. Like all' other licenses the rate fixed is purely 
 arbitrary, being just such a rate per cent, as the legislature thinks 
 the corporation should annually pay for the privilege of doing 
 business. 
 
 The gross earnings of a corporation may be large in volume, 
 and yet owing to business depression or bad management may 
 produce little or no profit. In such case it pays a tax updn a losing 
 business. But that is not unusual. The same conditions attend 
 the ownership of property taxed under the general ad valorem sys- 
 tem. Very frequently real estate or personalty which is abso- 
 lutely non-productive pays its full measure of taxation equally with 
 productive property. Moreover it is a well recognized fact that no 
 corporation can long continue to be unprofitable. Either it will be 
 made profitable or it will cease to exist. 
 
 The gross earnings system has one very vulnerable point of aatack. 
 The rate of taxation being arbitrarily fixed by the legislature, 
 
 45 
 
there will always exist the impending danger that that body unduly 
 influenced by the corporations may fix too low, or moved by 
 prejudice or vindictiveness may fix too high a rate. The same gen- 
 eral objection, however, will apply to all legislation, state and 
 national, and is not peculiar to taxation only. 
 
 The greatest care and impartiality should be used in determaning 
 the rate to be imposed upon gross earnings. Not only is there 
 danger of undertaxing, and thus depriving the state of revenues 
 to which it is entitled, tout there is also the danger of over-taxation 
 which may result in so crippling the industry, as to render it in- 
 capable of meeting its competitors in other states. Property should 
 not be confiscated simply because it is owned by a prosperous 
 corporation. 
 
 It should always be kept in mind that after all the consumer 
 ultimately pays the tax, and that the tax paid in the first instance 
 by a railroad, for example, is in its last analysis, a tax upon the 
 patrons of the road. No system of taxation has yet been devised 
 which, as a general rule, will prevent the taxpayer from shifting 
 the burden of the tax paid to the shoulders of the consumer of the 
 property taxed. 
 
 It should also be kept in mind that as to some of these public 
 utility corporations the state claims and exercises the power of 
 fixing the rates of service and transportation as well as the power 
 of fixing the rate of taxation, thus if it sees fit, limiting or 
 diminishing the amount of the gross earnings of the corporation, 
 and at the same time increasing the amount of its taxation, burn- 
 ing the candle at both ends. 
 
 All these things should be most carefully balanced, and the aim 
 should be the fixing of a rate which will afford a reasonable profit 
 to the stockholders of the corporation and a fair contribution for 
 the support of the government. What is needed is a square deal, 
 squarely made. 
 
 This commission does not know of any reason why telegraph 
 and sleeping car companies should not be taxed under the gross 
 earnings system. They are state-wide in their operation and fairly 
 belong to the class of state public service corporations. 
 
 LOCAI, PXTBLIC Utiutt Corpoeations. 
 
 The problem of properly taxing street railways, gas, electric light, 
 heating, power and water plants differs from that of taxing the 
 state-wide public service corporations only in the facts that they 
 are local in character, and not infrequently are created more for the 
 benefit of the public in the particular locality than for the pecu- 
 
 46 
 
niary gain of the stockholders. There is no good reason, however, 
 why they shouid not all be placed upon the gross earnings basis 
 and taxed accordingly. The tax collected should be paid Into the 
 treasury of the county where the company renders its service, and 
 distributed as other taxes collected in the city, town or village 
 where the corporation is located are distributed. 
 
 In determining the rate of taxation to be imposed upon such 
 corporations a sliding or graduated scale might be adopted vary- 
 ing the rate according' to the amount of gross earnings or according 
 to the population of the locality where the service is rendered. In 
 this manner due consideration could be given to those cases where 
 a subscription to the capital stock of the corporation represents 
 the generosity and public spirit of the subscriber rather than an 
 investment for pecuniary profit. 
 
 Advantage Over General Property Tax. 
 
 The greatest advantage of the gross earnings over the general 
 ad valorem tax system is that it entirely ellmina,tes the necessity 
 of the valuation of the complicated and peculiar properties of the 
 corporation. Experience has demonstrated that such attempted 
 valuations are intrinsically inaccurate and at the best are but 
 crude guess work. To approximate a fair valuation of either the 
 corporeal or intangible property of such corporations requires in 
 each particular case the knowledge and skill of experts. But a 
 fixed rate applied to the gross earnings not only renders the taxa- 
 tion of such corporations a mere matter of mathematioal compu- 
 tation but also gives to' the system a certainty and reliabilty 
 which is very desirable, while the practical experience of a very few 
 years would culminate in the fixing of a rate eminently fair and 
 equitable. 
 
 Upon the whole it may be said that in its practical operation 
 in this state the gross earnings tax has been satisfactory. While 
 there may exist a reasonable doubt as to whether the existing rates 
 are adequate or unjust, the system itself, as a method of fairly 
 taxing public utility corporations is, in the judgment of this com- 
 mission the best which has been yet suggested." 
 
 47 
 
Notes or A. E. Holcomb on CoNSTiruTioisrAiiTT of a State Law 
 
 Which Imposes a Tax Upon Babnings of a Coepobation 
 
 Where Such EIabnings abb Deeived in Whole ob in 
 
 Past Fbom Interstate Commebcb. 
 
 It may be suggested that there is doubt as to the legality of a 
 statute imposing a tax upon the earnings of a corporation derived 
 in whole or in part from interstate commerce, and that as the tax, 
 if limited to intra-state earnings would be entirely inadequate, 
 such a statute is impracticable. 
 
 The consideration of this proposition involves a reference to the 
 history of the course of the decisions of the United States Supreme 
 Court, and a somewhat close analysis of such decisions, having re- 
 gard to the particular and peculiar circumstances involved in the 
 various cases in which the subject has been discussed by that Court. 
 [Por the purposes of this brief comment it will only be possible 
 to state the principles which are deemed to be settled with reference 
 to the cases which are deemed to support such principles. 
 
 It may be stated at once, as a general principle, and without 
 qualification, that all laws which impose taxes directly upon receipts 
 from Interstate commerce, are void. Illustrative cases are: 
 
 McCall V. California, 136 U. S.'104; 
 
 Norfolk & Western B. R. Co. v. Penna, 136 U. S. 114; 
 
 Crutcher v. Kentucky, 141 U. S. 47; 
 
 Phila. & So. Mail S. S. Co. v. Penna., 122 U. S. 326; 
 
 Leloup V. Mobile, 127 U. 'a 647; 
 
 Brennan v. Titusville, 153 U. S. 289; 
 
 (Norfolk & Western By. Co. v. Sims, 191 U. iS. 441; 
 
 Allen V. Pullman Co., 191 U. S. 171; 
 
 Galveston, Harrisburg, &c. By. Co. v. Texas, 210 U. S. 224-6. 
 The above cases are, in The main, those where license or privilege 
 taxes have been imposed, but it is important to bear in mind that 
 the designation of the tax is unimportant but that its purpose, 
 nature, and effects are the important considerations. 
 
 This comment will serve possibly to explain the case now to be 
 considered and which forms the fundamental authority in support 
 of the constitutionality of a tax upon earnings. Including those de- 
 rived from interstate commerce. This case is Maine vs. Grand 
 Trunk By. Co., 14i2 U. S. 217 (1891), a case which seems, at first 
 blush, out of harmony with the cases cited above, and which was 
 unfavorably commented upon by text writers for a long time. 
 
 When, however, the real basis of the decision is appreciated, 
 much of the difiSculty disappears. Without quotation from the 
 opinion itself and from those in other more recent cases, it may 
 
 48 
 
be stated with confidence that the tax here imposed was In the 
 nature of a "commutation" tax in lieu of all other taxes upon the 
 road-bed of the railroad; that while the tax was designated as an 
 "excise," the name given was not considered of importance. The 
 real significance of the decision is that here there was sanctioned a 
 tax which was absolutely and directly a burden upon Interstate 
 commerce, and that this conclusion was reached because the Court 
 considered it merely as a measure of the burden which the corpora- 
 tion should bear in common with other property owners in the State. 
 This distinction may appear fine, but it is substantial and will be 
 seen to run through all the later decisions of the Court where this 
 and other similar cases are considered. 
 
 This case has been repea'Eedly cited in later decisions of the 
 Court, and its authority has never been questioned or modified. The 
 cases in which it has been cited, and in which the distinctive point 
 above mentioned is developed, are 
 
 Ficklen v. Shelby Co., 145 XJ. S. 23 (1892) 
 Postal Telg. Co. v. Adams, 155 U. S. 699 (1895) 
 Erie R. R. v. Penna., 158 U. S. 440 (1895) 
 Hanley v. K. C. So. Ry., 187 U. S. 621 (1903) 
 Wisconsin & Mich. Ry. Co. v. Powers, 191 TJ. S. 388 (1903) 
 Mich. Cent. Ry. v. Powers, 201 U. S. 296 (1906) 
 G. H. & S. Ry. V. Texas, 210 U. S. 224-6 (1908) 
 The case has also been cited and approved in general in 
 Ashly V. Ryan, 153 U. S. 446 (1894) 
 Pittsburg, &c. Ry. v. Backus, 154 U. S. 431 (1894) 
 Hooper v. California, 155 U. iS. 652 (189S) 
 W. U. Tel. Co. V. Taggert, 16S U. 'SL &1 (1895) 
 Adams Exp. Co. v. Ohio, 165 IT. S. 220 (1897) 
 These cases are referred to to indicate that the authority of the 
 Grand Trunk case is absolutely unshaken. 
 
 The case of Postal Telegraph Co. v. Adams, 155 U. S. 699, supra 
 may be referred to as it illustrates well the theory of the decision 
 of the Grand Trunk case. Here it was purely a license tax which 
 was brought in question and under the authority of Leloup vs. 
 Mobile, 127 U. S. 640, it would have seemed clearly illegal, yet 
 here, as in the earlier Grand Trunk case, the Court sustained the 
 tax entirely upon the theory of "commutation," that it was, in 
 amount, no more than the tax upon an ad valorem basis would have 
 been. This last case presents, it would seem, the extreme view of 
 Interpretation founded upon an examination of the effect of a taxing 
 statute, but its authority is unchallenged. 
 
 The very recent case of Galveston, Harrisburg & San Antonio 
 Railway Co. v. Texas, 210 U. S. 224-6, seems, however, to settle 
 
 49 
 
the status of the Crand Trunk case, and to dispose of all question 
 as to its authority. In this case the Court had of necessity, to exam- 
 ine all of its previous decisions in these cases, and the apparent in- 
 consistencies were very carefully brought to its attention on the 
 argument. The language of the opinion seems to set at rest all 
 further question and to finally explain the Grand Trunk decision. 
 The case is all the more decisive, because here a taxing statute 
 ■was quite apparently passed with full recognition of the decisions 
 of the C!ourts, and with evident intention to carefully provide against 
 failure. 
 
 The general result of an examination of the decisions of the 
 Supreme Court of the United States in the cases above cited, and in 
 many others, both in that Court and in the highest Courts of the 
 States, appears therefore to clearly indicate that in the absence of 
 Constitutional prohibition, a statute properly drawn, imposing a tax 
 at a given rate upon the earnings of a corporation, as an exclusive 
 tax and in lieu of all other taxes upon the property of the corpora- 
 tion, would be valid, even though the tax were made to fall upon 
 interstate earnings, as well as upon earnings derived from business 
 entirely within the State. 
 
 Phom Addeess by Pbof. Cabl C. Pmihn Delivered at Fiest 
 
 CONFEBBNCE OF THE NATIONAI, TAX ASSOCIATION, HELD 
 
 AT Columbus, O. — 1907. 
 
 "Shallow as are in point of fact the first two of the above-named 
 current objections to any departure from the general property tax 
 as applied to public service corporations, the third is merely falla- 
 cious, and rests upon ignorance of the principles which guide the 
 Supreme Court. Unless there is a deliberate attempt to limit by 
 means of taxation, the free interchange of products between the 
 several States, the Supreme Court of the United States has never 
 once interfered with the States as to the choice of the form of taxa- 
 tion for corporations engaged in interstate traffic. But on account 
 of the awe in which our Constitution is held, ignorance on this point 
 is very potent. A few years ago Canada sent a commission to this 
 country to investigate the methods in vogue for the taxation of 
 railroads. That commission rendered a report which for ability 
 and obvious evidence of diligence is not easily surpassed among 
 public documents dealing with taxation. The clear vision of these 
 commissioners showed them the fallacy of the first two points above 
 referred to, but so current, even among recognized authorities and 
 among our leading attorneys with whom the Canadians conferred, 
 was the third error, that this sagacious commission carried away 
 
 50 
 
the Impression that any method of taxation other than the property 
 tax was unconstitutional in the United States as applied to corpora- 
 tions doing an interstate business. Yet in the face of this current 
 legal view Justice Holmes, in voicing a unanimous decision of the 
 Supreme Court of the United States, a decision in which all the wis- 
 dom of that court on this point for a century is reviewed and sum- 
 marized, brushes aside a long argument with the curt statement, 'We 
 need say but a word in answer to the suggestion [he does not dignify 
 it as an "objection"] that this tax [a tax based on gross earnings] 
 Is an unconstitutional interference with interstate commerce.' " [191 
 U. 'S. 379 at p. 388]. The same court had previously said in regard 
 to a tax on the property and franchises of a corporation engaged in 
 interstate commerce, the tax being based solely on gross earnings, 
 "that a tax of this character is within the power of the State to 
 levy, there can be no question." [Maine vs. Grand Trunk Ry. 
 Co., 142 U. S. 217.] 
 
 Fkom Opinion in Coepoeation Tax Cases. 
 U. S. Sup. Ct. March 13, 1911. 
 
 "Nor does the adoption of this measure of the amount of the tax 
 do violence to the rule laid down in Galveston, Harrisiurg & San- 
 Antonio Ry. Co. V. Texas, 210 U. S. 217. In the Galveston case it 
 was held that a tax imposed by the State of Texas, equal to one per 
 cent, upon the gross receipts 'from every source whatever,' of 
 lines of railroad lying wholly within the State, was invalid as an 
 attempt to tax gross receipts derived from the carriage of passengers 
 and freight in interstate commerce, which in some instances was 
 much the larger part of the gross receipts taxed. This Court held 
 that this act was an attempt to burden commerce among the 'States 
 and the fact that it was declared to be 'equal to' one per cent, made 
 no difference as it was merely an effort to reach gross receipts by 
 a tax not even disguised as an occupation tax and in nowise helped 
 by the words 'equal to.' In other words, the tax was held void, as 
 its substance and manifest intent was to tax interstate commerce 
 as such." 
 
 ******* 
 
 "It is therefore well settled by the decisions of this Court that 
 when the sovereign authority has exercised the right to tax a legiti- 
 mate subject of taxation as an exercise of a franchise or a privilege, 
 it is no objection that the measure of taxation Is found in the income 
 produced in part from property which of itself considered. Is non- 
 taxable. Applying that doctrine to this case, the measure of taxa- 
 tion being the income of the corporation from all sources, as that 
 
 51 
 
is but the measure of privilege tax within the lawful authority of 
 Congress to enforce, It Is no valid objection that this measure in- 
 cludes, in part at least, property which as such could not be directly 
 taxed. See in this connection, Maine Vi Orand Trunk Ry. 142 U. 'St 
 217, as interpreted [Italics not in opinion] in Oalvdston, Sarris^urg 
 & San Antonio By. Co. v. Texas, 210 IT. S. 217, 226." 
 
 [It should be said that in the Texas case the property of 
 the railroad was taxed under other acts. It was not, therefore, 
 a "commutation" tax. This fact serves to explain the reason 
 for the distinction made and to reconcile the opinion in the 
 Texas case with that in the Maine case. In the latter case the 
 property of the railroad was not taxed except through the gross 
 receipts. — A. E. H.] 
 
 From WiiioTJGiBBT-'CJoNSTiTnTioNAL Law — ^1910. Vol. II, P. 72'3. 
 
 '^Prom the foregoing it would appear that the law with reference 
 to the State taxation of the gross receipts of companies doing an 
 interstate commerce business is not in as definite shape as might be 
 desired. One general principle may, however, be deduced from all 
 the cases. This is, that a state tax is invalid whatever its form if, 
 in effect, if lays a direct burden upon interstate commerce; and that 
 conversely, a state tax is valid, however measured, or (if we follow 
 the doctrine of Maine vs. Grand Trunk Ry.) whatever its form, 
 which may be fairly held to be a tax on the property of the com- 
 pany, whether tangible or intangible. The tax being thus valid, if 
 valid at all, only as a property tax, and its non-payment may never 
 involve a forfeiture of the right of the company to do an interstate 
 commerce business. The doctrine of Maine vs. Grand Trunk Ry. 
 that a tax measured by the gross receipts may be sustained as a 
 franchise or excise tax upon the right of the company to do business 
 in the state is certainly unsound, and is, it would appear, as above 
 indicated, so recognized in Galveston H. & S. A. R. R. Co. vs. Texas. 
 
 Perhaps the general doctrine which we have been considering is 
 best stated and illustrated in Postal Telegraph Cable Co. vs. Adams 
 (155 U. S. 688) in which it was held that a state has the power to 
 levy on a foreign telegraph company doing both a domestic and an 
 interstate business a franchise tax, the amount thereof being gradu- 
 ated according to the value of the property within the state, such 
 tax being in lieu of all other taxes. Though in terms a franchise 
 tax the tax was held valid as, in fact taking the place of a property 
 tax, which, of course, the state might constitutionally levy." 
 
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