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The Columbia University Libraries reserve the right to refuse to accept a copying order if, in its judgement, fulfillment of the order would involve violation of the copyright law. Author: Ohio. General Assembly. Title: Report of the Special Joint Taxation... Place: Columbus Date: 1919 COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET ORIGINAL MATERIAL AS FILMED - EXISTINQ BIBLIOGRAPHIC RECORD 653 Oh36 RESTRICTIONS ON USE: Ohio. General ussembly. Special joint taxation com- mittee. ^ Beport of the Special joint taxation committee of the 83rd Ohio Oeneral assembly. December 11, 1919. Colum- bus, 0., The F. J. Heer printing co., 1919. 165 p. incl. tables. 23'". Frank C. Parrett, chairman. "A report on the operation of state income taxes by Harley L. Lutz, PH. D. ... Presented to the Special j<^t taxation committee, September ^ mr : p. ash-m. 1. Taxation— Ohio. 2. Jacome tax. i. Parrett, Frank C ii. Lutz, Harl^ I^eist, 1882- ui. Ohio. Laws, statutes, etc i?. Title. Library of Congress HJ2427A7 1919 f7. 2S^7m TECHNICAL MICROFORM DATA ?f- S23V -5 " MASTER NEGATIVE « FILM SIZE :35-. DATE FILMED: REDUCTION RATIO: IMAGE PLACEMENT: lA IB IIB INITIALS: TRACKING # HLMED BY PRESERVATION RESOURCES, BETHLEHEM, PA. en 3 3 o ^ 3 I o ^ CA ^ Ul 3 > Q) O o m (D O CO X M lO 8 3 3 Ul o 3 3 o o 3 3 O 00 1.0 mm 1.5 mm 2.0 mm ABCOEFGHIJKLMNOPQRSTUVWXYZ ^ ll23«567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuv«vxyzl234567890 ABCDEFGHIJKLMNOPQRSTU\A/VXYZ abcdefghijklmnopqrstuvwxyz 1234567890 2.5 mm ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 1^ O o -D m -o o > o Ll "o 3D ^ -L > C CO 1 TJ ^ O 09 > JO o m Ac 4^ '4- 3 3 N3 O 3 3 Is Q) 31 si ■o p 2.S3 Sx 00 Nl tntlirCttpdfilidii]^ LIBRARY School of Business 5 I REPORT »»#»•• •» • J. J • • • » » »• J J » • >t » OF THE Special Joint Taxation Committee OF THE 83rd Ohio General Assembly December 11, 1919 Columbus, Ohio: The F. J. Heer Printing Co. . 1919 PREFACE. (.53 The special joint committee on taxation in submitting herewith its recommendations to the general asseml)ly for the purpose of increasing the depleted revenue stores of the state and its political sub-divisions, has no disposition to arouse a sympathetic reception for its prc^^ram by a recital of the tremendous difficulties encountered. Our only purpose in presenting this voluminous report is to aflFord the general assembly and the interested public an opportunity to glean therefrom an idea of the existing fiscal conditions and the course of reasoning followed, which have led to the conclusions herein presented. The work has been arduous and e^tacting. There has been a decided reluctance to increase the already onerous tax burden and the committee has been mainly inspired by a sense of necessity for increased revenues in order that the normal functions of our government be maintained and nourished. Much valuable assistance has been rendered the committee in its labor by interested citizens, inspired by a sense of devotion to our public institutions of government When request was made of these to lend their assistance and experience to the committee, a hearty and unselfish response was made, that must be characterized as most refresh- ing. To these, a grateful acknowledgement is made. Public officials, state, county and municipal, have been most helpful. Without exception they have rendered suggestions and advice of in- estimable value. Specialized assistance has been called to the aid of the committee and the value of this help has been so marked, that we despair of im- pressing the public with its incalculable worth. Professor Harley L. Lutz, of Oberlin College, was drafted into the service of the committee as economic advisor. He was dispatched to make a special study and survey of the operation of the income tax in the states of Wisconsin, New York and Massachusetts. His report based upon his investigations is found in the appendix to this report. In all of the deliberations of the committee, his advice and suggestions have been found most valuable and hdpftil. The tedious task of preparing this report has been left largely in hisr hands and those interested sufficiently to give it careful study should be the best judges of the thoroughness and soundness of his work. 3 4 Upon the organization of the committee, Professor Clarence D Laylm of the Ohio State University and L. D. Johnson, were selected as legal counsel. Professor Laylin has had long years of experience with taxation statutes, as an attache of the Attorney General's office, Mr Johnson has been engaged in the general practice of law for years and durmg a recent administration served as assistant Attorney General B<^ of these gentlemen have a broad grasp of affairs generally speaking and a comprehensive understanding of the magnitude of the public problan of taxation. We have no intent of engaging in fulsome praise but their patient and constant adherence to the problems of the com- mittee is worthy of a higher degree of appreciation than mere words . can convey. The greater part of this report has been prepared under the pressure incident to the opening of a legislative session. Every effort has been made to check and verify the figures presented, but some clerical inac- curacies doubtless remain. Equal care has been taken with all other statements of fact made in the report but it is possible that some errors remain notwithstanding these precautions. The committee in presenting its conclusions, once more wishes to convey its appreciation of the sympathetic attitude of all those who have an understanding of its problems. The only ambition that it has in discharging its duties to the best of its ability, is that there may be here- with presented some remedy that will obviate the necessity of lowering our governmental standards. Frank C. Parrett, Chairman. « CHAPTER I. QripiiMMition, Penoiuiel and Proceduire of the CommUtee. The s|>ecial joint taxation committee of the 83rd general assembly of Ohio was created by Senate Joint Resolution 6, which was adopted in January,. 1919. The text of this resolution is as follows: 83d GsNraiAL Assembly^ Regular Session, 1919. S. J. R. NO. 6. MR. PARRETT. JOINT RESOLUTION Relative to' the Appointment of Special Joint Taxation Committee. • Wherkas, It is apparent that there will be a serious deficit in the state, county and municipal revenues, the estimated amount being $7,000,000; and; "Whereas, The municipalities of the state are seriously embarrassed by the lack of sufficient funds to operate their normal and necessary activities ; and Whereas, It is the manifest duty of the present General Assembly to pro- vide means whereby these conditions may be met; and Whereas, It is imperative that taxation and revenue measures be enacted and in effect prior to taxation day in April, 1919, that the welfare of the state of Ohio may be properly cared for; therefore Be it resolved by the General Assembly of the State of Ohio: That four Senators, not more than two of whom shall belong to the same political party, appointed by the President of the Senate, and four members of the House of Representatives, not more than two of whom shall belong to the same political party, appointed by the Speaker thereof, shall constitute a Special Joint Taxation Committee to prepare and introduce in the House and Senate such bill or bills as they may agree upon that will give the people of this state revenues to operate the governmental functions. Any or all of bills prepared by said Committee shall be introduced in the Senate and House of Representa- tives by such Committee, and any rules of the Senate or House or joint rules of the Senate and House, shall be hereby suspended to permit of the introduc- tion of such non-partisan taxation measures. Said committee may, in its discretion employ a stenographer and expert authorities on matters of taxation and such other help as may be deemed neces- sary to assist in the performance of its duties. To carry out the provisions this resolution this committee is authorized to hold meetings while the legisla- ture is in session to spend from the money heretofore or hereafter appropriated 5 6 to discharge the expense of l^slative committees, such sum or sums as may be necessary, same to be paid by the state treasurer on the warrant of the state auditor, which warrant shall be issued upon filing itemized expense accounts from time to time, the same to be approved by the Chairman and Secretary of the committee. ■i Pursuant to the terms of this resolution which was later amended to include six members from each body, the following members were appointed to the committee. From the Senate : William Agnew, of Cuyahoga County. Wallace W. Bellew, of Hamilton County. Thomas M. Berry, of Allen County. John E. Holden, of Warren County. Frank C. Parrett, of Clinton County. Frank E. Whittemore, of Summit County. From the House: Rui)ert R. Beetham, of Harrison County. R. M. Billingslea, of Butler County. Milton Qark, of Warren County. Edward *J. Hopple, of Cuyahoga County. Huston T. Robins, of Ross County. Francis M. Thompson, of Franklin County. The committee met on January 22, 1919, and organized by electing Senator Frank C. Parrett Chairman and Francis M. Thompson secretary. Professor Clarence D. Laylin of Ohio State University and Hon. L. D. Johnson of the Columbus bar were retained as counsel to the committee. Professor H. L. Lutz of Oberlin College was later called in as economic advisor. Miss Minnie Rogers was employed as stenographer to the committee. A vast amount of time was spent during the first session of the general assembly in conducting hearings and discussing financial mat- ters with the large number of persons who appeared before the com- mittee. Many of these appeared in their individual capacity while a considerable number spoke also as the representatives of various organ- izations. The following partial list of the organizations which were thus represented will indicate the great variety of viewpoints which were given expression before the committee in this way. The Chambers of Commerce of Cincinnati, Cleveland, and various other cities. The Qeveland Bankers' Committee on Taxation. The Geveland Association of Building Owners and Managers. The Farmers Defense League. The Conty Auditors' Association. The Ohio Association of Real Estate Boards. The Ohio Library Association. The Ohio State Automobile Association. The Ohio State Tax Commissicm. The Ohio State Grange. The Ohio Taxpayers League. The Taxpayers Association of Hamilton County. Various Boards of Education, Chambers of Commerce, Financial Directors and cities and Superintendents of Schools were also heard. In the preparation of each measure the committee has given care- ful attention to the best developments of other states. Those persons who have been especially qualified to assist with the preparation of the various measures undertaken by the committee have been invited to conference when the respective drafts were in preparation. We feel, thetrefore, that we have had the benefit and advantage of a large amount of expert opinion and advice from these many sources, and we advance our program with the greater confidence because of this valuable as- sistance in its formulation. After the adjournment of the first session of the assembly a sub- committee was appointed to continue the study of the problems before the committee and with instructions to prepare first drafts of bills for the consideration of the \vhole committee. The members appointed to the subcommittee were : Chairman, Frank C. Parrett. Senator William Agnew. Mr. Huston T. Robins and Mr. Francis W. Thompson. The sub-conmiittee has held frequent sittings since the latter part 01 the summer, ^and after its work had been practically completed the entire committee was called in conference upon the measures prepared. These bills come now to the general assembly as the result of the whole com- mittee's deliberations. In this report we have undertaken first to outline the general financial condition of the state and its subdivisions. In Chapter III we have dis- cussed certain features of the present system of raising revenue, giving special attention to those features which are involved in the recommenda- tions which we are herewith presenting. In our final chapter these recommendations are discussed briefly and the committee's drafts of the proposed bills, together with a report on the operation of state income taxes, are given in an appendix. CHAPTER 11. The Fmnncial Sitmtioii. W hen the 83rd General Assembly of Ohio convened in January, 1919* it was generally conceded that the proWems of finance and taxation were among the most .important that were to occupy its attention. These problems had been forced so prominently into the foreground by a chain of sequences that extended far back into Ohio's financial history. It is not necessary to the plan of this report to analyze in detail the back- ground of the difficulties which had arisen, for that would lead us into a general discussion of the vast problem of financial control and adminis- tration, a field which really lies outside the jurisdiction of the present committee. It is sufficient here simply to point out that a final solution for the complex and extensive problems of public finance may be found only, if ever, when all phases of these problems are considered in their proper relation. A consideration of revenue problems alone is not suf- ficient for the proper solution of the financial puzzle; the control of expenditures and the proper correlation of outgo and income are equally essential. In other words, the whole problem. of budgetary development is involved in any final settlement. In our judgment the whole question of a general and efficient budgetary system is of such paramount im- portance that we commend it in all earnestness to the attention of the General Assembly. Genuine and effective economy in the public business can only be assured by the most careful consideration of the means by which proper control over both expenditures and revenues can be set up. We have been duly appreciative of the meaning and scope of this large task of financial reorganization. The present committee was cre- ated, however not for the purpose of studying the broader problems here mvolyed, but rather with a view to the consideration of one angle only of this general problem, namely, the improvement of the revenue laws of the state; and such suggestions bearing upon other angles of the prob- lem as may appear in this report or as may be found in the measures herewith recommended are included only because of their connection with the main work of the committee. It has been our desire, nevertheless, to correlate our own work with any that may hereafter be done for the future improvement of the financial structure of the state, and we have therefore earnestly sought to prepare our constructive proposals ia such 8 9 a manner as will make them worthy of permanent incorporation into a more general program of financial reform. The members of the General Assembly will readily recall the financial situation in the state at the time the session convened. The state treasury was believed to be on the verge of a serious shortage; a number of municipalities and school districts were facing bankruptcy, and in some instances actual defaulting of interest and salary payments had occurred. These conditions became worse as the session advanced and. with more thorough discussion of the situation by the committee it became increasingly evident that two lines of improvement must be pur- sued. The first was the immediate enactment of temporary relief meas- ures, and the second was the development of more permanent plans for the prevention of similar conditions in the future. The plans for tempo- rary relief were in time agreed upon and appropriate legislation enacted. Under these laws many localities have proceeded to take advantage of the special measures authorized and it is to be presumed that in most instances something adequate temporary relief has been secured. Your committee therefore has partici])ated in the two-fold task of formu- lating the preliminary legislation and of presenting, after more extended study, other measures from which more adequate and lasting results might be expected. A legislative recess until December ist was taken in order to allow the committee the time necessary for this work. Since the form which the committee's recommendations might take would naturally depend upon the constitutional provisions relating to taxation, the date for the opening of the adjourned session was arranged to permit the classification amendment to be voted upon by the people. It will be recalled that when the legislature convened the status of the constitutional provisions relating to taxation was in some doubt. At the electicm of 1918 the people had voted approval of two amendments to Article XII, Section 2 of the Constitution, relating respectively to the classification of property for taxation and the exemption of mort- gages. The question of the consistency of these provisions had been raised, and until an answer had been given by the Supreme Comt it was of course impossible to go forward confidently with tax legislation. The Court's decision against the classification amendment left the whole matter of popular policy in confusion and in order to secure a final expression of the public will it was agreed to re-submit the classification proposal at the next regular election. In the mean time the committee proceeded with such legislative measures as were already clearly author- ized by the constitution, inchuHng the inheritance tax, the income tax and the graduated automobile license tax. The inheritance tax was enacted before the session adjourned because of the necessity of pro- viding at the earliest possible moment a revenue resource which would lO approximately replace the liquor license tax. The remainder of the committee's program is submitted herewith. The classification amend- ment was decisively defeated and we have interpreted this vote to mean that in so far as a property tax is levied in Ohio it shall be levied by a uniform rule. The proposed bills which fonn an appendix to this report have been adapted as nearly as may be, accordingly, to the general requirements of the constitutional rule of uniform taxation and in the comments upon these measures which occur later will be found some explanation of the features in which such adaption has been undertaken. The problems to which the committee has directed its attention have been revenue problems. As indicated above, we have not attempted to meet the demand for larger revenues by an inquiry into the methods of spending those revenues already received, nor by attempting to pass upon the propriety^ of the purposes for which any administrative unit has been spending its income. From every quarter has been coming the pressure for greater revenue resources and our task has been to provide these larger resources. The intensity of the need has not been exactly meas- ured, although some data have been compiled which show the volume and the growth of state and local expenditures. These data were useful in reaching a decision upon the important question of the number and the scope of the new revenue proposals to be offered. An effort has also been made to appreciate the effect of each change suggested upon the general revenue situation in order that a proper balance aong the several parts might be maintained. The importance of this consideration will be clear from an illuus- tration. The principal source of local revenue is the direct tax on property. It has been decided that the uniform rule shall be retained and that all property shall be taxed at its full value in money. Accord- ingly,^ we have given some attention to the » laws relating to the effective enforcement of the uniform rule. The urgency of other revenue measures for local use, such as the income tax, will depend upon the effectiveness of these provisions. It is impossible to forecast with any exactness the yield of a more strictly enforced general property tax, but this much is clear from the experience of other states — as long as the uniform rule remains the income tax must be regarded as a minor and auxiliary revenue resource rather than as a major feature of the tax system. Its yield, therefore, will undoubtedly be less under such a view of its proper position and use. But another angle of the problem arises. The constitutional provi- sion which authorizes income and inheritance taxes requires that at least 50% of the proceeds of such taxes be returned to the municipal corpora- tions and townships in which the taxes originated. What shall be done with the other 50%? All or any part of it may either be returned II locally or retained by the state. A proper settlement of this question involves a consideration of the relative needs of the state and the local districts, and raises numerous questions of general policy as to the finan- cial responsibility for the performance of public functions. If the state retains it, how does this affect the state's revenue in comparison with state needs? * The addition of even a moderate revenue from such a source to the present income of the state forces a consideration of many problems which are not apparent at first thought in the simple question of the relation of the property and income taxes. We have endeavored constantly to weigh considerations of this sort in working out our recommendations. Almost every other subject with which we have dealt has given rise to similarly far-reaching complications, the only clue to which is be found in the general principle of a properly diversified and properly balanced revenue system. A satisfactory answer to the question of the new revenue resources that must be developed can only be made from a comparison of the present income and needs of the state and its subdivisions. In the effort to ascertain approximately the extent of this need for additional revenues we have considered the financial condition of the state, the municipalities and the schools. The evidence which has come to us from all sources appears to establish conclusively the case for larger revenues, if many important functions of the state and the local governments are not to fail of proper realization. I. The State Finances. The general situation with regard to the state finances is thus set forth by the Auditor of State in an advance copy of his report for 1919: STATEMENT OF ACCOUNTS WiTil ALL STATE FUNL>d FOR EACH FISCAL YEAR FROM 1913 TO 1919 INCLUSIVE. Fiscal Year. Total amount ap- propriated by the General Assembly. All funds. Total disburse- ment durinp the fiscal year. All funds. Total receipts during fiscal year. All funds. Excess of dis- bursements over receipts for fiscal year. All funds. Excess of re- ceipts over dis- bursements for fiscal year. All funds. Total cash bal- ance at end of fiscal year. All funds. 1913 1914 $24,929,7&4 90 29,347,632 38 24,374,544 C9 30,822,544 19 30,515,788 88 39,623,867 05 39,345,420 66 $14,707,624 46 18,345,251 65 11.886,009 06 19,695,912 33 21,293,020 88 22, 827. •29:) 61 25,934,104 33 $15,578,471 60 20,544,539 15 11,541,588 84 19,175,760 29 21,910,626 83 23,695.073 3t 25,476,682 23 $344,420 22 620,142 04 382,394 05 $870,847 14 2,199.287 CO $5,535,698 S3 7,7.34.985 83 7.890.666 96 6,b70,4^ 92 6,48R,02» 87 7,3.')5.507 60 6,898,385 60 1916 1917 1918 870,226 91 467,422 10 *1915 shows seven and one-half months caused by change of end of fiscal year from November 15th to June 80th. NOTE : — The large cash balance at the end of each fiscal year does not represent a surplus — simply a total balance of the several funds. A large portion of the balance m all the funds are obligated for specific purposes. Both receipts and disbursements include the transactions of the rotary fund. 13 The Auditor's comments upon a similar table in his report for 1018 are worth repeating. He said: • "It is gratifying to note that for the first time since 1914 the receipts of tlie Tl f ^fl"^!^"' P*^* ^'^v*^ «^<^eeded the disbursements. This fact is liable to be misleading unless we make proper analysis of the source of the in- creases and determine what state funds are benefited n .h "^^*" abnormal increase of $416,314.70 in the' sale of automobile tags adds nothing to the General Revenue Fund of the state. ^Jhe change of the Liquor License Law, providing that licenses shall be grant^ m May instead of November, caused additional revenue of $258,050.00 to be collected m the fiscal year 1918 that under the old law would not have been received by the state until during the fiscal year 1919. h H remarkable increase in the grand dupUcate* of the state last year of eight hundred and fifty milhon dollars by reason of the self-listing plan ^d abno!^ war valuations augmented the receipts of the Highway, University and Cbn^ bchool Funds for which the state makes a direct tax levy of 46-100 of a miU This increase 01 state revenue from direct taxation the past year amoimted to $282;003 61 th.n ^^'T.u'^ '^^^ increased more rapidly ban usual the past year, but these additions, with the exception of a part ofthe Liquor Licence Law increases, do not go into the General Revenue Fund f which the General Assembly makes all appropriations for the running expenses of the state government. * c*F««c» ox "The General Assembly, when it ;iieets in January, 1919. ^iU have as the rundV":r'''^H '""V '^'^ '^-^^^ ^^^^^ appr^pnatio; of tS ne<^^ funds, to conduct the state government for the biennium beginning July 11919 and ending June 30, 1.21. If the General Assembly realizes!^ it 2^ That ^ this crisis of all the ages, prudence is a patriotic duty, it wiU pay no attention to any book balances that the records of the auditor's and treasurer's offices may show but confine its appropriations strictly within the limits of the estimated revenues for each year that will come into the state treasury as follows • 1920, -^$S80%0.'^'' ^'^"^ ^"^^ ^' *^ 30. 1921, -SSoO.''''' '"""'"^ -^"^^ ^' *° ^' "I warn the General Assembly not to appropriate in excess of these estimates unless by legislation it provides additional revenues that wUl accrue to the funds' from which appropriations in excess of estimated receipts are made and be reason- ably certain that such new revenues will meet all increases. The constitution of the state. Art. XII, Sec. 4, says: 'The General Assembly shall provide for raisin* revenue sufficient to defray the expenses of the state,-for each year.' It is uncofl^ stitutional to make appropriations in excess of estimated receipts." The warning conveyed in the last paragraph quoted is of especial significance when we compare columns I and 3 of the above table. We find that there has been regularly appropriated an ^ount far in excess of the actual receipts for the fiscal year, which means that the state has been able to keep afloat financially only by reason of the fact that a 13 large volume of appropriations has lapsed each year. The margin of, appropriations over disbursements was unusually wide in 1918 because of the interruption to normal outlays occasioned by the war. It is natural and even- necessary that these losses be made good by greater activity with the return of peace and the auditor's warning of the danger of relying on the continued lapsing of so large a volume of apjM-opria- tiiMis is very timely. In addition to the estimates for the present biennium which are contained in the auditor's report, above quoted, we have been furnished with- some estimates which were prepared under the direction of the governor's office. Four estimates of the receipts were made, on the following bases : f he average increase in receipts for the five full fiscal years 1913-1919 (omitting the nine mcmths from Noveinber 15, 1914, to June 30, 1915) ; the average increase for the four years 1915-1919; the average increase for the three years 1915-1918; and an estimated in- crease in revenues on the basis of the gain in corporation tax receipts in the first four months of the fiscal year 1919-20 over the receipts for the corresponding months of the preceding fiscal year. The estimates of expenditures were the same throughout. A tabulation of these figures is presented in Table II. TABLE II — ESTIMATED RECEIPTS AND DISBURSEMENTS OF THE STATE GOVERNMENT FOR THE BIENNIUM, 1919-21. /. Expenditures. 1919-21 Appropriation Bill $52,973,494 Ifi Sundry Bill (est.) - 450,000 00 Institution for feeble minded 650,000 00 * Miscellaneous special bills (est.). 500,000 00 Total already voted $54,573,494 16 AddiHonai Appropriations Required (estimated) Board of Administration: 1 Institution for feeble minded..... $800,000 00 1 Institution for insane.. 800,000 00 Extra cottages for feeble minded 592,000 00 Extra land, hospital for insane 83,000 00 Increased operating expenses 1,548,000 00 Increase for institution engineers 70,000 00 Increase for bindery workers 8,000 00 Increase for Universities 600,000 00 Increase for other State Services.......... 3,500,000 00 Increase in operating and maintenance ex- pense for Ohio Sute University 180,000 00 Total additional appropriations $8,181,000 00 14 Unlapscd appropriations *n 4dq tap ro ^ "h«»ated lapses of 4,0.«),000 00 7,443.606 58 Grand .oul including ^tima.es ♦70.198.100 68 //. Receipts (a) On the basis of increase in the average total receipts for the full fiscal years 1913-1919: ^ Balance July 1, 1919 $6 898 m«i 'Ui Receipts .... ^*^*X?: ^ T , 50.622.826 87 Inhentance tax (estimated) 3,000; 000 00 Deficit for biennitim ' I W,521,212 37 Deficit for each year 9,676,888 32 4,838,444 16 (b) On the basis of increase in the average total receipts for the four full fiscal years 1915-1919: x„. V ; 53,707,062 99 Inhentance tax (estimated) 3,000,000 00 Deficit for biennium " 103,006,348 49 Deficit for each year 6,591,752 20 ' 3,295,876 10 (c) On basis- of the increase in the average receipts from corporation taxes during past three years, 1916-18, and exclud- ing liquor tax: rSu t6.898.385 50 Inhentance. ;-(esti;„a.d)\\\\-:::::: ' 158,717,385 50 Total receipts . . . Deficit for biennium 1^8,717,385 50 Deficit for each vear 11,480,715 19 ' 5,740,367 59 (d) On basis of increase in corporation taxes at same rate as the increase for the first four months of fiscal year 1919"^^' ^ ^^^^ rSs'"^'''^''' 1^,898,385 50 Inheritance tax (estimated):.:::::: :: tSjw S Deficit for biennium " — W.434,333 41 Deficit for each year 5,763,767 18 ^ • 2,881,883 64 IS A saving will be effected to the general revenue fund of the dif- ference between the receipts from the common school, university and sinking fund levies, and the amounts paid out for sinking funds and m aid of common schools. On the 1918 figures this saving would be ap- proximately $1,700,000. Deducting this amount from the above deficits, the annual deficit would be: . Under (a) $3,138,144 16 " (b) 1,595,876 10 « (c) 4,040,357 59, and « (d) 1,181,883 64 The additional appropriations for which estimates are presented do not include an allowance for the building program of the various state supported universities. Figures have been compiled which indi- cate that the student enrollment of these institutions will increase rapidly during the next ten years, and it is calculated that an adequate program of building for the purpose of accomodating this increase in enrollment would require for all of the state universities, at least $1,000,000 annu- ally during the ten-year period. Some items in the list of estimated additional expenditures deserve explanation. These items were supplied to the committee as constituting a part of the enlarged program of public activities upon which the state had embarked, or should embark. By including them in the above table we are not to be understood as giving them unqualified endorse- ment, nor are we even undertaking to pass upon the general questions of state policy which are here involved. We submit them as the esti- mates which have been offered to show the scope of the financial pro- gram which appears to confront the state, and our calculations here are based upon the assumption that such a program may be expected to gain general support. The additional outlays for the care of feeble-minded are suggested by the evidence which is readily available concerning the number of such persons now at large in the state. It is obvious that proper provi- sion for the segregation and care of these wards of the state is a public obligation which the state of Ohio has not adequately discharged in the past. Of the 10,000 feeble-minded persons in the state, only about 3,000 will be provided for in the above proposed institutions, when completed. The increased operating expenses of the board of administration repre- sent in part the increased costs of operation due to wage and salary advances now in effect, and in part contemplated expansion. The latter portion comprises some $309,000 af the total. The proposed increases i6 for the universities and the other state services are for the porpoM of making salary advances, and for university operating expetSeT^ basJ^r.^T**' ^'^^ ^°«P^' fi^^t three being the yield of the corporation tax. The basis for this expected increase prfXT t? °' '''' ^"^^'^^ p--^ gS::? providing for the organization of corporations with no par value stocks If we consider the experience of the past few yea« wrSnd Ae dSt anging from $x X81.883 to $4,040,357. the difference being accouTted for by the lo^ m»rece,pts in 1916 as compared with 1914 and 1917. The period preceding 1919, but this calculatio.i included the return from the K aTTt'Ts '"A' ^^'■"•^''^ '•^^ ^'^'^ °f this tax duded, as .t W.II be m the future, and the estimated deficit rises £0 $2,881 - 883 even after the mclusion of the yield of the new inheritance L the Jass'idv torLt::' th, biennium is estimated by Tax Commissi^ Cassidy to be $3,000,000. On the other hand, it seems doubtful if the as- ««npt,on whKdi is made in the fourth estimate can be sustained The T t^T*^' "•°7%.. rests on a comparison of the four months in L S7u \ "^'^ corresponding months of 1918. that is to say, with the four months of our most strenuous war effort and of our most r.gorous restriction on business activity not comiected with the war. For th,s reason the margin of increase thus shown appears to be m excess of that which might reasonably be expected over a two-vea^ penod of post-war development. Furthermore, there is no certaintv whatever ti«t the new capital stock law will prove ultimately as pop2^ T- T^'^u The estimated receipts are probably h.gher than the actual receipts will prove to be. On the annual deficit during the next two years of from $1,000,000 to $4000- 000. on the basis of the yield which may reasonably be expected from the ZZZ^^l considering at all the building requirements of the universities. ^ This situation makes it worth while to analyze in somewhat greater detad the pnncipal sources of the state revenues. Such an analysis for 01. mTfi '913-1918. is presented in the following table. In 1915-1916 the fiscal year was changed from Nov. 15th to June 30th and figures for the nme month period are omitted. J"'" ana TABLE III — ANALYSIS OF THE SOURC£S|iM|AT£ REVENUE, 1913-1918. Source 1913 1914 1916 1917 1918 Capital stock tax on do- mestic corpora- $1,661,123 358,296 3,093,740 2,508,192 1,295,660 134, 8»4. $1,837,938 478,584 1,639,053 1,451,001 112,753 $2,102,597 597,796 1,852,828 1,483,825 186,444 $2,198,338 580,088 771 528 1,609,913 1,721,610 331,698 $2,582,702 564,621 4 G94 286 1,768,644 1,869,655 287,549 Fees from for- eign corpora- Excise taxes on gross Ficceipts . Liquor licenses . Fees from insur- ance companies Collateral inher- itance tax $9,051,911 $396,504 2,878,365 $8,867,594 $990,578 6,252,191 $9,527,275 $1,201,259 3,238,689 $10,193,184 $1,745,046 3,351,074 $11,762,457 $2,160,370 3,633,077 Automobile Dept. State Levies for Sinking Fund, Schools and Highways Total taxes... All other receipts. $12,226,780 3,351,691 $16,110,363 4,430,173 $18. 067, 223 5,108,877 $15,280,304 5,621,672 $17,555,904 6,139,169 Grand Totals. j$15, 578, 471 ^,544,439 $19,176, 100* $20,910,976 $23,695,073 ♦As in Auditor's Report, 1916, p. 67. This table was compiled from the material published in the annual reports of the state auditor. The principal tax revenues are shown above and the first total represents the yield of these taxes. The collections of the automobile department and the levies for irreducible debt, universi- ties, cemg. The percentage mcreases show that the older governmental ac- tivities, such as the general administration and the protection to life and property, have expanded least rapidly of all the forms of public outlay here shown. The greatest relative increases have occurred in those forms of public activity which now count much in the promotion of the general well being^. such as health conservation, sanitation, educa- tion, improved highways, charitable and hospital relief and recreation. Enforced retrenchment in public outlays now means the reduction of these beneficent social activities and an inevitable retrogression toward a lower plane of civilization. ^ Although some evidence of waste has been presented to the com- mittee, we cannot consider this a sufficient explanation of the problem- nor IS It an adequate solution of the revenue difficulties now confronting Ohio cities to advise them to live within their incomes. Waste and ex travagance are always bad and should be vigorously opposed every where; but it would be a far easier task even for the cities to live within *Notc-The last item, "general," is not separately reported in 1909. their incomes if the incomes were larger. These increases in municipal outlays have come notwithstanding all of the resistance offered by the taxpayers, the restrictions on the tax levies, and the pruning by budget officials. Some waste there has been, in spite of all efiforts against it, but a democratic government is quite likely to be wasteful. There has doubtless been some expansion of the functions of municipal govern- ment, although the census classification does not permit detailed com- parisons. Without question too there has been an expansion of the ad- ministrative organization. The aggregate population of the nine cities increased from 1,529,345 in 1909 to an estimated total of 1,978,339 in 1918, while the aggregate area increased from 117,789 acres to 170,513 acres in the same time. Without any change at all in the character of the public functions performed, the physical growth of these cities would have caused an increase in the cost of government, and the tasks 01 supplying these larger areas with the services of government probably meant a relatively greater cost as the area and the population increased. Finally, the figures given above and similar data which might have been compiled, reflect the general advance in prices, an advance which has affected the purchasing power of public as well as private incomes. In view of these facts we cannot escape the conclusion that much of the recent growth of expenditures has been inevitable, and that we are destined to see a continuation of this growth. It is futile to oppose it, for the maintenance of organized social life must and will go on. We ought by all means to provide a sufficient volume of revenue resources to insure that the advantages ^ind benefits of modern govern- ment shall be paid for as they are received and enjoyed, and to take such measures as are pojpsiblie to prevent an undue proportion of their cost being shifted to future generations, b. Schools. I. The Common School System. "Religion, Morality and Knowledge being necessary to good govern- ments, schools and the means of .education shall forever be encouraged." Ordinance of 1787, Art. III. It has always been a part of Ohio's tradition, a part of which we are often most proud, that in the first document under which an organ- ized government was set over the territory from a part of which the state was later formed, such an estimate had been placed upon the value of education as a fundamental necessity of good government. The noble sentiment expressed in the Ordinance of 1787 is familiar to every citizen for it has been perpetuated in the constitution from the very beginnini^ of the commonwealth. The constitution of 185 1 reaffirmed this 24 high principle and there was written into that document as a mandate to the general assembly, for the realization of this ideal, the following language: "The general assembly shall make such provision, by taxation on otherwise, as, with the income arisingr from tfie school trust fund, wiU secure a thorough and efficient system of common schools throughout the state ♦ ♦ ***. It becomes the task of this committee, in the course of its study of the financial condition of the state's school system, to inquire into the degree to which this ideal is being realized. We are not attempting, as a result of this inquiry, to propose a re-organization of the school system, for this would carry us beyond our proper jurisdiction as a com- mittee on taxation. We are very glad to be able to say that we do not believe a general reorganization is called for, in order to secure full compliance with the constitutional ideal of a thorough and efficient com- mon school system throughout the state. In many respects the citizens of Ohio have a right to be proud of their schools. It is a matter of common knowledge, however, that there are many points at which im- provement is greatly needed if our schools are to continue to deserve our pride. We shall confine our discussion here to the financial aspects of the school problem, for this is the key to the situation. Financial weak- ness is the cause of so many of the defects which competent observers now find in our school system that neither the committee nor the general assembly may longer neglect it. Many persons who are expertly familiar with the Ohio schools have appeared before the committee and manv others have contributed to our knowledge on this subject. We are summarizing here the case for further school support as it has been presented to us through these various and diverse channels. In this part of our discussion we are referring to the grade and high schools as the state common school system, as distinguished from the institutions of higher learning which are also a part of the state educational system. The first fact to be emphasized is that the cost of school main- tenance and operation has been steadily and rapidly increasing. Con- vincing evidence on this point has already been presented. The total local taxes for school purposes rose from $25,986,162 in 1913 to $44,668,- 675 in 1918, or 71.93%. The total cost of education in the nine largest cities in the state increased 62.7% from 1909 to 1918. And it is as true of the school as of other local administrative units — as shown by Table VI above — that the amounts required, in the judgment of those re- sponsible for their management, were considerably ijx ^cess of what could be allowed under existing restrictive laws. The reasons for this rapid increase in the cost of education are obvious enough. To begin with, the total enrollment in both and grade and high schools has been increasing steadily. The total enrollment in the former increased 14 3% from 1890 to 1918 and in the latter 266.9% in the same time. As in the case of the cities these mere physical increases have inv(rfved a steadily mounting charge for building and other equipment, and in operating expense. The especially rapid in- crease in the high school enrollment during this period is particularly significant in this connection, for it has forced school districts to pro- vide a large number of high school buildings, which differ materially from the grade buildings in the type of construction and character of equipment required. It is a fact, too, that the growth of high school enrollment has carried many districts past the capacity of thdr original buildings within the past ten years, and a very large vcdtune of new school building construction has thus been forced upon them. We have just been passing through the turning point of the original building capacity and in the new construction the effort has been made to antici- pate the future requirements for twenty years or so, in many instances, but this all adds to the present outlays for interest and sinking funds, as well as for maintenance and operation. In many other cases, of course, the new buildings were replacements which were necessary to care for the existing school enrollment. Another reason for the rising cost of education has been the ever broadening curriculimi of the schools and especially of the high schools. As new subjects are added, such as agriculture and the physical science$ upon which scientific agriculture rests, physical education, and other new stibjects, new and specialized equipment and a more highly special- ized teaching staff become necessary. This expansion involves increased cost, finally, at another point, namely, the salaries paid to teachers. It has always been difficult to provide an adequate supply of properly qualified teachers, and with rapidly rising, living costs these difficulties have been multiplied enor- mously. No other group of workers have stayed by tiieir jobs in the if ace of rising living costs more loyally and patriotically than the school teachers ; and it is hard to find a group of workers in the community of whom greater advantage has been taken, as a reward for their unselfish- ness. It is absolutely essential that the standards of compensation in teaching be advanced, even if this does mean higher school expenses, for in no other way can the school protect themselves against the com- petition of other and better-paid fields of emplojrment. Here again we seem to hear some saying that the schools ought to be required to live within their incomes and that the garment should be I I cut to fit the cloth. But we must remind all persons so minded that in a peculiarly vital and significant sense the educational garment may not be so rigorously tailored. Our educational standards liave been set for us — the pattern of this particular garment was laid out in 1787 — it is that full measure of education, thorough and efficient, reaching out to every part of the state and to every citizen of the state, which will promote good government and the safety and security of the state. A mean and stingy school financial policy will produce a larger crop of citizens who are not intellectually capable of the duties of citizenship and who are, in consequence, a menace to the security of all. It is a simple matter to ascertain whether proper funds are now available, in all parts of the state, to provide and maintain that measure of educational facihties which in all fairness must be regarded as the minimum, and in so doing it will be possible to determine whether the state as a whole is adequately facing and discharging its responsibility for the proper advancement of the school system. The amazing revela- tions of the literacy tests applied to the men called under the selective draft are, in a way, sufficient to establish the case. Of all the men examined, 700,000 in the nation at large were illiterate. General Glenn writes as follows concerning the results of the army tests as applied to Ohio men: "In Ohio 41.2% were illiterate according to this test, 28% of these being negroes and the balance, or IS.2%, being white; and in Ross county I know that there were 1100 men rejected for this cause." This means that a considerable proportion of Ohio's citizens who went forth at their country's call to fight for democracy had been deprived of the most elemental privilege which our organic law guaran- tees to every citizen. It is our especial concern, in this report, to examine the state's share of responsibility for this condition, in order to determine what shall be the state's obligation in its correction. Our policy of school manage- ment has been a curiously divided one in the past. The chief sources df revenue for school purposes have been local, and we have not hesi- tated to permit, even to encourage, a vicious gerrymandering of school districts with no regard whatever to tlie relations of needs and resources in the great multitude and variety of districts thus set up. The state has contributed for local use a sum equal to $2.00 for each enumerated youth of school age, and, more recently, an additional amount approxi- mately equal to 50% of the salaries of -the district and county super- intendents. This school fund, which is the extent of the state's con- tribution to common school support, is distributed to all districts with- out regard to the needs of the several districts. In 1906 the policy of 27 additional aid to so-called weak school districts was inaugurated. This aid has been meager enough, but the conditions which were to exist in a district before such aid could be obtained were so hard as to exclude many localities the scliools of which were really in serious need of addi- tional support in order to operate properly. The state has never pur- sued an effective policy of state support of schools, for the aggregate disbursements under both of these funds has never exceeded $3,000,000. The policy of more or less complete local support of schools is in reality a very unfair method of distributing the cost of modem educa- tion. The relative cost of a certain standard of education is just as great in the poor or weak district as it is in the strong one. All dis- tricts are required to .bring their children up to this minimum standard, because these children, all together, from the weak and the prosperous districts, shall one day be the state. Men are no longer bound for life to the township of their birth, and with the mobility of modem life the children from the hill counties join the workers and the electorate of the large cities. The responsibility for a proper educational mini- mum for all citizens cannot longer be avoided by tlic stale, for even with much higher levies for school purposes than arc now possible under the law, it would be very difficult in some districts to provide the necessary educational equijMnent and teaching force. These districts are simply too poor to provide, unassisted, that educational minimum which all citizens of the state should possess. The situation in the weak school districts illustrates the dangers ind the injustice of our present ])olicv of excessive reliance upon local, revenues for school support. Sections 7595-7597 of the General Code define a weak school district as one which is unable to pay its teachers a salary of $60 per month* for eight months, after the maximum legal school levy has been made, three-fourths of which shall have been as- signed to the tuition fund. No such district shall be entitled to aid un- less the number of pupils of school age in the district is at least twenty times the number of teachers employed therein. :rhese are pitifully low standards, but in 1918 there were 245 sclioo: districts in 27 counties which could not comply with them and which received state aid. These districts, with three exceptions, would all li" south of a line drawn from New Philadelphia through Columbus to Batavia In many of these districts levies of from six to eleven mills had been made and yet state aid proved necessary. In some cases this means that the fauU was with the district boundary lines, a defect which the general assembly has had abundant opportunity in recent years to correct. But in many other instances these facts emphasize the defects of our policy of local responsibility for the great bulk of school cost. 28 Furthermore, there are many other school districts in the state whicli have been seriously handicapped financially, but which were beyond the absurdly low minima set up in section 7595. This section preserves the salary standards of a generation age, and many districts which in reality are little stronger than the state aid districts have had to pay more than $60 or get no teachers. Even m the case of some of the larger cities, where living costs are higher, the proportion of the school budget that has necessarily been spent on salaries, in order to have teachers at all, has reduced the amounts available for the building program to such a pomt that very unsanitary and unwholesome arrangements have been made for a part of the school population. Basement rooms, portable rooms, overcrowded rooms, inadequate heating, lighting and toilet facil- ities—shortcomings of these and other sorts have been freely cited to us by those who have appeared in behalf of the school system. FinaUy, in all districts the schools have suffered especially under the burdensome restrictions imposed by the tax limit law of igii. We have discussed below the very obvious defects of this measure but we must point out here one further significant aspect of it. The stale has not only set up the policy that the resources of the district shall bear practically the whole co.unty certificates. Agriculture, physical training and other specialized subjects are also prescribed. In other words the state has been steadily adding to the cost of education by this advance in the level of its standards but it has been restricting, pari passu, the financial ability of the school districts. Between the upper and nether millstones the school system is being crushed. The remedy is simple enough. We do not deprecate the advance in the standards of instruction and equipment. On the other hand we wel- come them as the signs of progress. But as these standards advance it must be made ]>ossible for the school administrative authorities to keep pace with them in securing larger funds for school maintenance and operation. In some instances this may be done by the reorganization ot school district lines ; in others a greater freedom to authorize additional levies for school purposes would be desirable and would be gladly wel- comed. We have recommended the extension of the policy of S. B. 187 by incorporating it in our school relief bill. But in addition to these measures there must be for all school districts a greater recognition of the state's obligation for the proper support of education. The obliga- tions of citizenship are statewide and the training for citizenship must be statewide. Our pian of school relief contemplates the recognition of the state's share in this responsibility by the provision for a levy, uniform throughout the state, which shall provide a fund for the better support of common schools. The details of this plan are presented below. 2. The State Universities. The higher institutions of learning are suffering from the general financial difficulties also, though the reasons, obviously, are not at all points the same as in the case of the common schools. The principal sources of university revenues have been the legislative appropriations, supplemented by such income as may have been received from land grants and other sources. Nominal fees are charged to students but it has always been a part of our university policy that the benefits ot higher education shall be afforded 10 the citizens of the state without tuition charge. In view of the condition of the state finances it may be proper to consider a change in this policy but we are not now recom- mending it. The university needs are threefold — First, higher salaries for the teaching and administrative personnel, an absolute necessity unless we are content to see all of the best men of our state university faculties mi- grating to private employment or to other institutions. The very alarming exodus from the Ohio State University last summer indicates that this possibility is always real when salaries are inadequate, and a moment's reflection will convince any thinking person that such a condition pro- 30 duces a frame of mind that is disastrous to morale and efficiency. The second need is for increased provision for operation and maintenance. This requirement is only natural in *view of the general increase in operating and maintenance costs everywhere. The state has a consider- able capital investment in its university plants and the best educational interests of the state, as well as the dictates of a selfish business policy, require that proper provision be made for the maintenance and operation of these plants. The third need is the capacity for expansion. Esti- mates have been submitted to the committee based on population and school enrollment data, to show that by 1929-30 Ohio colleges and universities will be obliged to provide for 37,000 students. Of this number it is estimated that from 13,000 to 16,000, or 35% to 43%, will be enrolled in state institutions. Many of the privately endowed colleges and universities are already near the limits of their enrollment capacity and they cannot raise these limits materially without very great increases in endowment. The state must, therefore, prepare to assume the steadily increasing burden of providing higher education to all who are fitted for it and ambitious to obtain it. The rapid increase in high school enroll- ment is the best confirmation of these calculations, and we are urging that a broad, generous view be taken of the educational future of the state. Various estimates of the outlays required have been presented. The following summary of needs for all state-supported institutions was pre- pared for the committee by President O. M. Hughes, of Miami Uni- versity : TABLE VIII. PROBABLE BUDGET OF HIGHER EDUCATION IN OHIO DURING THE NEXT TEN YEARS. ■ Personal Sen/ice and Maintenance Buildings Total. $115,741 $2,356,134 1,000,000 4,375,000 1,000,000 4,625,000 1,000,000 4,875,000 1,000,000 5,125,000 1,000,000 5,375,000 1,000,000 5,625,000 1,000,000 6,875,000 1,000,000 6,125,000 1,000,000 6,375,000 1,000,000 6,625,000 President Hughes adds, in comnient upon the figures here presented: ^The above figures seem large. They are. But so is OHIO ! So are the sums onr states and communities are called upon to expend year 1^19-20 $2,240,393 1920- 21 3.375,000 1921- 22 3,625,000 1922- 23 3,875,000 1923- 24 4,1-36,000 1934-25 4,375,000 1925- 20 4,625,000 1926- 27 4,875,000 1927- 28 5,125,000 1928- 29 5,375,000 1929- 30 5,625,000 after year, to pay the price of inefficiency, tuitrained leadership, and ari uiiinfornied electorate. Ohio in 1929-30 should have a population of six million people. This enormous outlay for education will represent almost exactly one dollar per capita ! Study the tables and estimates in detail, and it is apparent that these figures are not extravagant. They are extremely conservative. They represent the least Ohio can do and main- tain her proper position in the educational activities of the nation. Our people believe in higher education ; they certify to that by the way they are taking advantage of it. Are they not willing to pay for what they want ?" Officials of Ohio State University have submitted a projected budget for the next five years which calls for outlays for personal service and maintenance only, rising from $1432,030 in 1919-20 to $2,635,416 in 1924-25. This does not take into account the building program, to which reference is made above. The principal suggestion which has been offered by the university officials for providing these increased funds is that some specified or designated sources of income, or amounts of income, be set aside for university use. The necessity of depending absolutely upon the ap- propriations made biennially necessarily compels a short-run view of their problems and bars that careful long-range elaboration of policy which is conducive to^true economy of management. III. The Increase of Local Debts. The most striking, and in some ways the most convincing evidence of the hiatus between local revenues and expenditures is found in the very rapid increase of local debts in recent years. The aggr^te local debt for all purposes since* 1900 as reported by the auditor of state is shown in the following table: TABLE IX. TOTAL LOCAL DEBT FOR CERTAIN YEARS SINCE 1900. Year. Total Local Debt. 1900 $96,193,513 1910 . 187,574,322 1915 -. 356,028.968 1918 434,047,798 This rate of increase is indeed startling and with all due allow- ance for the misleading character of the figures the local debt situation may be regarded as critical. We have pursued a policy of comparative indifference to the rate of debt creation, but of rigid restriction upon the ability of a community to pay off its debts, and it is small wonder if the public credit of such a community is impaired in the outside financial i2 toitcrs. to the extent that public credit is thus impaired this condi tion would be reflected in a discrimination against its bonds which would increase the burden on the local taxpayers. It is not to be understood, however, that the whole of the above local debt constitutes a burden upon the taxpayers, and in this respect we have characterized the figures as misleading. The real extent of the debt burden would be better shown if a distinction were made be- tween the debt which is self-sustaining and that which is not. That is, we should be able to separate the bonds issued by self-sustaining public utilities and on account of special improvements to property, from those which constitute a direct charge against the general tax revenues. Further, a correct debt analysis would show the amount of bcmds which had been issued for the purpose of funding floating deficits and for refunding earlier issues. The latter would be a burden on the taxpayers of course, unless they were refunded by a public utility, but we cannot form an accurate judgment of the bond-issuing habits of a community without knowing more of the circumstances than are given us in the above figures, or than is presented by the auditor of state in his discus- sion of the subject of local indebtedness in his annual report for 1917 It is not our purpose to defend the local debt situation; on tiie contrary, we believe the situation to be sufficiently serious to warrant more ef- fective measures being taken to control debt issue and to provide for the reduction of the present volume of outstanding debts. We do be- lieve, however, that a distinction should be set up that will show the difference between self-sustaining and non-self-sustaining debt, and that the true measure of the local debt burden is the pressure of the latter class. We are recommending the submission of a constitutional amend- ment for the control of debt issue, and discussion of the details of this plan is found in chapter IV below. CHAPTER III. Some Features of the Existing Revenue System. A complete analysis of Ohio's present revenue system is unneces- sary in the present connection, and especially so since the committee has not undertaken a general reorganization of that system. It will be of advantage, however, to comment briefly upon certain outstanding features, the selection of which is governed somewhat by the recom- mendations later to be presented. In a certain ^ense these may be said to be the weaker phases of our tax system. At any rate they are the points at which it has appeared to be most obviously of advantage to begin the work of reconstruction. I. Tbe Separation of Revenue Sources. The basis of the Ohio Revenue system is of course the general property tax. During the second half of the 19th century both the state and the local subdivisions drew their main support from this source. The administrative system was decentralized and therefore weak, and such serious inequalities had come to exist in the distribution of the state tax levy on property that when, toward the close of the century, the plan of separating the sources of state and local revenues appeared, it was welcomed as the final solution of all fiscal difficulties and problems. As this plan was worked out in Ohio, the property tax was relegated to the local units and the state direct levy on property was greatly re- duced and finally abandoned as a source of revenue for general state purposes. On the other hand the state built up various other sources of revenue, chief of which have come to be tiie different excise and other taxes on corporations, the inheritance tax, and until recently, the liquor license tax. The principle of separation of revenue sources has gained very general acceptance throughout the state and we readily grant the value of every argument which might be advanced in favor of continuing this policy. We are not prepared at this time to present an exhaustive argument either for or against the plan which has become such an integral part of state policy, and in what follows there is, therefore, no thought of going further than to suggest certain rather obvious considerations which bear on the case. In the present judgment of the committee these considerations point toward a modification of this policy, and in this respect the committee's proposals are perfectly con- 33 34 sistent with earlier acts of the legislature, acts which can only be in- terpreted as an admission of the unsatisfactory operation of the separa- tion plan. The Hite Road Law of 191 3 is a case in point. Our. brief analysis of the state revenues confirms this view of the effects of separa- tion upon the state's finances. The first consideration to be noted is that separation of sources has not solved automatically all of the administrative problems of the assessment and equalization of property. As noted above the diffi- culties earlier encountered in the assessment of property, especially real estate, and its equalization at ten-year intervals for the distribu- tion of the state tax, were so great as to appear impossible of proper solution. But the support of the state government- from indirect taxes has not reheved the state of the task of supervising the assess- ment and equalization of property. After the separation program was in operation the state created a state tax commission and en- dowed it with extensive powers of supervision and control over local assessors, and in one experiment the entire process of local assess- ment was placed under central control. The present legislature has extended the commission's powers in the assessment of real property and the decisive defeat of the fNToposed classification amendment can only be interpretod to meui a popolar willingness to see this adminu- tmnre control atrengtheBed aBd eKtended, especially in the directimi ol secnmg a more substantial asaessment of peraenal property. It appears from this that Ohio has really been obliged to develop precisely the same type of central tax administration that has been developed in those states which have not embraced the policy of separation of sources. It follows, too, that with such administrative development, the effect of local competitive under-valuation and evasion can be quite successr- fttlly neutralized so far as undesirable shifting of tax burdens is con- cerned. The experience of Wisconsin and Massachusetts in distributing equitably a fairly heavy direct state tax is conclusive on this point There need be no hesitation, therefore, over the committee's plan for school relief which is presented below, on such grounds as might have been urged twenty years ago, for we have in the meantime set up adequate administrative machinery for the control of those defects in the state levy. A further point for consideration relates to what may be called, for want of a better name, the fiscal adequacy of the program of sepa- ration, especially from the standpoint of the state revenues. By this we mean to raise the question whether the indirect revenues upon which the state is at present so largely relying are sufl&ciently adequate and elas- tic to permit the state to assume certain obligations which are dearly in 35 the nature of state functions. The analysis of the state revenues which was presented above makes fairly certain a' negative answer to both tests — radequacy and elasticity. Wliile the receipts from the indirect taxes have increased notably in recent years they are not sufficient today to cover the present cost of the state's functions to to permit of an increase of the scale on which the state is now supporting public education and other important activities. It is useless to expect the state will be able to expand its activities or to conduct its present operations on a more ample scale from the existing indirect sources of state revenue. As little may be expected of these resources in the way of elasticity. The yield of the taxes on corporations is a resultant of two factors, the rate and the volume of business, of capital stock or other basis of levy. Frequent adjustments of rates would prove very unsatisfactory to the state as well as to the taxpayers concerned, and if experience in other states is of any significance, it will not always be an easy matter to work out equitable readjustments of this sort. The volume of business or of capital stock is not within the state's power to control, and the yield of such taxes is, in consequence, relatively inelastic. It cannot easily be expanded to permit that broadening of the state's fiscal activities which normal growth and varying conditions often require. In the effort to re- lieve the state of certain evils inherent in the older administrative sys- tem it now appears fairly clear that the sources of state revenue were unduly restricted, while there proved to be no escape from the adminis- trative obligations involved. It does not appear possible to supplement the existing sources of state revenue by other indirect taxes which will give to the state's rev- enues that amplitude and elasticity which are essential to progress. The two taxes to which attention would naturally be turned in this connec- tion are the inheritance and income taxes, but it must be remembered that the constitution expressly provides that at least 50% of the proceeds of these taxes must be returned tathe districts of origin. Further, while a marked increase *may be expected from the inheritance tax as revised by the present general assembly, it must be said that there is a general tendency to over-rate the fiscal possibilities df these taxes. Through a period of years the inheritance tax becomes a fairly dependable revenue producer, but its yield in a given year is highly uncertain and until experience has been accumulated it is impossible to foretell the returns from the present inheritance tax. There is a belief in some quarters that the income tax will not prove notably successful when in^sed in ad- dition to the general property tax, yet this situation confronts us at the present time in the use of the income tax in Ohio. Your committee ur^es, therefore, that the whol^ situation be faced with an open mind 36 and that no pre-conceived or academic preference for the policy of separation be permitted to interfere with any further modifications of that policy which may be rendered necessary in the present emergency. IL Tlie tax limit law. Sections 5649-1 to 5649-6 inclusive contain the provisions for the limitations of tax rates. These sections were originally enacted in 1910 (loi O. L. 430) in connection with the general revaluation of the state which was undertaken in that year. The depreciated basis of valua- tion, which had become universal during the period of ineffective local adtmnistration of assessments, had naturally produced very high tax rates, amounting in some instances to 50 or more mills on the dollar. The decennial reappraisal of real property in 1910 was made the occasion of a thorough revision of assessments, and while this revision was in process the state tax commission was created and given supervisory jurisdiction over the work of local assessors and boards of review. It replaced also the very ineflficient state board of equalization and in this capacity it was required to equalize the real estate assessments, which were then to stand for four years instead of ten is had been the case since i860. It was a natural and necessary part of this sweeping change in the basis of valuation and in the administrative procedure that the level of tax rates which had become customary under the old regime be reduced to a plane of conformity to the changed valuations of property. The original tax limit law of 1910 was not enacted until after the assess- ment of that year was practically completed, so that it was of little influence in determining the basis of assessment. As originally drawn its limitations were not entirely clear and administrative features were lacking, and substantial amendments were added in 191 1. A budget commission, so-called, was set up in each county but this term is really a mis-nomer, for the budget commissions neither prepare local budgets nor assist in their preparation. Their sole function is that of securing tedmical compliance with the provisions of the tax limit law, and to that end they are empowered to "adjust the various amounts to be raised so that the total amount thereof shall not exceed in any taxing district the sum authorized to be levied therein." The wisdom of the general policy of tax rate reduction in connec- tion with a general advance in assessed valuation cannot be questioned. Some sort of legislation to secure this result was absolutely essential if confiscatory tax levies and local extravagance were not to follow. The above sections represent, from this point of view, a very serviceable method of protecting the taxpayer during the transition from a very low and unequal basis of valuation to a much higher and probably more 37 equitable valuation. There was no especially inherent merit in the par- ticular tax rates adopted as the timits, and the principal criticisms which may now be offered against the whole tax limit plan of 1910 rest upon the tendency to regard as of enduring worth and significance a measure which was really designed to effect certain temporary ends. The specific criticisms which are here brought against the Smith tax limit law are not intended so much as criticisms of the general principle of tax rate limitations as of the particular form of tax limitations embodied in sections 5649-1, ff. 1. In the first place we desire to cmpiiasixe tiie fact tiiat thei^* is no inliereiit reasonableiiess in the particular rates set op as the fimitft. The propsr basis for the selection of these fijures in 1910 and 1911 was that such maximum rates, applied to the increased valuations of those years, would produce approximately the sane public revenue as the old rates had produced on the old valnaiio*is These rates were only an approximation at that time and it was con- sidered necessary in 1910, for the purpose of further checking extrava- gance, to insert a schedule of aggregate revenue increases, whereby the total taxes levied for 191 1 were not to exceed the total for 1910, plu:> 6% thereof for 1912, plus 9% thereof for 1913, and 12% thereof for any years thereafter. This schedule was removed in 19 13 in recogni- tion of its temporary character and this removal was in reaUty an ad- mission of the temporary character of the whole scheme. 2. The interior limitations, as they are called, are arbitrary an«1 very often produce serious inf^^stice as among the various levying dis- tricts. Here again it now appears fairly clear that the limits of 5-5-3-2 mills for cities, school districts, counties and townships re-^pect- ively. were not experimentally determined but were written into the law without regard to the requirements of these several administrative dis- tricts. Furthermore, certain levies which the state has imposed must be so included, as it must be also all interest and sinking fund charges on debts incurred without popular vote. Since the state levies, the county levy and the debt charges are really preferred claims within the ten- mill limit, it often results that the actual limit on school and municipal taxes is very much less than five mills each, and so these districts are made to suffer through no fault of their own. Nor can they, by the most careful management, avoid the restrictions which may thus be im- posed upon the levies which the law apparently meant to authorize. 3. The method of controlling expenditures by a flat limitation applied to the whole state is too rigid, too mechanical, and has not really resulted in protecting the taxpayers. If the total tax rate of a district is not now in excess of the original limits it is a fairly good 38 indication that the activites of this district are not such as to require large expenditures. A ligidy flat limitation on the tax rates to be Ivvied by all districts asmnw^ that the r e imir eincnts of all districts are iiipuMlimr at about the same rate, and neglects absolntely the fact thcw diose dBstricts which are comparatively new but which are grow- ing rapidly in population, such as the newer industrial centers, may have an entirely different scale of requirements which must be met speedBly, than some of the older and more slowly developing com- mwiitiii i It neglectsv too^ the vast difference between the require- ments of rural and urban communities and seeks to set up a common standard of tax burden for all. 4. Further, the excessive emphasis upon tax rate limitations which has followed the exaltation of the Smith Law has led to a corresponding indifference to the facts relating to the creation of debts, when as a matter of sound financial practice the extremity of emphasis should be upon the debt limit rather than upon the tax limit. It has generally been found to be true that when debt limits and tax limits conflict the former yield first for the simple reason that people naturally prefer to postpone the day of payment and are inclined to take full advantage of such opportunities as are afforded them by weak debt limits. The very rapid increase of local debts in Ohio in recent years has doubtless been due in part to the severe restric- tions pat upon the tax rates. Not an inconsiderable part of the total r^resents funding bonds, issued to cover accumulated shortages in current funds for operating expenses. The wide margin of 5 mills for the interest and sinking fund charges of authorized debt issues, in contrast with the restricted total of ten mills for all oper- ating expenses and unvoted debt charges is really an invitation to indulge in debt financiering. It has been a simple enough matter, as the practices of some municipalities have shown, to accumulate debts which represented the excess of operating cost over operating revenues obtainable within the 10 mill limit, and then to secure popular approval of the funding bonds on the ground that this was necessary in order to place the charges outside the 10 mill limit. Unless a municipality followed this course, there was no way of utilizing the surplus levying power up to 15 mills. It was very un- wise to compel resort to deficit financing in order to secure permis- sion to use this surplus, instead of being able to make use of it directly for revenue purposes. The present arrangement of the Smith law limitai:ions puts a decided compulsion upon borrowing for current expenses. We hKw^ reached the conclusion that it is 39 of less significance thai tho Uol nte be rigid^ linuled tban it it that pdUie debU bo Mtrictod But if greater emphasis is placed on the debt limits it means that less should be given to the tax limits, on the theory that it matters far less how much a community is spending provided it is paying its way as it goes, while, it is of much greater importance to make certain that the present g^eration is not accumulating vast charges against posterity. One of the committee's recommendations is a plan for limiting the debt issues of various districts, and in our comment upon this plan below we have referred more fully to the significance of the proposal in connection with the general subject of tax limits III. The Acfaninutraftion of tho Genend Property Tax. The defeat of the classification amendment at the recent election means the retention of the general property tax as the form of revenue system through which the great bulk of the public revenues for local purposes are to be collected. We have already stated our interpretation of the vote on this amendment, which is, that the people of Ohio prefer, while a property tax is used, to have all property taxed at a uniform rate. We have given considerable attention to the administrative ques- tions involved and have obtained an expression of views from many persons whose suggestions might be of value to the committee. Our proposals for additional legislation which would be required to secure the attainment of this end are given below. Here it is our purpose to outline the administrative machinery of the property tax that we may understand the points at which this machinery appears to require im- provement in order to function more effectively >a. The Assessment of Real Estate. When the tax administrative system was overhauled, in 191 o, a quadrennial reappraisal of real estate was provided for in lieu of the decennial revaluation which had been conducted since i860. The county auditor was to provide the necessary maps and plat books for the local boards of assessors, and was to supervise their work (Sections 5571- 5574). No quadrennial reappraisal was ever made under this law, which was replaced before the staled date of the first reappraisal by the Wames Law, so-called, which set up a system of highly centralized tax administration. Under this law both real estate and personal prop- erty were to be assessed annually by centrally appointed deputy tax commissioners. After two years the centralized tax administration pro- vided for in the Wames Law was abandoned and the county auditor was made county assessor, ex officio, with general authority over the assessment of all property. He was required to reassess real estate aimiially when so directed by the tax commission or when in his opinion such reassessment was advisable (Section 5548). A subsequent sec- tion of the same act gave the tax commission power to order a reassess- ment of either real or personal property in any district or subdivision thereof, when in its opinion such property had been unequally or im- properly assessed (Section 5624-4). The commission's control over re- assessments disappeared in the revision of the tax law in 1917, and in consequ^ce no sufficient opportunity for its practical exercise ever arose. Aside from this temporary interjection of central control over the original assessment and reassessment of real property, sections 554S and 5549 vested an undue discretionary authority with the county audi- tors and the boards of county commissioners and in consequence only isolated mstances of reassessment of rea! property have occurred. Tlie rcsidt of these various changes of policy has been that no general cor- rcction of real estate valuation has been made since 1910. It was felt early in the session of last winter that this administrative defect should be corrected and this policy the general assembly has already approved Senate Bill 146 places a greater responsibUity upon the county auditor for the annual determination of the correctness of the assessed value of real estate, while it gives the tax commission more precise and definite authority than it has had heretofore in the initiation and control of the assessment and in the conduct of reassessments. The tax commission may now order initial assessments or reassessments of real estate in any taxing district, or in an entire county where this procedure is found necessary, or when it is petitioned for by 25 local taxpayers, a board of township trustees, or a . village or city council. The auditor is specifically required to make such correction in each year as will main- tain a full value assessment of real estate. This hasty review of the recent changes in the methods of assessing real estate reveals a fluctuation between the principles of centralization and decentralization in tax administration. The present plan may be said to represoit a fairly reasonable compromise. The county auditor is a locally chosen official but he is now subject to the supervision and omtrol of the state tax commission. A check upon laxness or disin- clination is thus assured while the beneficial elements of home rtile are preserved. With the provision so recently enacted we feel that the administrative machinery for a proper listing of real property is fairiy con-plete and in good working order, and that in so far as the appli- cation of the uniform rule to real property is concerned, we have already provided ample administrative facilities for a proper enforcement of this principle. The tax commission will doubtless require more adequate 41 financial support if it is properly to discharge all of the duties which are being placed upon it, and we recommend that larger appropriations for the employment of expert and clerical assistants be made. b. The Assessment of Personal Property, The changes of policy which have been made with respect to real estate have for the most part applied to the assessment of personal prop- erty also. The Wames Law deputy tax commissioners were placed in charge of personal property assessments, but under the Parrett-VVhitte- more Law of 1915 the assessment of personal property was returned to the jurisdiction of the locally elected assessors. This act was nulli- fied by the courts after one assessment had been made, and in 1917 the present system of a voluntary return was introduced. The taxpayers are now provided with the proper blanks by the county auditor and are required to make an independent tax return, under oath, uninfluenced in any way by the assessor, whose principal functions now appear to be that of administering the oath to taxpayers, of giving assistance in making the return when this service is requested, and of correcting the returns under the direction of the county auditor. The essential feature of the present system of listing personal property is the utter absence of inquisitorial participation by the local assessor. The personal property returns are subject to further examina- tion by the county auditor, who now possess the authority to supervise the assessors, to issue instructions to them from time to time. (Section 5367) ; to direct them to correct the returns (Section 5368) ; to re- quire the appearance of any persons who may have knowledge of prop- erty not returned by any taxpayer; and to compel the production of books and papers in evidence (Sections 5398-5403). Any person who refuses to appear and give testimony when sum- moned by the auditor is subject to like proceedings from contempt as witnesses in actions pending in the probate court (section 5403). On the basis of his findings in any such investigation Section 5401 specifica'ly provides that the auditor shall proceed "at any time before the final settlement with the county treasurer to correct the return of the assessor and charge such persons on the duplicate with the proper amount of taxes." An examination of these sections would indicate that the county auditor already possesses ample authority to enforce the laws relating to the listing and assessment of property for taxation. The General Code a^so contains an imposing list of powers which may be exercised by the state tax commission in the supervision of the assessment of property. (See Sections 1465-12 to 1465-27). Some of the more important of these are the auUiority to appoint agents who shall 42 have the ri^t to inspect books, papers and other records of any company, firm, corporation, person, association or co-partnership subject to the laws which it is required to administer ; to compel the production of these books, papers and other records; to appoint agents who shall have all of the powers of the commission in any investigation ; to obtain information at the source fn»n all persons or business concerns subject to laws which the commission is required to administer ; to institute contempt proceed- ings in the probate courts ; and to take the depositions of witnesses raid- ing outside the state. In such investigations no witness shall be excused from giving evidence or testimony on the ground of self-incrimination ; akhoi:^ he shall not be prosecuted for any penalty or forfeiture so dis- closed except for perjury in so testifying. Effective operation of these provisions are also contingent upon more ample appropriations. Necessity may be deemed to exist for legislation to connect more intimately the powers of the tax commission and of the county auditors m the assessment of property. We have no specific suggestions to make on the subject at this time, but we have the matter under advisement and may present recommendations at a later date. IV. The Limitation of the Debt- Incurring Powers of the Local Subdivisioiis. The need for more effective control over the debt-incurring power of the local units is best shown by an outline of the changes which have occurrred in the statutes relating to that subject. In the earlier acts which authorized the use of public credit by municipalities and townships no limits were set to the volume of debt that might be incurred for the specific purposes for which local units were authorized to borrow, nor was it considered necessary to set a curb upon the dis- cretion of municipal councils and township trustees by requiring a vote of approval. (For example, see 76 O. L. 158, 1873.) The list of purposes for which bonds might be issued was broadened in 1893 (90 O. L. 229), and the idea of a restriction on the local borrowing power was distinctly repudiated in the following language, which occurs in secticm of the act: Nothing^ herein contained shall be construed as limiting or restricting any power to sell bonds for any of the purposes named in this section otherwise con- ferred by law ; but no bonds issued for any of the above named purposes and in accordance with the provisions of this section shall bear a higher rate of interest than six percentum, payable semi-annually, or be sold for le^s than par". 43 The policy of simple restriction on interest rate and sale price was not developed further in the direction of effective limitatioa on the quantity of debt issued and outstanding until 1902, when the so- called Longworth act was passed (95 O. L. 318). This act authorized the issue of bonds by municipal corporations and townships for a list of specified purposes, and set up two further limits to the exercise of this authority: 1. The amount of debt which might be issued in any one year without a vote of the people was limited to 1% of the total assessed valuation of property for taxation. 2. The total amotmt of debt so issued which might be outstanding and unpaid at any time, was limited to 49{^ of the total assessed valua- tion of property. There was apparently no intention at this time to limit the amount of debt which might be created with the approval of the people. The percentages which were introduced as limits applied, in the original Longworth act, to the aggregate of bonds outstanding and unpaid. In 1906 a change was made which was proper enough in part, in that it based the limitation of debt upon the net indebtedness, which was defined as the difference between the par value of all out-^ standing bonds and the amounts held in sinking funds for their re- demption. An outside limit of 8% was also introduced for all debt, whether issued with or without vote. (98 O. L. 65). This act was made the occasion, however, for an extension of the debt limits by the peculiar modifications which were introduced into the definition of "net indeDt- edness". It was provided that certain classes of bonds should be ex- cluded from consideration in computing the volume of net indebtedness to which the percentages of i%, 4% and 8% respectively should apply. The excluded classes were : 1. Bonds issued with the approval of the electors. 2. Bonds issued in anticipation of special assessments for the improvement of property. 3. Bonds issued for the purposes of constructing, improving and extending water works. 4. All bonds issued prior to April 29, 1902 (The date of the orig- inar Longworth Act). The effect of such a definition was obviously to increase suddenly the debt-incurring power of many localities. That these restrictions which the Longworth act had introduced did not operate to check the increase of local debts is clear from the following figures showing the total loeal debt during the period 1900 to 1910: 44 Total heal debts ^ m,m,m ^^^^ • • 125,396*603 ^^^'^ 138,856.813 ^^^^ 146.849,926 ^^^^ 157,023,489 170,179,657 ^^^^ • ' 184,314,231 ^^^^ 187,574,322 ^^^^ 199,260,470 Meantime the stage was being set for a further extension of the debt limit, and this time in a very undesirable direction. The borrowing power of municipal corporations was extended in 1903 (96 O. L., 51) by an act which authorized the use of deficiency bonds in the follow- ii^ terms: "Section 3931. G)uncil may issue deficiency bonds in such amounts and de- nominations, for such periods of time, not to exceed fifty years, and at such rate of interest not to exceed six per cent as it deems best when in the opinion of council it is necessary to supply a deficiency in the revenues of the corporation. The total amount of deficiency bonds issued by a corporation, outstanding at any time, shall not exceed 1% of the total value of all property in the corporatioii as hsted and assessed for taxation. The issuance of such bonds shall be approved % the vo'es of two-thirds of all the members elected to council, and approved by the votes of two-thirds of all the electors of the corporation voting on such question at a regular or special election to be provided for by council". The authority to refund bonds which the municipality found itself .unable to redeem at maturity had been granted much earlier (See R. S. Section 2701. 70 O. L. 5; 89 O. L. 417; 92 O. L. 170). Apparently these two classes of bonds had begun to be inconveniently large, for we shall presently find that measures were taken to relieve localities of the embarassment which they were causing. The next legislation relating to debt limitations was enacted in 191 1, in connection with the general readjustment of valuations and tax rates which became effective in that year. The first: atti (102 O. L. 11) pre- served the 1% and the 4% limits on debt incurT€xi without popular ap- proval for certain purposes, and the outside Ihpaitation of 8% on the net debt which could be incurred by a municipality for any and all pur- poses, whether with or without vote. Net indebtedness was defined as in the earlier acts. The increases in assessed valuation had been made at the time this act was passed but the full results were probably not available. Whether from lack of accurate knowledge of the increases made or frwn design, the readjustments in the percentage limits had 45 the practical effect of a further extension of local borrowing power. Section 2 of the act just mentioned provided that the 4% and 8% limits should apply to the valuations of 1910 until September 30, 191 1, and that on and after October i, 191 1, these limits were to be reduced to 2y^% and 5%, respectively, of the valuations of property that might thereafter be established. There are no records extant to indicate the general assembly's intention with regard to the maintenance of the same relative restraint on local debts that had theretofore existed, but it is certain that the changes made resulted in an extension of such local debt-incurring capacity. We are not in such doubt with respect to the second debt limita- tion enactment of 191 1 (102 O. L. 262). This rather extended act was a brief codification of the debt limit laws — it brought together all of ihe provisions relating to the creation of local debt which have been outlined above, including the changes which had been introduced earlier in the same session. The deliberate extension of the limits came in the new list of classes of bonds which were to be excluded from the defini- tion of net indebtedness in computing the debt limits. The changes may be shown by restating the list of excluded bonds, which is as follows (Section 3949, G. C.) : "a. Bonds issued prior to April 29, 1902. "b. Bonds issued to refund, extend the time of payment of, or in exchange for, bonds representing an indebtedness created or incurred prior to April 29, 1902. "c. Bonds issued in anticipation of the collection of special as s es i ments, either in original or refunded form. "d. Bonds issued for the payment of obligations arising through emergencies caused by epidemics, floods or other forces of nature. "e. Bonds issued to meet deficiencies in the revenues, as provided for in sec- tion 3981 of the General Code. **f. Bonds issued for the purpose of purchasing, constructing, improving and extending waterworks when the income from such waterworks is sufficient to cover the cost of all operating expenses, interest diarges and to pass a sufficient amount to sinking fund to retire such bonds when tfa^r become due". The exclusion of flood and other emergency bonds was proper enough, and was very useful in repairing the damage done by the disastrous floods of 1913. But it was highly improper that refunding and deficiency bonds should have been so treated. The appearance of such bonds is at all times a sign of inadequate tax revenues or of woefully incompetent financial administration, and it is not without significance, as we look back upon other events of the year 191 1, that the way should have been made easier for municipal deficit financiering through these changes in the debt limit law in the same session of the 46 legislature in which was being provided a greater incentive for resort to such methods in the peculiar arrangements of the tax limit law. We have already pointed out that this law has not served effectively to check the increase of local indebtedness, but has rather appeared to have the contrary effect of encouraging it. The next step in the control of the local bond issuing practices was the adoption of Article XII, Section ii of the state constitution, in 1912. This section reads as follows: "No bonded indebtedness of the state, or of any political subdivision thereof, shall be incurred or renewed, unless, by the legislation under which such indebted- ness is incurred or renewed, provision is made for levying and collecting annually, by taxation, an amount sufficient to pay the interest on said bonds, and to provide a sinking fund for their final redemption at maturity". This amendment proved particularly embarassing for the time be- cause of the restrictions upon the local tax levies which the tax limit law had imposed. These limits, it will be remembered, permitted the interest and sinking fund levies for debts incurred before June 2, 191 1, and for all debts issued thereafter by vote of the people, to be made outside the ten mill limit, but required them to be included within the fifteen mill limit. All bonds issued without popular vote were to be provided for within the ten mill limit. On the face of things we have here an effective limitation upon the volume of local indebtedness which might be incurred, because of the close restrictions upon the tax levies for the purpose of paying the mterest and sinking fund charges against such debts. And in view of the constitutional requirement that tax levies for such purposes must be made, nothing more would seem necessary in order to hold down local debts. As a matter of fact, however, this has not happened, as the figures given above show. On the contrary, it may with reasonable accuracy be said that the principal effect of the restrictions on the levying power of localities has been to diminish their debt-paying power, and so to influence unfavorably the standing of Ohio municipal and other local bonds in the general financial market. Theoretically the full faith and credit of an Ohio municipality is plecjged for the payment of interest and principal, but practically, this is not the case becau.se of the restrictions on the levying power for such purposes. Such bonds must be sold on less advantageous terms and this means an additional burden on Ohio taxpayers. The constitutional amendment of T912 would have been much more embarassing for many localities if it had not been for certain earlier statutory enactments which have permitted the withdrawal of 47 money or securities held in the sinking fund for other purposes than bond retirement. Section 4506 authorizes the payment from the sinking fund of all judgments found against the corporation except in condem- nation of property cases, (96 O. L. 54), and Section 4517 authorizes the trustees of the sinking fund to sell or use any of the money or securities in their possession for the satisfaction of any obligations under their supervision. These raids upon the siiddnfir funds tunately perfectly legal, but they have the effect of defeating the purpose of the constitutional requirement for sinking fund levies. Such practices and the laws which make them possible cannot be too ttroogly condrmnedy for in addition to the evils of deficit fiminring wludi they en cour age tliey hmwe hdped to divert attention from fhm more inixirtant proUems of taxation reform wliidi odierwiso wooUl have been forced upon the state long ago. The final enactment in this series of debt limit laws came in 1917, when the amount of debt that might be incurred in any one year without popular vote was reduced from 1% to J4% of the total assessed valuation of property. This- change came too late to be of great service in debt restriction, for the localities had already piled up an accumula- tion of debt which in many instances has become extremely burdensome. The extent of this burden is shown by the following data, compiled by the auditor of state in 191 7. The eighty cities in the state collected in tax revenues for the year 1917 an aggregate of $26411,178 for city purposes, but it required $180,657 in excess of this large amount to pay the interest and retire the bonds falling due during the year. The per- cent of the tax income for the year which was required for interest and bond redemption purposes is shown in the following table, which gives the number of cities in each percentage group. NUMBER OF CITIES HAVING INTEREST AND RETIREMENT CHARGES BEARING THE INDICATED PERCENTAGES OF TAX INCOME FOR YEAR.* Percentage ^ groups Kumber Under 50% 2 50% to 100%... 42 100% to 150% 28 Over 150% ! 8 Total 80 The only explanation of this situation is that the funds for current operation were obtained from new loans and from the sinking fund ^Auditor of State, Report, 1917, pp. 6-10. through the device of confessing judgment in suits for salaries and other claims brought against the cities. The conjunction of debt and tax limits conspired to make this the easiest way of securing the needed revenues. The conclusion which we reach from this record, when read in con- nection with the rise of local debts, is that the general assembly must set up a debt limit which will really operate effectively to control local debt creation and redemption. The debt limits must be strenghtened and the tax limits sufficiently relaxed to permit the payment of current expenses from current income, while the resort to public credit should be restrained to those proper and necessary uses which alone justify the loan as against the tax for the support of government. A careful revision of Sections 3913 and 3931 should probably be made in order to limit more strictly the local emergency borrowing powers. V. The Ohio System of Tajdng CorpomtioBt* The Ohio S3rstem of taxing corporations is necessarily complicated, by reason of the great diversity of the classes of corporations which must be reached under any adequate system of corporate taxation. In presenting this brief outline of the Ohio system we have had no in- tention other than to exhibit thereby some of the complications of the subject and to describe briefly, for the benefit of the general assembly and of other readers of this report, a part of the Ohio revenue system which we have not undertaken to change. Our reason for not entering upon such an undertaking at this time will perhaps be made clear as our exposition proceeds; and such further explanation as may be re- quired may more profitably be given after the outlines of the present system are before us. Our system of corporate taxation must be presented from two points of view, in order to be thoroughly understood. The first is the form of the tax imposed and the second is the purpose, whether sta^e or local, for which each tax is levied. In this discussion we shall fol- low the order observed in the General Code and shall indicate for each class of corporations first the nature of the taxes imposed and then the treasuries into which these taxes find their way. I. Miscellaneous Business Corporations. All miscellaneous busi- ness corporations, domestic and foreign, are subject, first of all, to the genera] property tax (Sections 5404-5406). Their real estate and such tangible personal property as merchants* and manufacturers' stocks and personal property on farms, is assessed and taxed where located; and their other personal property is assessed and taxed in the p^ace which they may designate as their principal place of business. The property of corporations is returned to the respective county auditors and is 49 assessed by them. In recent y ws the auditors, acting under the gen- eral direction of tht state tax commission, have been requiring submis- sion of balance sheets and other financial statements for the purpose of checking the returns of property made on the assessment blanks. The rates applied are the local rates of the several taxing districts m which the property is listed and the taxes paid on account of such prop- erty are for local iises. This general class of corporations is also subject to taxation for state purposes. Domestic corporations are required by Section 5498 to pay a tax of 3/20% or not less than $10, on their subscribed or issued and outstanding capital stock, and such shares are exempted from taxa- tion as property in the hands of the holders (Sections 192 and 5372). Foreign corporations pay a similar franchise tax of 3/20%, or not less than $10, on the proportion of the authorized capital stock represented by the property owned and used and the business transacted in the state (Section 5503). The shares of such corporations are not exempt from taxation as property in the hands of the holders, if the latter are residents of the state, unless two-thirds of the property of such cor- poration is located within the state. 2. Banks. The method of taxing banks is in general determined by the rules which have been laid down by the federal laws for the state taxation of national banks. These institutions may be taxed by the states in which they are located in the same manner in which other moneyed capital is taxed. In practice this means that all banking in- stitutions recognized as such will be taxed by a given state in the same manner, to avoid discrimination. Bank real estate is to be taxed where located in the same manner as the real estate of individuals (Section 5409). The bank shares are to be taxed in the place where the bank is iQpated, to the holders thereof, unless the bank has agreed to assume the taxes. The assessment of bank shares is made by the county auditor, on the basis of the book value (or the market value if sucli is ascertain- able) less the assessed valuation of the real estate locally taxed (Sec- tion 5412). No state tax is imposed on banking institutions as such, except certain fees levied on state banks for the support of the state banking department. 3. Public Utilities. All of the real and personal property of public utilities which is used in the business is subject to taxation for local pur- poses. A return of this property is made to the state tax commission by whom the assessment is made and certified locally to the various taxing districts in which the property is located. The distribution is on the basis of proportionate valuation except in the case of express, tel^raph and teiephont companies. In these cases die real estate locally assessed so is deducted from the total valuation of the property used in the state, and the remainder is apportioned locally, in the case of express companies in tfic proportion of the gross receipts from the different taxing districts in which express company property is located; and in the case of the telegraph and telephone companies, in the proportion of the miles of wire in the different districts. The various classes of public utilities are also taxed for state pur- . poses on their gross receipts from business done within the state. This is an excise tax levied by the state for the privilege of carrying on the intra-state business (Section 5485). The rates vary with the different dasses of utilities, and range from 1.2% in the case of such companies as electric light, gas, water, heating and cooling companies, to 4% in the case of steam railroad and pipe line companies. The various classes of car companies (sleeping car, freight line and equipment companies) pay an excise tax of 1.2% on that proportion of their capital stock which represents the property owned and used within the state. 4. Foreign Insurance Companies. An excise tax is levied by the state, for state purposes, on the amount of gross premiums received by foreign insurance companies from policies covering risks within the state, less return premiums and considerations received for reinsurances. The tax is computed by the commissioner of insurance and the present rate is 2j^%. This very hasty review of the Ohio system of taxing corporations win suffice, perhaps, to reveal the maze of complications which has been built up. In view of such an entanglement of taxing provisions it is impossible for anyone to decide, without far greater opportunity for careful study than we have had, whether such a system is operating properly or not. It is perfectly clear that there are too many interests involved to undertake a reorganization and readjustment of the system of corporation taxes without the most careful study of the whole prob- lem. At one point is the local revenue derived from the corporate property locally taxed, and the effect of a general change in the system upon the local finances; at another point is the system of segregated revenue sources for the state, and the effect upon this policy of a general reformation of rates and type of tax applied ; at still another point is the questeion of the relative tax burden which the various groups and classes of corporations ought to pay, as compared among themselves and with other classes of taxpayers. The proper basis of corporate taxation must also be considered ; and finally, there is the far-reaching question of th^ ultimate incidence of such taxes. The extent to which these taxes 51 are successfully shifted must be considered in determining the weight of the so-called corporation taxes. These are some of the considerations which have caused us to refrain from attacking the vast problem of our corporation taxes at this time, for we realized that the date set for the opening of the adjourned session of the general assembly would arrive before a study of such magnitude could be completed. These considera- tion will also serve to make clear our reasons for not extending the in- come tax which we have recommended to the incomes of corporations. A satisfactory tax on the income of corporations would require careful and extensive adjustments of the present system of taxing corporations for local and state purposes. The constitution would not at present permit the substitution of an income for a property tax (See Article XII, Section 2 and Article XIII, Section 4),, and such an income tax would need to be regarded as a minor and auxiliary revenue measure. But even such a measure, we insist, could properly be undertaken only after very thorough study of all phases of the problem. We recognize that the Ohio system of corporate taxation is confused, at points illogical, and in some instances perhaps unjust. We su|^est that the further study of this immense problem, with a view to securing greater unity in the whole tax system, might very well be given the careful considera- tion of the general assembly. VL SamBiMry of FindingB in Chapt^s II and III. The financial situation in Ohio, as the committee views it after the above survey, may be summarized thus: so far as the state's finances are concerned, there will almost certainly be a deficit for the present biennium, although the amount of it will be determined by the volume of additional appropriations which may be made and by the yield of the existing and the new sources of state revenue. The most serious aspects of the state finances are the inelasticity and the inadequacy of the tax revenues, the excesses of appropriations over actual receipts and the need of a greater degree of state participation in matters of state- wide interest and responsibility, such as health supervision and educa- tion. In view of the expanding requirements of these and other public activities it is our judgment that the present state revenue system is proving increasingly insufficient, and that . serious consideration should be given to its readjustment. The data compiled by the state tax commission shows that the local subdivisions assessed a total tax revenue of $120,000,000 in 1918. Other materials assembled by the same body, indicate that the budget requests f rmn these subdivisions which were denied by the local budget commis- sioners totaled some $30,000,000 to $38,000,000. (See table VI above. Allowance is here made for the omitted districts.) It is impossible to determine just how much water these original requests contained, in anticipation of the squeezing which it was understood would be applied by the budget commissioners, but it is most unlikely that the entire amount refused was unnecessary excess, and it foUows that the amounts received in 1918 were insufficient to permit the proper conduct of the local governmental activities in that year. In the following chapter we have presented our estimates of the revenues which , may be expected from the new measures which are herewith recommended, and we pre- sent here a summary of these estimates for the purpose of showing the extent to which our program may be expected to meet the existing financial requirements. We admit freely that we are indulging in guess- work, but we have takai care that we shall understate rather than ex- aggerate the situation. Our figures may properly be criticized, there- fore, from this point of view. The additional revenues which it is clear must be provided for the state and the local units may be obtained, ultimately, from different sources, or by a combination of sources. The possibilities are the fol- lowing : I.. The new taxes herewith proposed by the committee ; 2. Enlarged taxes resulting from the increases in the property duplicate ; 3. A similar increase in revenues resulting from advances in prop- erty tax rales. A fourth possibility exists, in the form of other additional sources of revenue not covered in this report. We have refrained from the consideration of such additional sources of public income until the effects of our present suggestions may be more accurately appraised. The esti- mated yield of the new taxes proposed and the estimated distribution to the state and the various subdivisions are as follows : S3 ESTIMATED TOTAL YIELD OF THE NEW TAXES AND ESTIMATED DISTRIBUTION TO THE STATE, THE CITIES AND THE OTHER LOCAL SUBDIVISIONS. • Tax. Total Yield. Estimated Share to Cities. Estimated Share to Other Local Subdivisions Estimated Share to State. Tax on Motor Vehicles • Totals Total Minimum Re- quirements in ldl8. $7,000,000 3,000,000 8,000,000 $2,500,000 1,250,000 5,000,000 $1,000,000 250,000 1,000,000 $3,600,000 1,500,000 2,000,000 $18,000,000 $8,750,000 $11,774,005 $2,250,000 $3,473,641 17,000,000 Estimated Shorta^re $3,024,005 $1,223,641 Note: — The estimated share for the state includes the yield of the inherit- ance tax, which has already been included in Table II above. The yield of the vehicle tax will not enter the state general revenue fund at all, hence the only item available for the estimated state deficit will be the yield of the income tax. The estimates of the local requirements were arrived at by assuming that the 12% increase for the 18 missing counties would be spread evenly among the various classes of subdivisions. The minimum requirements shown in Table VI above were increased 12%, and this total was then reduced 1/6 on the assumption" that the preliminary budget requ&sts had been inflated by that amount in anticipa- tion of cuts. The school needs as shown in Table VI above are omitted here because it is expected that tiiese will be met by our school relief bill It must be borne in mind that our calculations have proceeded upon the basis of the 1918 local requirements, and that by 1920 these total requirements would have advanced materially. It appears from these estimates that the amount of additional revenues v^hich will become available for the local units in 1920 through the new revenue measures here outlined, if all are adopted, will not prove sufficient to cover the local needs on the basis of last year's requirements ; but in order for even the degree of relief which we have suggested to be realized, it will be necessary to enaet the income tax in time to apply to incomes arising in 1919, that is, before the close of the calendar year 1919. We are accordingly recommending this bill for passage, but in pre- senting it we feel that our position with regard to such a tax should be frankly stated. We have been very favorably impressed by the plan of property and income taxation proposed by the National Tax. Assodation in its Model System of State and Local Taxation. A correlation of property and income taxation of the sort there proposed is not now pos- 54 sible in Ohio for constitutional reasons and we have been obliged there- fore to view the income tax as a minor and auxilliary revenue resource. Some members of the committee are reluctant to enact the income tax in addition to the present system of property taxation, and we are sub- mitting this, bill only because we see no satisfactory alternative method of prwiding larger revenues to meet the immediate needs of the state and the local subdivisions, particularly the municipalities. These needs are urgent and immediate; they represent the amounts which ought if possible to be provided for the fiscal year 1920, and it must be under- stood that our estimated shortages as stated above are undoubtedly far below the actual figures for 1920, because of the rate at which public outlays are expanding. Our entire program will not assure iromplete relief, as we have shown; but even this degree of relief will not be available unless the income tax, and we may add, the motor vehicle tax, are enacted, for the following reasons: 1. The increases in the property duplicate which we may reason- ably esqiect to follow from more eflEective administration will produce no tStd upon local revenues until the tax collections of 1921. 2. The emergency relief bill for cities (H. B. 567) provided ad- ditional support for the fiscal year 1919 only. 3. Any increase which may occur in the property duplicate will produce no effect upon the state's revenue for general purposes, even in 4. It would avail nothing at this date for the year 1920 to modify the existing tax rate limitations, since these changes would not become effective in producing enhanced revenues until 192 1. 5. Finally, the amount of yield which may be expected from the increases in the property duplicate, when efifective, and from the in- heritance tax, are quite uncertain. The yield of the income and motor vehicle taxes is also uncertain, but we see no escape from the conclusion ^t their support, whatever it may be, will be needed in order to permit tfic state and the localities, especially the cities, to function. These considerations do not reduce the income tax and the motor vehicle tax to the status simply of emergency measures. Our estimates of local needs are based on the 19 18 figures, and we have not undertaken to calculate the rate at which these needs are at present expanding. The inevitable growth of our cities will not only absorb the yield of the new taxes here proposed, but will doubtless compel ultimate resort to the final great resource of the state, the aggregate property duplicate. If larger revenues can be secured by listing a larger total of property for taxa- tion, it will naturally result in a more equitable distribution of the tax burden; but if the efforts which we suggest making to this end fail of 55 the expected results, we see no alternative but the imposition of heavier rates than are now permitted by law, if education, health and sanitation, the protection to life and proDertv. and all of the other beneficial activi- ties of goverment are not to languish. We urge this the more strongly because we are as reluctant to countenance further resort to an unwise use of public credit as we are desirous that the present program of local debt extinction be maintained and even extended. Unflinching taxation for a few years will result in the retirement of a sufficient volume of local debt to free very substantial local revenues for current use without a further advance in tax rates. We urge that such a policy of local finances be made possible. CHAPTER IV. Simmuury ol the CommilWs ReconoMBdiitioiis. The committee's program falls into two parts, as indicated above. The first consists of the temporary relief measures which were enacted dunng the first i»rt of the present session. The other includes the pro- posals of a more permanent character, such as the revised inheritance tax, the income tax and the extended control of the state tax commission and the county auditor over the assessment of real property. We shall present our recommendations in logical order, with explanatory comments upon each feature. Naturally less attention will be given to those por- tions which have already received the sanction of the general assembly. I. Tlie Temporary Relief Measures. The laws under which emergency relief was extended to local sub- divisions were passed as H. B. 567 and S. B. 187. The former authorized the taxing authorities of counties, municipal corporations, townships and school districts to fund deficiencies for the year 1919, issue bonds and levy taxes for the necessary interest and sinking fund charges. The latter measure was enacted as an aHemative, open to boards of education only. These boards were authorized, at their discretion either to seek relief under H. B. 567, by funding their deficits, or to proceed at a special election to secure approval of the voters for a special levy for school purposes for the year 1920, the rate not to exceed 2 mills. The mem- bers of the general assemb^ are already familiar with these measures and further descriptive comment is. unnecessary. II. Tlie Legislative Proposals ol a More Permanent diaracUr. a. For the more effectwe enforcement of the property tax. We have already described the changes which the committee worked out respecting the administration of real estate assessments. In that connection we expressed the judgment that these changes were adequate and sufficient to insure a proper valuation and assessment of real property. We have not, therefore, deemed it necessary to recommend further legis- lation in so far as this phase of the matter is concerned. With regard to the proper assessment of personal property, we have also shown above that very extensive powers have akeady been given to 56 57 the county auditors and state tax commission. If a broader exercise of these powers were made possible by more ample appropriations, it would go far, in our judgment, to realize that degree of supervisory authority which is consistent with a safe treatment of tiie credit structure of the state. b. The Inheritance Tax. The committee's inheritance tax measure was enacted in the earlier session of the general assembly and the text of tiie law is not reprinted in this report. Inasmuch as there has been no suitaWe opportunity hitherto for die discussion of this bill, we include herewith an account of its more salient features. The position of the inheritance tax in the modern taxation system IS too well established today to require argument in its defense. Ohio's inheritance tax law has long been out of line with the best l^slation on this subject, since it has applied to collateral heirs only, its administra- tive provisions have been defective, and its yield, therefore, negligible. A progressive direct inheritance tax law would have been of doubtful constitutional validity after the case of State vs. Ferris (53 O. S. 314, 1895), until this drubt was removed by the adoption of Article Xllj Section 8, in which the rule of progression was expressly sanctioned. The immediate occasion which compelled resort to the direct in- heritance tax was the prospect of losing the liquor revenues, a prospect which became a certainty as the national prohibition amendment was ratified The joint special taxation committee proceeded to study with -reat care the inheritance tax laws of the various states and in tiie pre- paration of the bill which was enacted into law we sought to draft such a law as would reflect accurately Ohio's general position on the subject of inheritance taxation. We found that there were wide varia- tions in rates, estate groups and exemptions. We avoided the extreme radicalism of one section and the extreme conservatism of another and sought to work out a safe middle ground that would somewhat tless many persons in the state who still firmly believe that such a tax limit law has actually succeeded in limiting expenditures. Our proposal for debt limitation comes to the general assembly in the form of a joint resolution providing for the submission of a constitutional amendment. We have decided to recommend the limi- tation as an amendment rather than a staute, because of its relative * importanice, and because of the greater need of making it secure. Wa dedra to reiterate our setded judgment that ^wluHb m Haauk on tax rates is good, an effective limit on debts is vastly better, and that th force of popular sentiment should be built up back of the latter rather than the former. It is of much less importance that tax rates be limited than it is that localities should more neariy pay as they goi. We have emphasized the tendency for debt limits to give way before the pressure of rising tax rates. In order to prevent this, the debt limit should be made more secure from the attack of those who would avoid immediate payment for what they get. As a constitutional amendment it will have this greater security, while it will operate with immensely increased effectiveness as an actual check or limita- tion to restrain the excessive and improper use of public credit. In our judgment it will not have the effect of denying to any community that use of public credit which is compatible with a sound theory of the use of public credit. Our theory of public credit is that it is a valuable public resource which should be used to supplement the taxation resources, and never as a means of evading taxation. It should never be resorted to, therefore, for the purpose of covering operating deficits, nor for financing im- provements which by their nature and by the frequency of their recur- % 66 rence. are propwly charges against current revenues. A temporary loan in anticipation of revenues may be permissible if occasioned by emergency outlays, but if this practice becomes frequently necessary it .s convmcng evidence of the inadequacy and inelasticity of the public revenues. A revision of the tax laws is far wiser in such circumstences than the continued funding of operating deficits. _ PuWic credit may properly enough be used, under certain con- ditions, to provide improvements which are self-sustaining; the funda- mental condition here being that the revenues or collections from such improvement be irrevocably pledged to the payment of interest and sink- ing fund charges. As an additional safeguard the investor would doubt- less insist that the general credit of the borrowing district be also pledged ,r„«*^ ]■ ".P"^' """"^^^ j"''g"'<="t' furthermore, to use the public credit for the construction of non-self sustaining im- provements of such scope and cost as would produce an excessive burden , "^"^ concentrated in one or two tax years. The main test of the legitimacy of the use of public credit for non-selfsustaining miprovement becomes, therefore, the period of time within which the out- lay m question may be expected to recur. We may illustrate this point by the case of school buildings. The school population of Qeveland, Cincinnati, and other large cities of the state IS mcreasmg at such a rate as to require the construction of one or- more new school buildings each year. As long as this rate of increase continues the outlays for school buildings should be viewed as current expense and should be provided from current revenues. The policy of borrowing money for such, construction means a vastly increased cost of school buddings, for the taxpayers must not only pay taxes enough in J^JJ to cover the interest «» the deferred mstallments of debt redeemd, and in time these interest diarges may exceed the current cost of additions. For example, the Clveland school debt, less sinking funds, on July i. 1919, was $io,7n 277 At an average interest rate of 5% this means that the taxpayers of the aty are paying out $535,675 annualty, or almost the price of two new schoolbuildings. for the privilege of financing their building program in ^ But the small city or the village, which needs a single new building at infrequent intervals, could not pay for such improvements as a current expense without adding a very heavy tax burden for one or two years The total cost of a building paid for by a loan will be much ^eater, and yet we have here a case of the necessary and legitimate use of public credit. In the same way a great auditorium or other large, unique under- trfang, ev«i by a large city, may properly enough be financed by loans 67 Distinctions of the sort which we have here hastily outlined can only be set up by proper administrative control, and not by statutory enactment. It is not feasible at this time to undertake to prescribe the kind of administrative control over debt creation which would permit the realization of these standards, and we have therefore attempted to secure somewhat similar results by proposing such debt limitations upon as will compel careful observance of the sound principles underlying debt creation and management. The limitations which our recommendation sets up are the following: 1) A limit on the total net general debt, that is the debt which must be carried by levies against the general mass of property. 2) A two-fold limitation on the maturity of all debts, consisting of a) a maximum limit of forty years maturity, and b) a further restriction of the maturity to the probable life of the improvement. 3) A limit of eight years on the maturity of emergency debts. The basis of the first limitation is the assessed valuation of the taxable real property in the borrowing district. Th^ reason for adopt- ing real property as the measure of the general debt is that the real property valuation is subject to less fluctuation than the total valuation, including personal property. The uncertainty of the results which may attend the efforts to secure a larger return of person property makes it appear probable that this fluctuation will not abate in the future. For a similar reason we have also excluded the value of mines and mineral rights, for as the underlying deposits are exhausted the valuation upon which the debt limit rests declines. The actual percentages which have been used were determined ex- perimentally, except for townships. We have calculated the ratio of debt outstanding on July i, 1919, to the assessed valuation of real estate for 1918, for 85 counties, 53 cities, 53 city school districts, and 33 villages. The range of these ratios for each district is shown herewith. In the case of the city school districts the sinking funds were deducted, but accurate data were not available for the determination of the amounts held in sinking funds against the general debt of counties, cities and villages, as distinguished from the assessment and puWic utility ddbts, and in these cases the ratios represent the ratio of gross debt to assessed valu- ation of real estate. Since the net debt would be a smaller figure, the ratios allow somewhat greater leeway than actually appears. I. RANGE OF COUNTY RATIOS. Number of Counties having a Ratio of General Debt to Assessed Valuation of Real Estate, of 68 Less than 23 54% to 1% .'***' Yj 1% to 27 154% to 2% g Over 2% !.]..!!!!.*!.!!!! lo 2. SAME, FOR CITIES AND CITY SCHOOL DISTRICTS City School CiHes Districts Less than 1% 8 1% to 2% 83 2% to 3% 15 3% to 4% 5 4% to 5% over 2 6% to 6% Over 6% 3- SAME FOR VILLAGES • • w...^ 3 • -r i 6 7 10 4 Less than 1% 1% to 2%... 2% to 3%... 3% to 4%... 4% to 5%... Over 5% ... We did not attempt to distinguish cities and villages in the limits provided, but set a limit of 4J4%. for all municipal corporations. In es- tablishing the legal limits it was not considered wise to use the highest ratios found for each class. To be effective the limit should really operate. ^ On the other hand we have no desire to penalize those local units which now have a ratio higher than the established limit for the class. Our plan, accordingly, provides that in such event the further excess borrowing power of such a district in any year shall be limited to 50% of the amount paid to sinking fund in that jrear. We have also pro- posed that a special levy of not to exceed 2 mills may be voted for sinking fund purposes if it is desired to increase this margin. Snch a restriction in time will bring every district within the limits now set and thereafter diese limits shall apply and be observed. The percentages which we propose are for the limitation of the general debt only. We have excluded therefrom bonds issued in anticipa- tion of special assessments for the improvement of property and those ittued for the abstraction or acquisition of public utilities, to the extent that the latter are self-sustaining. If a community prefer that a publicly owned utility be not self-sustaining this choice will mean a reduction of the general borrowing power to the extent necessary to provide the interest 69 and sinking fund charges s^inst such public utility debt outstanding.. The general borrowing power of such a unit may be increased by raising the rates of the commodity or service supplied through the publicly owned utility. In the event that a community desires to enter a new field of public ownership or activity, we have provided that bonds for this purpose may be issued outside of the ratios here set up provided the future income of the undertaking be pledged to the payment of interest and sinking fund charges. This proviso carries with it, by implication, the agreement to fix such rates as will yield the necessary amounts. Emergency bonds for certain purposes, tmder proper safeguards, are also excluded from the limits. It is clear that such a plan of limiting indebtedness will operate far more effectively to restrain borrowing than a severe tax rate limitation. With these provisions in operation there should be such modifications in the tax rate limits as may prove necessary, in order to permit full and complete con-pliance with the debt retirement program that is here made compulsory. We recommend that modifications of this character be made as may be required in order to sustain the restrictions on debt creation here established. . e. The school relief bill. We have discussed at some length in Chapter II the situation of the schools and in that discussion we dwelt particularly upon the relation of the state to the educational system, and upon- the state's obligation to insure tht provision for certain educational minima. We have also sur- veyed the existing sources of state revenue and from this survey it be- comes clear that the state would be unable to discharge this obligation adequately from its present revenues from indirect taxes. Nor would it be possible to rely upon the new indirect taxes for school relief. Their ^ggr^te yield would scarcely provide the necessary revenues, if all could be devoted to such use; but the constitution requires the assign- ment of at least 50% of the receipts from these taxes to the mu licipal corporations and townships in which the taxes originated. The only re- source, therefore, whereby a sufficient revenue might be obtained to meet the school program adequately seems to be a direct levy on the property of the state. In the preparation of the bill for school relief we have again fol- lowed our usual practice, and have consulted freely with many persons whose special qualifications entitle their opinions and suggestions in the school problem to respect. We have had valuable assistance from repre- sentatives of the state and national or^nizations of teachers in devdop- ing the i^n which we have adopted. 70 The principal object of this bill is to create larger funds for the payment of salaries to teachers and for other school expenses. This object we have sou^^t to accomplish by providing for a state levy, so- called, of 1.7 mills, and a county levy of i mill, to be distributed as hereinafter described. The local levy for school purposes is reduced from 5 to 3 mills, and in order to make compliance with the 10 mill limit possible the township limit is reduced to ij^ mills, while the present state levies for universities, cmnmcm schools and state sinking fund are abolished. The net gain to school districts from the new state levy will be the difference between 1.7 mills and .15 mills, the total of the three state levies herewith cancelled. The net gain to the state general revenue fund will be the difference between the receipts from these levies and the amount now paid out of that fund in support of common schools. In Table II above we have estimated that this saving would . have been about $1,700,000 in 1918. A special tuition levy of i mill is also proposed, to be subject only to the 15 mill limitation. The total levies on property thus far proposed for school purposes are advanced from 5 mills to 6.7 mills, of which 5.7 mills will be subject to the 10 mill limit and i mill subject only to the 15 mill limit. In the event that a school district is at present near the limit of the levies which are subject to the 10 and 15 mill restrictions, respectively, scHne further elasticity will doubtless prove necessary. This dement is secured by including the device which was adopted last spring as an emeigency measure and we propose to authorize boards of edu- cation to levy up to 2 mills outside of the 15 mill limit. Section 5649-5 now authorizes such levy outside of the 10 mill limit, and we are simply proposing that 2 mills of such levy be permitted, subject to no restric- tions. The additional local elasticity which is thus assured is made the more necessary by reason of the plan for the distribution of the funds secured from the state and county levies, as will appear from an ex- amination of the system of distribution. This plan of distribution is as follows. First the sum of $500,000 is to be set aside from the proceeds of the state levy as a reserve fund for the equalization of educational opportunities throughout the state. The disposition of this reserve fund will be described later. Of the re- mainder, which is designated "The State Common School Fund", such amount shall be set aside as will cover the allotment required on the basis of teachers employed and salaries paid, and the remainder shall be apportioned among the counties on the basis of the enumerated youth of school age. Each coimty's share shall be apportioned to the school districts and parts of districts therein on the basis of the aggr^[ate at- 71 tWdanbe' 6f pupilsi The sum distributable on account of teachers Is apportioned in ah amount equal to 25% of the salary paid to any teacher who receives $800 or more, but in no event more than $350 to any teacher. Only such teachers shall be included in this apportion- ment as are qualified to hold certificates other than tem^raty oY- elncr-- gency certificates. The proceeds of the county levy shall be distributee^ in the same manner as the state levy, except that the county shall dis- tribute to the sdiool districts on the basis of teachers employed an amount equal to 125^% of the salary paid to those teachers receiving $800 or more, but in no event more than $175 to each teacher, and the remainder in proportion to the aggregate days of attendance. Such is, in brief, the central feature of our plan for greater sup- port of common schools. The two-fold plan of distribution emphasizes the salary paid to teachers and the length of term. The minimum salary of $800 must be paid before aid from the state and county levies may be had, but when this minimum is reached the state and county together pay 375^% of it, or any other salary paid up to $1,400. This reasonable upper limit to state and county aid is inserted in order to prevent the wealthy school district which is able to pay large salaries from absorbing an imdue share of the two levies when their needs were relatively lesd than those of other districts in the same county. The further restriction to those teachers whose professional qualifications entitle them to regular certificates is in line with the policy of requiring professional training of teachers which has already been introduced in this state. It is quite in harmony with our emphasis upon the state's obligation in education to provide in a financial relief bill for the protec- tion of those standards which the state is setting up for the improvement of the quality of instruction. It was necessary to change numerous other sections of the General Code in order to preserve consistency between the existing school laws and the new sections, and the remainder of the bill is largely devoted to these correctional amendments. The principal changes which were necessary were the following: i) In section 7575 the former levies of .055 mills for common schools and .0025 mills for sinking fund are abandoned, and the amount of state aid which was rendered under these levies is absorbed in the larger "State common school fund" which is created by the levy of 1.7 mills. The amounts which the state is obligated to pay as interest on the irreducible debt will continue to be paid to the districts which are entitled to receive them, as determined by the auditor of state, but the money for this purpose will now come from the state general revenue fund. The levies for the several state universities are repealed entirely 72 in order to make greater leeway for common school snpport within the interior tax rate limitations. 2) Section 7600 provides for the new plan of distribution which has already been outlined. The latter part of this section was intended to correct the inequalities arising in the case of those districts which are entitled to receive interest on the common school fund, otherwise known as th^ irreducible debt of the state, and the income from unsold school lands. This capital constitutes a kind of endowment for these districts, an income over and above what is being received from the local school levies on property. These fortunate districts are entitled to some advantage, and this is recognized in the proposed terms of section 7600. The endowment or trust income is to be paid, as here- tofore; but an amount equal to 75% of such income is to be deducted from the allolixient to such district on the basis of teachers' salaries and aggregate attendance of pupils. The sums so deducted shall be added to the amounts available for distribution in the remainder of the county. 4) Section 76001 is new. It provides for the apportionment of the amount which may be received from the state and cities by parts of school districts, in the event that such districts be in two or more counties. The whole number of teachers employed and the aggr^te attendance of pupils for such parts of districts is to be determined by the proportion which the enrollment of pupils from such parts of district was to the total enrollment of the district. 4) Section 7603 is amended so as to include the amount received from the state and the proceeds of the county levy in the "tuition fund" to be used for the payment of the salaries of teachers and superin- tendents only. 5) Our program of more careful and adequate provision for debt retirement and more severe limitation on debt creation called for an amendment of section 7613. This section at present requires boards of education to set aside for bonds for which no sinking fund levy had been made an amount equal to 1/40 of such debt. Presumably the sums so provided are to be carried as a sinking fund, but this is not so stated, in terms, and in any case an amortization rate is prescribed with iio r^rd to the maturity of the debt. We have changed this require- ment to cover, definitely, the obligation to provide a sinking fund for the retirement of bonds so outstanding. 6. Sections 7736, 7747 and 7751 relate to the payment of tuition for grade and high school pupils in the event that they attend school in another district, whether by reason of distance or the lack of proper sdiool facilities in the district of residence. The tuition to be charged m such cases is to be based on the average monthly cost per capita of 73 ccmducting the schools so attended by pupils who are naration of the income tax bill was the same as that observed in drafting the inherit- ance tav law. That is, we gave careful attention to the experience of those states which appear to have had the best results with income tax- ation, and we did not hesitate to draw freely upon this experience. Wc have had at hand, too, the text of the federal income tax law. In this very difficult field, however, we felt especially the need of first-hand study and our economic advisor was instructed to visit certain states and pre- pare a report upon the operation of the, income taxes in those states. This report will be found in the appendix. The proposed income tax bill falls naturally into two divisions, the first dealing with the determination of taxable income and the second witfi 74 the administrative provisions. It is unnecessary to analyze the bill in detail, and we shall not undertake here more than a brief comment upon Certain features. 1. The tax is to be imposed only upon the incomes of persons who are residents of the state; but all income received by residents of the state, fnHHl whatever source derived, is to be included in the return of inccMne. Corporate and partnership incomes, as such, are not to be hir- duded, because it is our aim to reach the taxpaying capacity of individi- uals, and it is well-known that taxes imposed upon business concerns do» not ordinarily stand as a burden, but are shifted as a part of the expenses- of the business. We recognize, too, that the income tax could not in- equity be extended to business corporations without a complete readjust- ment of the system of corporate taxation now in vogue. As we have* pointed out above, such a readjustment involves a further readjusonent- of die whc^e system of state revenues, and with this problem we have^ done nothing more than to call attention to certain of its aspects.. We-* have been impressed by the recommiendations contained in the Plan for a Model System of State and Local Taxation, by a committee of the Na- tional Tax Association, to the effect that a state income tax should be levied on the income of persons only, and npoa the total income of all persons who are residents of the state and none other. Very early in our ckliberations on this subject, therefore, the deddon was reached to pre-, pare a \All along this line. 2. The definition of gross income follows closely that contained in tfie federal law. It is defined broadly to include income and gains of every sort, whether derived from a regular pursuit or business, or from incidental transactions or occupations of any nature. In section 5773-1, paragraph 8 we have expressly excluded stock dividends from taxable inccMne. We undmtand that a different rule obtains in the federal prac- tice, and that the matter is now pending before the United States Su- preme Court. It is our judgment, however, that transactions of this sort do not result in the appearance of income, and we are therefore excluding them from the definition of taxable income. 3. The prc^r taxation of the gain resulting f rwn the sale or trans- fer of capital assets presented a very difficult problem to the conmiittee, ay it has to others who have undertaken to deal with it. The plan pro- posed in section 5773-5 represents a compromise whereby we sought to secure some revenue from the accretions of capital increment realized as income through sale or exchange, and at the same time to avoid excessive restraint upon the alienation of property such as would be induced by Ae necessity of reporting Ac whole increase in capital value wfaidi had accrued over a layer the option of keeping an inventory according to which ht may report and pay taxes upon the annual increase of value as it occurs, before a sale or transfer has actually been made, whether in anticipation of such a trans- action or not. In the event of realization the amount of taxable gain shall be asstuned to have accrued at a uniform rate over the three-year period and shall be taxed at the rates for the respective years. A re- vised return may be required for each of these years in order to ascer- tain whether any part of the income so aj^rtioned is actually to be taxed, after allowing for the exemptions and deductions to which the taxpayer would be entitled. 4. The deductions from gross income for the purpose of determin- ing taxable net income follow in general those of the federal law, with such changes as would naturally be involved in avoiding the taxation of federal agencies. In the determination of losses we have provided spe- cifically for the deduction of losses shown by the inventory, in case an inventory is kept, as a counterpart to the plan of taxing gains if such are shown by the inventory. It is clear, of course, that a consistent policy must be followed by the taxpayer, who must submit to taxation on such gains as are shown by the invent^ if he expects to take advantage of losses disclosed in the same manner. The proposal for the deduction of interest on debts (section 5773- 8(2), was suggested by the Plan for a Model System of State and Local Taxation. The object here is to limit the deduction of interest to such proportion of total interest payable as the total taxable income bears to the total income from all sources. A taxpayer's income might include a large amount of exempt income, sueh as the interest on United States bonds, and his own interest deduction should be Hmited to that pro rata part which his taxable income bears to his total income. The specific exemptions to individuals have been set at $500 for un- married persons and $1,000 to married persons, with $aoo additional for each dependent. We recognize that these figures mean an encroach- ment iipon that subsistence mininram which all authorities agree should be exempted, but we have ventured thus far because of our desire to secure as wide a diffusion of the burden of the income tax as possible, and also because of the need of additional revenue from the tax. In section 5773-8(9) we have followed the policy already estabhshed in the inheritance tax in restricting the exempted contributions to those given to such religious, educational, charitable and similar classes of institiitioiis as are conducting a substantial part of their activities in this state. 5. Inasmuch as residence within the state ss made the test of tax liabihty, fiduciaries are required to report and pay tax only upon such part of the incom? of trust estates as is paid to persons residing within the state. Partnership incomes as such are not taxed but the partner- ship may be required to make a return of income as a source of informa- tion regarding the income of the dividual partners. 6. The question has sometimes been raised as to the advisability of simjjy requiring taxpayers to file a copy of their federal returns, upon which the state income tax might be applied. We have considered the possibility of this course but have decided against it on the followii^ grounds: First, the conflict of tax jurisdictions. The federal government ex- empts various inci»nes derived from the state, such as interest on state bwids and the salaries of state officials and employees. A state need not do this and our proposed income tax law does not. On the other hand* a state law must exempt entirely all federal agencies, even those which are not entirely exaiqited by the federal law, such as interest on the pub- lic debt and the salaries of federal oflicials. Second, there are some other differences in the determination of gross and net income under the two laws. The federal personal income tax law is co-ordinated with a corporation tax, and dividends are ex- empted from the normal tax. The prq)osed law for Ohio does not ex- empt dividends received by the individual. In the same way the federal law would permit a deduction of the state income tax, but this is not allowaUe under our bill. Our provision for the deduction of interest on indebtedness and of losses differ from those in the federal law. These and other possible points of difference would really necessitate a sq>arate return, or at least a supplementary return whereby the proper correction could be made in the first return, so that little would he gained by the effort to rely on duplicate returns. Finally, it is very much more desirable from the administravtive standpoint, to have a separate return made to the state. We have been strongly advised against the plan of duplicate returns by the tax com- missioner of Connecticut, whose experience with the other system in the taxation is to follow up and check the indefinite number of corrected and amended and supplementary returns which are being made. While tlic Coonecticut plan has involved the taxation of corporations rather 77 than individuals, we preferred not to take the chance of similar dif- ficulties with the individual return. Further, our system of assessment and collection makes it necessary for state and local officials to have oompiidbt ccmtnd of the returns, and to give to these officials the com- plete authority to decide whether or not a return should be made and a tax paid by any person. The administration of the income tax reqtiires the establishment of a fairly com{^ete organization, connected with, and yet supplementary to the existing administrative organization. The state tax commission is placed in general charge of the income tax and in order to enable this body to carry the additional burden we have added a fourth member to that body (section 1465-1). This presents the additional advantage of making the tax icommission a bi-partisan administrative board. The county auditor is made local assessor of incomes, ex-officio, and is required, insofar as this act is concerned, to obey the orders and instructions of the tax commission and to make such reports to it as the commission may direct. He shall appoint such deputies and other assistance as the commission may authorize and at rates of compensa- tion estabHshed by the latter. Returns are to be made by taxpayers to the auditor of their respective counties of residence. Fiduciaries are to make returns in the. counties in which the beneficiaries reside, or if the estate is held for contingent beneficiaries or for lutme distribution, in the county of residence of the fiduciary. The county auditor shall make the assessment of income tax and certify a duplicate to the county treasurer, by whom the tax is to be cdlected at the' same time amd in the same manner as other taxes, except that the whole amount shall be collected at one time, which will naturally be the next- date for tax payment after the return has been filed and the income tax assessed. This date will depend, therefore, upon the date on which the taxpayer's fiscal year closes. For the convenience of those yho have become accustomed to the federal methods, it is provided that any taxpayer may pay his tax at the time of making his return, subject to subsequent correction and final determination of the tax due by the county auditor. Appeals from the assessment as made by the auditor are to be taken to the common pleas court of the county wherein the collection is to be made. These cases are to be given precedence on the docket and heard promptly, and in the meantime the tax appealed from shall not be collected. A condition precedent to the appeal is a bond given to the 78 county auditor by the taxpayer for the performaiicc of the decree and the payment of costs. The tax commission may acquire information at the source by re- quiring appropriate reports from all companies which now make rq>orts to the commission, and also by requiring similar information from aU other persons, firms or corporations which now report to any other state officer. The commission shall furnish the blanks and forms suitable for the collection of the information required and the other state officers are required to assist in collecting and forwarding this information to the commission. Suitable provision is made for securing secrecy of the returns, and a penalty of not to exceed $i,ooo fine and one year impris- onmrat, or both, with forfeiture of public office or employment, may be imposed upon any officials or employes who violate these provisions. Contracts or covenants to assume the tax are made void, because the object of this law is to tax each individual on his taxable personal in- conie, and the tax assumption covenant defeats this purpose by intro- ikiGing exempti(Mis for the individual which are not compatible with this purpose. We have made some effort to estimate the yield which might be ex- pected from such a tax cm incomes as we have here proposed. The yield of the income tax depends, of course, upon the rate and the volume of taxaUe net income that will be returned by residents of the state. It is inqxis^Me to ascertain the latter, and we have been compelled to rely upon estimates based on the returns made under the federal income tax law by residents of the state. The latest material available on this point is found in the Statistics of Income compiled from the Income Tax Re- turns for the calendar year 1917. In this report no analysis was made of the incomes between $1000 and $2000, and we are therefore comf^etdy in the dark as to the amount of revenue which may be expected from the taxable incomes below $2000. Our estimate of the yield of the tax on incomes above $2000 is presented herewith. (1) Total income returned for calendar year 1917 $596,090 92^ (2) Personal Exemptions $194,019,000 (3) Contribtitions 13,745,314 (4) Federal Income and Excess Profit Taxes 30,989,654 258,753,968 (5) Total Taxable Net Income 1359 335 954 (6) Taxable Net Income, $2,000 to 14,000.....:.... $53,130,854 Tax at 1% $531,308 54 (T) Taxable Net Iiicx>me, $4,000 and over 306,206,100 Tax at 2% $6,124,122 00 Total Taxes 6,655,430 54 79 For the sake of completing our estimate, let us assume that the num- ber of returns of taxable inccmie between $500 and $2000 will be equal to the number of returns of $2000 and over. (In 1917 the number of returns between $1000 and $2000 was 47.25% of the total.) Let us assume further that the total net income returned in such groups is one- fifth of the amount returned in the other classes (in 1917 this ratio was 18.04%). This would- mean that 95,396 taxpayers would return $119,- 618,184, or an average annual income of $1253. On the further assuntp- tion that the ratio of taxable to total net income between $500 and $2000 would be the same as between 2000 and 4000, the taxable net income would be 30.25% of $119,618,184, or $36,184,500, and the tax on ^is amount at 1% would be 361,845. The total tax on this basis would be $7,017,275. We realize that calculations of this sort are only roughly approxi- mative, in view of the many factors which cannot be accurately con- sidered by reason of the meager data available. We indulge in specu- lations of this sort for the purpose of providing ourselves with some basis, however insubstantial it may be, upon which to adapt the income tax into our general estimate of the relief to be obtained from the new taxes as proposed. We migrht say that the Ohio income tax law as we have drafted it may be expected to yield between $7,000,000 and $8,000,000, and in our summary to Qiapter III we have used the lattee figure, althoug-h we realize that it is doubtless too hi^h. We have proposed to divide the yield of the income tax between the state and the local subdivisions entitled to share therein, namely the municipal coroorations and townships, In the ratios of % and Ya, re- spectively. This would give the state about $2,000,000 00 and the local units, about $6,000,000.00 on the assumption of an $8,000,000.00 yield We have found that the probable shortage of state revenues will be be- tween $1,000,000.00 and $4,000,000.00 and this proportion brings the state revenues fairly well into balance with expenditures for the present Hennium. Of the portion distributable locally the cities will receive by far the larger share, for the income tax is everywhere characteristically an urban tax. About 37% of the federal income tax of 1918 was paid from New York State, according to Professor Seligman of Columbia University, and of this amount 87% was paid from New York City. Milwaukee County, Wisconsin, with 18.86% of the population of the state, was assessed for 44«oi% of the total income tax in 1916. We may expect a similar distribution of taxable net income and income tax yield in Ohio, which means that the cities will actually obtain some relief by Bo securing by far the lai^r share of the 75% allotted locally, although, as we have shown above, this relief will be insufficient for 1920. S^ned: Frank C. Pareett, Chairman, WlIXIAM Agnew, Wallace W. Bellew, John E. Holoen, Frank E. Whittemore, Rupert R. Beetham, R. M. BiLLINGSLEA, Milton Clark, Edward J. Hopple, Huston T. Robins, Francis M. Thompson. ' On account of illness Senator Hiomas M. Berry has not been able to attend the sessions of the committee, nor to sign the report. APPENDIX TO THE Report of the Special Joint Taxation Committee r OF THE » ■ 83rd Ohio General Assembly A REPORT ON THE OPERATION OF STATE INCOME TAXES BY H ARLEY L. LUTZ, Ph. D. PROFESSOR OF ECONOMICS IN OBERUN COU^GE Presented to the Special Joint Taxation Committee September 18, 1919 LETTER OF TRANSMITTAL. To Senator Frank C. Parrett, Chmrman of the Special Joint Taxation Committee, Columbus, Ohio. Dear Senator Parrett : — I take pleasure in presenting herewith my report on the operation of Stote IncfMne Taxes. Respectfully sulwnitted, Hasley L. Lutz. September i8, 1919. When Professor Seligman published the first edition of his extensive work on Income Taxation, in 191 1, he concluded an exhaustive survey of the methods and results of state income taxation with the generaliza- tion that the income tax should be administered by the federal govem- •ment.^ He was forced to this conclusion by a consideration first, of the -experience of the American states in their efforts at income taxation during the 19th century, and also, because of the increasing importance of interstate transactions with the resultant difficulty of dividing or allocating such incomes to tlie several states. The second of these con- siderations still remains, and will doubtiess always constitute a very real difficulty to the equitable operation of a state tax upon incomes. The first ground of objection has been so successfully met, however, during the past eight years by at least two states that we may now rea- sonably enough postulate that a new era of income taxation has been reached. That is, we have not solved, and we probably shall never solve satisfactorily all of the problems of interstate apportionment, although some progress has been made in this direction; but we do know how to overcome the other difficulties which proved so serious in the earlier experiments. These difficulties were administrative defects, and they led to general and complete failure. The following summary of the causes of this deficiency by a careful student of the earlier state income taxes may serve as a kind of historical guide post: ^ "A careful study of the history of the tax lea^s one to the conclusion that the failure has been due to the administration of the laws. This conclusion is borne out by both the admissions of the advocates and the assertions of the opponents of the tax, and is corroborated by the reports of tax commissions. The causes operating to produce this failure in administration appear to have been four ; the laws them- selves have been defective m the provisions for their own administration; the officials have been lax in the enforcement of the laws; the taxpayers have been persistent in evading them; and the nature of some incomes has made them especially difficult to reach. The income tax thus far, failing to recognize the weakness of Ae average taxpayer, have allowed him to return his own income. Some argue that to employ any other method would be undemocratic and that pid>lic sentiment would never submit to it However, although die public has always opposed any inquisitorial system, the opposition has been often due rather to the fear that it may attain die end sought than that it is counter to the ^irit * Seligman, The Income Tax, 1911, pp. 418-429; 654-655. •Kinsman, The Income Tax In the Commonwealths of the United States, Pub. Amer. Econ. Assn., 1903, p. 117. 97 88 of democracy. * ♦ ♦ We have yet to learn of a plausible argument in sup- port of the assertion that the income tax is more inquisitorial than other forms of direct taxation. The income tax has succeeded in nations quite as democratic as Ac United States. Other methods than self-assessment have been employed successfully, both by foreign nations and to a limited extent by some of our own states:*' The first of the modem state income tax laws was passed by the legislature of Wisconsin in 1911. In this state the movement for an in- come tax received its first imi)etus in the very general dissatisfaction which had been aroused by the inequitable operation of the property tax as applied to personal property. A constitutional amendment au- thorizing an inccHne tax was adopted in 1908 by a large majority.* A tentative measure was introduced in 1909 and adopted in 191 1. From the very outset the success of this measure was in such marked con- trast with the earlier state experiences that a number of states have since resorted to this form of taxation, though not all of them have seen fit to follow the Wisconsin law in its most distinctive features, that is, its administrative methods which, mpre than anything else have made it successful. The state income tax laws adopted since 1911 have been the follow- ing, which is a complete list so far as the writer can discover; West Virginia, Oklahoma, Connecticut, 191 5; Massachusetts, 1916; Missouri, Delaware. and Mcmtana, 191 7; New York, 1917 and 1919. Income t9xes of older sort are still in force in Virginia, North Carolina and Tennessee. The income tax laws of the past eight years may be grouped into two classes, on the basis of their scope. In one group are those laws which apply to incomes of every sort, as in Wisconsin and New York. The former state has one general income tax law, the latter has enacted, separate acts for the taxatioa of individual and corporate incomes. The odier group, comprising all other states having income tax laws, have applied these laws to a limited class of incomes. In Massachusetts, Oklahoma, Delaware and Missouri, the tax is levied on the income of individuals only, and in Massachusetts the scope of the law is further confined to. certain classes of individual income. West Virginia, Con- necticut and Montana levy the tax upon corpora,te incomes oaly. There is, thus, a considerable variety in the form of the state incitoie tax laws, in * The Wisconsin constitution now contains the following tax provisions : "The rates of taxation shall be uniform and taxes shall be levied upon such property as • the legislature shall prescribe. Taxes may also be imposed upon incomes, priv- ileges and occupations, which taxes may be graduated and progressive, and reasrehensible to the average taxpayer. A necessary part of the administrative machinery of every tax act is the procedure for review and abatement of assessments. This is always a difficult problem, for neither of the practicable alternatives is wholly satisfactory. In general, the tax assessing and administrative officials may be designated as a reviewing board, whose findings on the facts may be final ; or an appeal may lie to some outside authority, usually a court, which is often lacking in the technical qualifications required for passing upon disputed issues of fact. All things considered the re- view upon the facts should be conducted by the higher taxing author- ities, with proper safeguards for the protection of all legal rights by the courts. The Massachusetts procedure really combines tiiese alternatives. Any person aggrieved by the assessment of a tax under this act may ap- peal to the tax commissioner within three months. In case of dissatis- facdon with the tax commissioner's ruling, the appeal may be carried either to a board of review, consisting of the treasurer and auditor of the Commonwealth and a member of the governor's council, or to the superior court of the coimty of his residence or place of business. The former alternative permits cases involving small amounts to be reviewed without great expense. Thus far the whole number of such appeals has been siiiall, and the issue most often raised has been that of domicire. information at the source is provided by requiring all corporations, associations, partnerships and trusts to file lis\s of all employes residing in the state to whom wages or salary in excess of $i,8oo was paid during the preceding calendar year. Foreign corporations doing business in the state are required to file a list of their Massachusetts stockholders and bondholders to whom dividends and interest were paid. The treasurers of cities, towns and counties, and the state auditor, are required to file lists of employes receiving more than $i,8oo. ' The problem of distribution of the proceeds of the income tax proved impossible to settle out of hand, and the Joint Tax Committee proposed a temporary arr^gement which was readjusted each year until 1919, when a permanent plan of distribution was adopted. The constitu- tional amendment which authorized the income tax did not impose any restriction upon the manner of the distribution of the proceeds, and the legislature was therefore free to work out a long run advantageous arrangement. 96 The plan for the first year was to preserve the status quo by per- mitting each city and town to receive as much income and personal prop- erty tax in 191 7 as they had received from the taxation of all classes of personal property in 1916. Any siirplus above the amount of income tax cdkctions required for lliis purpose was to be distributed locally in the proportimi of the state tax levy for 1917. The state is at all times to retain enough to pay the costs of administradon. After temporary modi- fications in 191 7 and 1918 a final plan was inaugurated in 191 9, imder which the state retains, as before, sufficient to pay the costs of adminis- tration, and distributes the balance in two ways. First, to each city, town and district shall be given such proportion of an amoimt equal to the difference between the average amount of tax levied upon personal property in such city, town or district in the years 191 5 and 1916, and the amount, calculated by the tax conmussioner, that would be produced by a tax upon the personal property actually assessed in 191 7 and 1918 at the average rates which prevailed therein in the years 191 5 and 1916, as is 90% thereof for 1919, 80% thereof for 1920, and so on to 1928, when this feature of the plan will disappear. Second, in any year the surplus of the tax shall be distributed in proportion to the state tax levies, and after 1928 the whole proceeds shall be so distributed. This final aUocation plan was the recommendation of another Joint Taxation Committee, which reported in 1919. This committee consid- ered the question of a distribution according to source, but advised against it, and the income tax deputy spoke very strongly against such a plan. Some of the difficulties which he anticipated were incident to the local situation and to the particular kind of income tax which is now in force for Massachusetts, but the problems of domicile, and the intricate accounting problems involved in the determination of actual source of the income, are universal. In this sense, the determination of the source of incomes and the apportionment among districts is the interstate problem in miniature. The general! difficulty can only be solved by an arbitrary plan of apportionment which preserves as much as possible of the equi- ties in the case. Such a distribution according to source is attempted in Wisccmsin, and it is accomplished by an arbitrary rule which is discussed later.^ * The first result of these years of income taxation in Massachusetts has been a greatly improved attitude of taxpayers toward the whole question of assessment and taxpaymg. This change, which was testified to by lawyers and business men as well as by the state tax officials, is the result of the better equalization of the tax burden which is accom- plished under the inccwne tax. The advantage which was once obtained ^ See bdow, p. 116. 97 by the colonizing movement is now negatived, and the strict, impartial and efficient administration of a state-wide tax has made competitive tax dodging quite unpopular. The people generally have already ac- cepted the income tax as a matter of course, they are rapidly adjusting their affairs to it, and there appears to be a general confidence in the adequacy and hcmesty of its operation. Another gain is in the increased revenue which the income tax has produced. The following table from the tax commissioner's report for 1917 shows the preliminary results under the first assessment: (000 omitted.) Class. No. of Re- turns. Business In- Come. 3% Gains. Annuities. Interest and Dividends. Exemptions, 6% Class. Total. 162.217 10,071 13,8!)5 $1,625 924 12 $no8 176 51 $24 $6,435 453 1.349 $103 7 5 $8 603 1,553 1.411 186.183 5.000 $2,562 15.04K) $835 1.5 $24 $8,237 461 $115 11,658 477 191.183 $2,577 $837 $24 $8,698 $.20 12,135 The amount of intangibles assessed in 1916 and the tax derived therefrom are not ascertainable since the Massachusetts tax returns did not separate the two classes of personalty. It* required $8,120,621 to reimburse the cities and towns in 1917 for the loss in taxes due to the decrease in the total personalty assessed in 191 7 below the' amount as- sessed in 191 5. This decrease represents the amount of tax which, it is assumed, had been derived from intangibles, plus a small allowance for a fuller disclosure of tangible property in 191 7. Estimating the loss due to the $300 exemption and that due to the exemption of non-resident beneficiaries of estates and trusts at $2,100,000, the former yield of that part of the intangibles which paid income tax in 1917 was about $6,367,- 000 to $6,867,000. The new tax represented, therefore, a real gain of about $2,000,000 in the first year. The old tax on business incomes pro> duced $770,228 in 191 6, as compared with $2,577,061 under the new law. The 3% tax on gains from dealings in intangibles was new, and pro- duced $837,000. By July 31, 1919, the net assessment of incomes for IQ17 had reached $12449,655, through various corrections and additions made by the tax commissioner. The assessment for 19 18, at the date ot publication of the annual report, was $14,387,339. The assessment for 98 1919 was in prc^ess during the summer and no figures were available It is quite evident, however, that the income tax on interest and divi- dends is proving to be very much more productive of revenue than was the former tax at high rates on the capital value of such intangibles as were hsted. This fact is the clearest possible evidence of the extent to which successful evasion went on under the earlier tax system, and demonstrates beyond doubt, cavil or contradiction the wisdom of the change made. The new tax is not only yielding more revenue, but it is distributing the taxes on this class of property vastly more equitably than could possibly have been the case before. Under the general properly tax the owners of large amounts of intangibles either escaped entirely, or se- cured immunity by emigrating to one of the numerous tax colonies in which, in return for a moderate compromise assessment, an absurdly low tax rate was established. Of one of these tax colonies the Joint Com- mission of 1919 wrote as follows: * ♦ifii nP^r"^** famous case was of the town of Orleans, which in 1910 had taxed 1181,000 of personal property at the rate of $15 per $1,000. The next year the assessment of personal property was increased to $968,000 and (lie rate fell to $300 m 1910 assessment of personal property had further increased to $3,941,000 and with the corporation and bank taxes it was necessary to make the most lavish expenditures for highways and other improvements in order to have any rate at air. The wealthy owner of intangibles is no longer able to purchase unmunity for himself at the expense of the small investor, the widows and origans whose funds are in the hands of fiduciaries, and that small band in every community whose exaggerated sense of honesty compells ' them to list every dollar of their intangibles regardless of the general practice of the community and regardless, too, of the fact that their action subjects them to substantial confiscation of the income from their property. So far as intangibles are concerned, the Massachusets law has the supreme merit of effecting a genuine and lasting equalization of harden amcn^ the owners of intangibles by widening the tax base and lowering the tax rates. This equalization of tax burden has been improved also as between the whole class of intangibles and the property which remains subject to taxation at local rates. The increase of revenue from the intangibles is the best evidence of this improvement. The method of distribution which was adopted tended to stimulate the local assessment of tangibles, for eadi community's share of the income tax was influenced by the mar- gm between the total assessment of personal property before the income Report of the Joint Special Commission, 1919, p. 41 99 tax act went into effect and the assessment of personal property remain- ing subject to local taxation in the year following. Every local asses- sor was therefore under a stimulus to increase the assessment of tangibles, and considerable progress has been made in overcoming the loss to the grand duplicate due to the withdrawal of intangibles, as the following table shows: « TOTAL ASSESSMENT OF PROPERTY YEARS 1916-1918. (000.000) Year. Assessed Per- sonal, ex- cluding Bank stock. Resident Bank stock. Buildings. Lands. Total. Grand Total. 19^6 $1,208.0 694.7 817.5 1 $33.2 30.3 32.7 $1,998.1 2,091.0 2,149.6 $1,687.0 1,715.5 1,734.6 $3,685.1 2.806.8 3,884.2 $1,926.1 4,o31.8 4,734.6 1917 1918 The first column included in 1916 all personalty, but in 1917 and thereafter it includes simply the tangible personal property. It is sig- nificant that the assessment of tangibles increased $122,700,000 in 1918 while the aggregate of lands and buildings increased only $74,300,000. Such a relative rate of increase will of course not be maintained,' but this growth in the assessment of tangibles, together with the increased revenue which is being obtained from intangibles under the new system, shows conclusively that a wholesome redistribution of tax burden as between real estate and personal property is in process. Another beneficial result of the income tax in Massachusetts has been a better equalization of distribution of tax burden among the various communities of the state. Reference has already been made to the vicious practice of tax colonization which was so notoriously common under the former system. This is a practice which is not un- known in Ohio though it has probably not attained the proportions that it did in Massachusetts. And yet, there are possibly hundreds, even thousands of instances over tl^e state, of citizens who have maintained a tax domicile or residence in a country place or small village in order to obtain the advantage of low tax rates. Enough property has been returned in these districts, with their small revenue needs, to keep the tax rates down, while the growing municipalities in which these individ- uals have conducted their successful and profitable business operations have groaned under excessive rates or have been threatened with finan- 100 dal asphyxiation under the onerous restrictions of our tax limit law. The S3rstein of distribution applied in Massachusetts has turned the bu!k of the income tax receipts back to the deserving municipalities, because of the proportion of state tax which has been derived from these dis- tricts. The manufacturing towns which have really produced the income are enabled thus to derive a proportionate benefit from the tax, and so an equalization among communities has been effected. The beneficial effects of the permanent income tax distribution scheme will henceforth be interfered with in some degree by an educa- tion bill passed in 1919, but this resu't is in no way to be attributed to the income tax itself, nor wdl it follow that an advantage will again accrue to the formerly flourishing tax colonies. The education bill aims at a redistribution of a portion of the income tax receipts on the basis of the needs of the schools, which means, in effect, and the act so provides, that the poorer school districts, with small property valuations and a lower range of salaries for school feachers, are to be aided in school maintenance by the more wealthy and prosperous sections. Under this plan it was estimated that the following cities would experience losses in 1919 as shown below: Receipts Loss From to School Fund Income Tax Net Lost V • 1627,700 .11,187.355 $559,655 New Bedford 87.340 107,415 20.105 Springfield 136,700 159,432 22.733 Lowell 67,800 83,148 15.a48 Lawrence 65,550 75,348 9,798 Fitchburg 29,6('0 37,128 7.528 Holyoke * 53,610 60,099 6,489 f t These losses are serious and especially in the case of Boston will have rather disastrous effects for the present upon the property tax rates. There is no immediate prospect that the situation may be cor- rected within the income tax, but some other changes in the tax system may soon afford compensatory relief to the industrial centers. These changes relate to the system of corporate taxation and they will be briefly outlined because of their rather intimate bearing upon the per- sonal income tax and also because they are suggestive of the coarse which this committee may wish to pursue with r^;ard to the taxation of OHporations. The system of corporate taxation in Massachusetts is too compli- cated to be described in detail here. In brief it is a system of frsmchise valuation, which is taken to be the excess of the value of the capital stock over the value of property knally taxed (real estate, machinery). property located outside the state and taxed where located and exempt securities. In 1903 the franchise assessment was limited to 120% of the valuation of real estate, machinery, merchandise and taxable securi- ties. The assessment is made by the tax commissicmer and the tax is levied at the average rate of taxation upon all property in the state. It was inevitable that serious inequalities and injustices should develop in the operation of such a rigid and mechanical system of cor- porate valuation. These have been pointed out by the tax commis- sioner, by various students of the subject, and by more than one legis- lative committee. No definite proposals for change were considered until last year, when a special committee on the corporation tax recom- mended the abolition of the whole system of franchise taxation and the adoption of a corporation income tax. In order to safeguard the state's revenues this committee was obliged to include in its bill certain minimmn provisions which amounted, in effect, to classification of property, since they involved the imposition of low tax rates on corporate property.^ Such a classification was repugnant to the unifority clause of the state constitution and this proposal was dropped. Because, of the unprece- dented state expenditures occasioned by the war emergency, revenue measures applying to corporations were passed which were substanti- ally similar to the plan now in effect in Connecticut. » All corporations doing business in the state, both domestic and foreign, were required to file with the tax commissioner true copies of their returns to the commissioner of internal revenue under the federal income tax, and a tax of 1% was laid upon the corporate net income as shown by these returns. These laws were revived for one year in 1919. Meantime, another Joint Legislative Committee on Taxation had been created to study the problem further, and this committee, reporting in 1919, was unable to endorse the corporation income tax plan of 1918 for the reasons given. It did recommend the submission of a classifica- tion amendment, which, if adopted, would make possible impartial con- sideration of the proposal. It advised further study of this plan of corporate taxation, which it held had not yet received general approval in Massachusetts. In the meantime it proposed certain changes in the existing system of franchise taxation which aimed at the elimination of the injustices while they provided larger revenues from business cor- porations. Under the change made one-sixth of the tax is retained by the state (being the average amount accruing to the state in tiic years ^Report of the Joint Special Committee on Corporation Tax, lfll8, p. lOl 'Report of the Joint Special Committee on Taxation, 1919, p. 24. 'Laws of Massachusetts, 1918, chs, 253, 155: revived for one year by Laws. J918, ch. 343. / / -» I02 1910-1917 on account of no>n-resident stockholders) and the balance is distributed locally in proportion to the assessment of tangible property of the corporations. ^ The increased amounts which will go to the indus- trial centers under this act will offset the estimated losses due to the education act of 1919. Incidentally, the state's revenues will be en- hanced, to the general benefit of property locally taxed. Certain changes in the rates of the income tax have recently been adopted which illustrate the flexibility of this part of the revenue sys- tem. It has long been the practice in England to vary the rate of the in- come tax in making the final adjustment between estimates of expenses and receipts. With the development of an adequate budget system in this country, a similar flexible adjustment might prove possible. The attainment of this ideal is yet far distant with us, but the Massa- chusetts experiments prove its fea.sibility, friuiecticut Tax Conmiission. Report, 1918, p. 52. 104 A State at the close of the fiscal year bore to the fair cash value of the entire real estate and tangible personal property, with no deductions on account of incumbrances thereon. If the profit were derived principally from the holding or sale of intangible property, the net income was to be apportioned on the basis of the relative gross receipts for the fiscal year within and without the state. An evident defect in this method of apportionment, in the case of the first class of corporations, is the use of one figure, the fair cash value at the close of the fiscal year. It is possible under this provision for "window-dressing'" to reduce the proporticm of movable assets within the state by depletion of stocks, and in other ways. It is quite apparent, also, that with the spread of the plan of levying a super-tax upon cor- porate incomes including those from interstate business, serious compli- cation will arise unless there is a uniform method of apportioning income. That this uniformity will not be attained is fairly certain, for the New York and the Wisconsin plans of apportionment both differ from the Connecticut plan. 1 he conflicts of interest among the states are impor- tant and real, and in the years to come they may become a source of severe multiple taxation upon large interstate businesses, unless there is a genuine effort at uniformity at this point. At the outset the Connecticut law was apparently simple enough ^ and it produced a substantial revenue at a very slight cost of administra- tion. In his report for 191 6 the tax commissioner discussed these fea- tures of the law with enthusiasm and optimism and at the time there seemed to be good ground for his attitude. The subsequoit experience is revealed by the figures showing the annual yield:* 105 tion of federal taxes will be discussed in connection with the New York law.^ With the administrative methods adopted it wouM have been rather incongruous for Connecticut to refuse the deduction, and of course, when the act was passed no such burden of federal taxation was anticipated as has actually come to pass. Neither did the administrative officials anticipate the very serious complexities which were to be intro- duced with the later federal legislation. The deputy in charge of the tax was positive that had Mr. Corbin been gifted with prophetic fore- sight, this particular plan of corporate taxation would never have been introduced. It has been especially troublesome to keep up with all of the amended reports which taxpayers have filed with the federal revenue officers, to check their accuracy, and to carry through the necessary ad- ministrative detail which this apparently endless succession of changes involves. The act has thus far withstood the test, in the courts. The Under- wood Typewriter Company refused to pay its taxes in each of the first three years, and the case was taken to the supreme court. With one dis- senting vote the court held that the tax was not a restraint on interstate commerce, but a privilege tax, and within the field of the valid exercise of the state's power to tax. The law was also held to be not in violation of the 14th amendment, since it was a reasonable levy, on a reasonable apportionment of the company's income to the state.* The New York Income Tax Law. The financial situation in New York which led to the adoption of an income tax was quite similar to that Which exists in Ohio today, al- though in some respects matters were even worse in the former state. The theoretical basis of the New York system was the property tax, but through two generations of ineffective administration this tax had be- come almost entirely a tax on real estate. Thus, in 1866 the proportion of personal property to total assessment was 25.5% ; in 1870 it was 22%. in 1898, 14.6%, and in iQi4,*only 377%. At various times special taxes had been imposed on different classes of personal property, such bank shares, mortgages, vehicles, etc. But all of the authorities agree that these exemptions have had no long run effect upon the amount of personal property assessed ; rather, the state tax commission has insisted that they are indicative of the large amounts of taxable property whic^ have continued to escape taxation. * See below, p. 109. 'Underwood Typewriter Co. v. Champion. io6 The tax situation in New York has be^ the subject of serious study by a number of special tax commissions. The latest of these was a joint legislative committee, which published an admirable report in 191 6. To this committee the legislature had submitted the following question — • "How can the state most equitably and effectively reach all property which should be subjected to taxation and avoid conflict and duplication of taxation of the same property?'* A part of the committee's reply to this question is as follows : ^ ''Without passing upon the broad questions of public policy involved in the adoption of a new tax system whidi questions should more properly be decided by the legislature as a^ whole, this Committee, in answer to the specific question sub- mitted to it, desires to state that all of the evidence presented and all onr investi- gations, tend to show that the end sought for will be accomplished best by: 1) the abolition of the present tax on personal property; 2) the wididrawal of general business incomes from the provisions of section 182 oi the tax laws; and 3) the impositicm of an income tax on individuals and geneial business curporatioiis, induding manufacturing corporations/' The recommendation for a general income tax did not meet with legislative approval in 191 7. The principle of income taxation was adopted, however, in the franchise tax imposed upon mercantile and manufacturing corporations,- This law was re-written in 19 19 and little attention will be given the earlier draft except to note its place in the evolution of the New York income tax laws. It was very successful as a revenue producer. For the first eight months, November i, 1917, to June 30, 1918, the comptroller reported collections amounting to $14,- 769,275.' The loss due to the withdrawal of these classes of corpora- tions from section 182 (the franchise tax on capital stock) was reported as $172,466. Nothing was accomplished by this act, however, to correct the in- equalities and injustices in the operation of the property tax, to which the joint cmnmittee of 1916 had so ably called attention. Various in- terests in the state became active in pressing the campaign for a reform of the property tax, and in 1919 a legislative committee presented, a bill for the imposition of a tax on personal incomes. This committee made no published report, but it established connections with many of the organizations which were interested in the subject and conducted a series of hearings in which various angles of the problem were presented. The outcome was the introductimi of a bill in. the preparation of which the ' Report of the Joint Le'gislative Committee on Tustation, p. 208, *Laws of New York, 1917, ch, 726. ' Con^troller of New York, Report, 191%, p. xvii. 107 committee had had the assistance of a number of able students of taxa- tion, including Professors C. J. Bullock, of Harvard University, and E. R. A. Seligman, of Columbia University. The bill was enacted with- out substantial change except for the transfer of the administration of the law from the state tax commission to the state ccmiptroller. This change was made in the closing days of the session for partisan political reasons, as is frankly admitted on all sides in Albany. This act, imposing a tax on personal incomes, together with the amended tax on business corporations, brings New York well into line in the practical application of the program suggested by the committee on a model application of the program suggested by the committee on a model tax system. Your committee has already decided upon a personal income tax, and the New York model is perhaps the best one for it to follow^ although some features of that law were not approved by the leaders in taxation in New York and should not be introduced here. In- stead of undertaking a summary of the act, a copy of it is made a part of this report and copies are put into the hands of the committee, (This bill is not here printed as a part of the report.) The ^ce of this report is given over, then, to comments upon various features of the act, with special emphasis upon those points at which caution should be exercised in following the New York statute. For convenience in reference, the comments will follow the section numbering of the law. Section 350. The practice of giving a list of definitions is char- acteristic of the New York tax laws. It is .thoroughly commendable. Section 351. The attempt to tax nonresidents upon the income from * pro]>erty owned and from business, traded, professions or occupations carried on in New York was inspired by a local situation which has no parallel in Ohio. A large number of persons do business or earn in- comes in New York and reside in New Jersey, and the tax on nonresi- dents was confessedly aimed directly at this group. The taxation of nonresidents is not approved by the committee on a model tax system, and its argument against the practice is familiar to this committee. Mooreover, this feature of the New York law has already been the subject of litigation, and was recently held unconstitutional by Judge Knox of the United States circuit court, the principal basis for the de- cision being that nonresidents were discriminated against in the deduc- tions and exemptions allowed.^ The case will go to the supreme court and in the meantime the legislature will be asked to coirect the defects which seemed to weigh with the court. If possible New York will retain some means of taxing the " Jersey ites", but any state which has no such local * The Yale and Town Manufacturing Co. v. Travis. io8 problem, and Ohio does not have, would better not make the attempt to reach nonresidents on their persona] incomes. Section 352. This section exempts intangibles from the property tax. The committee on a model system recommended this, and it is done m Massachusets and Wisconsin, as well as in New York. Whether u can be dfits denved from the sale of real estate or other cap tal asS 3-' whiter sTrf Tl "^-^er gains, profit, a«l t^^^f whatever sorf. The or.gmal law included the estimated rental of dwell- ings when occupied by the owner, but this proved so fruitful of admt- strative difficulties and so barren of results that it was eliminated Tn to J * X in this year also, to a distribution of earnings accrued since January i iqu and nliH J^^the stockholder, whether in cash or in stocl!. I„ froin the sa e of capital assets acquired before January i. loii the fair market value as of that date was fixed as the basis!^ Rerfd^ts Vere made taxable only on incomes earned or derived from property located withm the state, and non-residents were to be taxed sinAlarly on ln- ii6 comes arising within the state. A system of apportionment for inter- state incomes was provided. The geographical rule was modified by the familiar legal doctrine of situs. The act provided that the income af real estate, farm, mine or quarry, should be taxable at the situs of the producii^ property. The income from intangibles, specifically land omtracts, mortgages, stocks, bonds and securities, is to f o^ow the domi- cile of the owner for taxation purposes. Income received from non- residents from these species of property is not taxable, even though the property which they represent and from which they derive their value, is located in Wisconsin. For interstate concerns a statutory rule of apportionment of income is provided, or a separate accounting may be made, with the approval of the commission. This view of the taxability of incomes is not in accord with the best modern thought, as represented by the plan for a model system of state and local taxation. It conflicts with the New York and other laws, and if retained, will undoubtedly lead to an increasing measure of double taxation on non-residents. The tax commission is urging that Ae law be harmonied with other laws by making domicile or residence the test of taxability.* The method of apportioning the incomes of firms or individuals doing business within and without the state is apparently designed pri- marily for manufacturing corporations, and it is primarily this dass of concerns which would be involved. This method is as follows: "In determiniiig the proiK>rtioii of capital stock employed in the state, the same shall be computed by taking the gross business in dollars of the corporation in the state and add(ing) to same to the full value in dollars of the property of the corporation located in the state. The sum so obtained shall be the numerator of a fraction of which the denominator shall consist of the total gross business in dollars of the corporation, both within and without the state, added to the full value in dollars of the entire property of the corporation, both within and without the state. The fraction so obtained shall rqiresent the propoitkm of the capital slodc represented within the state." Much difficulty has been met under this rule in securing a fair ap- portionment to Wisconsin of the income of. the large creameries and canneries which buy their raw materials in Wisconsin and sell most of the product in other states. The Heintz Company is now engaged in contesting the validity of the commission's determination. Since the law apphes both to individuals and to corporations it is necessary to provide separate provisions for deductions from gross in- come, exemptions and rates. The act in reality combines in one law a ^Wisconsin Tax Commission, Report, 1918, pp. 6-a 117 system of taxation similar to that of New York. That is, it is a com- bination of tax on personal incomes and a business tax on corporations, using net income as the basis in the latter case. Viewed ifi this light, the Wisconsin plan foreshadowed the general outline of the Model Sys- tem, although with some features not acceptable to the latter. In determining the net income of individuals the following deduc- tions are allowed, i) wages and salaries paid to employes who have as- sisted in producing the income. In order to secure this deduction employers must supply a list of all persons to whom $700 or more is paid annually. Other allowances are, 2) the ordinary and necessary ex- penses ; 3) losses not covered by insurance ; 4) dividends on stocks of cor- porations the income of which is taxable under the act; (with provision for partial deduction in case only a part of the corporate income is tax- able) ; 5) interest on all debts, providing the debtor reports amounts paid, form of the debt and names of creditors ; 6) pensions ; 7) all taxes paid on the property or business from which the income is derived; 8) inherit- ances; 9) insurance received, except in the case of endowment paid dur- ing life the excess of payment over amounts paid for the insurance is taxable as a prc^t ; 10) and dividends paid on stocks of banks taxable by Wisconsin. The interest exemption is clearly too broad, and the commission favors a restriction to the interest paid on debts incurred in the opera- tions from which the taxable income is derived. The language of the act does not permit a deduction of federal income taxes, which were not in existence when the law was passed. The commissicm recognizes two sides to this question but is inclined to favor the deduction. The attempt to determine and tax the so-called "profit" element in endowment or other term insurance is peculiar to the Wisconsin statute. The difficulty of accurate and equitable determination of this element makes this an objectionable feature. The exemptions allowed to individuals are $800 for single persons, $1,200 for husband and wife, $200 for each child under 18, and $200 for each additional person actually supported by and entirely dependent upon the taxpayer for snupport. These exemptions allowed to ' individuals stand as originally enacted and are reminiscent of the figures commonly advanced about 191 1 as representing the minimum of decent subsisten<^. They are unquestionably too low for the present era of inflated prices! These exemptions are specifically denied to non-residents on their income from sources within the state, and to corporations. The rates on personal incomes are graduated accordmg to the follow- ing elaborate schedule : ii8 Taxable Taxable Class Income Rate Class Income Rate 1st $1,000 1 % 8th $1,000 3i% 2nd 1,000.'.. 1\% 0th 1,000..... 4 % 3rd 1,000 U% 10th 1,000 4i% 4th 1,000 15% 11th 1,000 5 % 5th 1,000 2 % 12th 1,000 51% 6th 1,000 2i% 13th 1,000 6 % 7th 1,000 3 % And on all over 6^ The deductions allowed to corporations include wages and salaries paid, provided a list of employes receiving $700 and over be filed as in the case of individuals ; losses not covered by insurance ; taxes imposed by any state upon the source from which the income taxed by this act is derived; ordinary expenses, with reasonable allowance for use, wear and tear, and the depletion of mines ; interest paid in the operation of the bfusiness from which the income is derived, provided a list of pa3rments be filed as in the case of individuals; dividends from corporations, the income of which is taxed, with a proviso for the apportionment of this deduction according as only a part of the said income is taxable ; bank dividends ; and co-operative associations may deduct amounts distributed to patrons in proportion to their patronage. The corporations that are taxable are allowed no exemptions. All public funds and the income of the following classes of corporations are entirely exempted — banks, religious, educational, scientific and benevo- lent institutions, and the public utilities. The law originally contained a very complicated scheme of rates on corporation incomes, the actual rate being governed by the relation be- tween net income and the assessed valuation of the property in Wis- consin. The. thought was to stimulate the local assessment of corporate prc^rty and thus to provide a revenue resource in the event that the inccHne tax receipts should prove disappointing. The plan proved im- practicable and was replaced in 191 3 by a straightforward graduated sys- tem, the schedule running as follows : . Taxable Taxable Class Income Rate Class Income Rate 1st 11.000 2 % 5th $1,000... 4 % 2nd 1,000 2J% 6th 1,000 5 % 3rd 1,000 8 % 7th and all above 6 % 4th 1,000 31% The administrative provisions of the act are in many respects the most important contribution which Wisconsin has made to the whole problem of state income taxation. These, more than any other feature. 119 distinguish the Wisconsin act from the long list of failures which pre- ceded it. They have served as the model for the administrative portions of the Massachusetts and New York laws, and it is hardly too much to say that the degree of success or failure which will attend such a law in any other state will depend upon the extent to which the administrative principles contained in this act are observed. The tax commission is in general charge of the income tax. It is required to divide the state into assessment districts and to appoint an income tax assessor for each district. These assessors are in fact chosen under civil service rules, as are all deputies and assistants who may prove necessary. Their salaries are fixed by the commission, but are not to exceed fiye cents on each $1000 of assessed valuation as equalized by the tax commission in the previous year. The county board of each county in which an office is established is required to provide suitable quarters. The assessors of incomes assess all individuals upon their incomes and for each unanswered question the assessor or his deputy is subject to a penalty of $5.00 unless satisfactory cause can be shown to the commis- sion. They are required to assist the county clerk in the comi^utation of the taxes due front individuals, and in addition to their duties in con- nection with the assessment of incomes, they are required to act as super- visors of assessment. In this capacity they have general charge of the local assessment of property. They work with the local assessors, inspect and check up their work, search out omitted property, and exercise general supervision over the assessment process. Corporations make the return of theirjncomes to the state tax com- mission and are assessed by that body. The tax as computed is certified to the county clerks of the counties in which the offices of the corporations are located. Individuals who are aggrieved by the assessment of their income may appeal to a county board consisting of three resident taxpayers in each county, appointed by the state tax commission. These boards may review and correct the assessment, and a further appeal may be taken to the tax commission, sitting as a board of appeals on their own original assessments. Corporations may appeal directly to the commission. The method of collection is unique, but it is of considerable interest to Ohio because of the constitutional provision for distribution in this state. All income taxes, on both personal and corporate incomes, are certified to the local treasurers and are extended upon the local tax rolls to a special column, and are collected at the same time and in the same manner as are all other taxes. Each taxpayer is required to give his post office address, and if he has income which would have a situs for 120 taxation in another district, is required to indicate its location. Business concerns doing business in more than assessment district are to use the same rule of apportionment between districts as is used by interstate concerns. Of the collections the local treasurers certify io% to the state, 20% to the county, and 70% to the town, village or city in which the tax- was assessed, levied and collected. When the last-named share exceeds 2% of the equalized valuation of property, the excess shall be paid to the county to be distributed to the towns, cities and villages ac- cording to school population. Cities of the first class were required to begin the creation of firemen's ' pension funds out of the first receipts, setting aside each year sufficient to maintain the fund at $175,000. All expenses of administration are paid by the state, from the io% quota alloted to it There ranains one other feature which may be of especial interest to Ohio. This is the offset of personal property. It was introduced in 191 1 as a compromise, a bridge by which the state might pass from prop- erty to income taxation. It was necessary to safeguard the local revenues while the income tax was in the experimental stage; there was also a certain inclination to avoid double taxation of personal property, e^)eciaUy of intangibles, and the perscmal property o£Fset was devised as a ccmtromtse. In effect, it permits any taxpayer to present the tax receipts for personsd property taxes, except for the tax on stocks in banks and banking institutions, and secure a credit toward the payment of his income tax. This means simply that the taxpayer will pay the larger of the two taxes, an arrangement which exists in this precise form in one of the Canadian provinces. The commission now recommends the removal of this provision.^ It points out the absurdity of an elaborate mechanism for the assessment of incomes, only to have this result nullified by the presentation of per- sonal property tax receipts. Further, the state should either tax personal property or exempt it The present arrangement is an unfair discrimina- tion against the owner of real estate, since it ostensibly taxes personalty 'bifl in reality does not do so, and without granting specific exemption. Moreover, the advantage to be obtained by a lai^e assessment of per- sonal property at low local rates has led to much fraud in the classifica- tion of property. Many concerns have sought to pad their personalty assessments by urging assessors to list fixed machiner)% buildings on leased land, and other forms of property usually considered to be real estate as personal property in order to increase the amount of offset against income tax. The best solution appears to be that proposed by the National Tax Association committee on a model tax system-tax ^Wisconsin Tax Commission, Report, 1918, pp. 6-8. 121 tangibles at a low fixed rate, at their situs, on account of the burdens of local governments and exempt intangibles entirely. The whole treatment of personal property by the Wisconsin act will be of some interest to us in Ohio, as will be also the views of the Wis- consin tax commission on this important subject. The income tax exempted outright certain classes of personal property, the proper assess- ment of which had become almost impossible, even with improved meth- ods of administration. These exempted classes were — moneys and credits of all kinds, including stocks and bonds ; household goods and furnish- ings; farm, orchard and garden machinery, implements and toob; and some other minor items. The principal reason for this action was the intention of the legislature definitely to substitute income for property taxation. Whether this intention were wise will be discussed presently; but it is true that as affairs stood in Wisconsin the attempt to tax the more elusive forms of personal propery at high local rates had brought extra-legal exemption. For example, moneys and credits were assessed locally in 1910 at $22,349,000, and this the commission found to be$i4.8i% of the true value of such property. For the other forms of personal property which were exmpted the commission found the assessment of 1910 to be at 17.2% of true value. At the average state rate for 1910 the exempted classes would have paid $959,000 in taxes. The total assessment of income tax in 1912 was $3,482,000, of which $1,609,000 was paid by the presentation of personal property tax receipts. The general advantage which has been derived from the use of the income tax may be shown by the Mlowing table which the state tax commission has prepared:^ EXCESS OF INCOME TAX OVER THE PERSONAL PROPERTY TAX USED AS OFFSET AND THE ESTIMATED AMOUNT LOST BY THE EXEMPTION OF CERTAIN PERSONAL PROPERTY. Income Tax Personal Tax Est. Tax on Delinquent year Assessed Used as Offset Exemptions Income Tax 1912 $3,482,000 $1,609,000 $700,000 $241,000 1913 4,084,000 1,805.000 700,000 . 251.000 1914 4,145.000 1,987,000 • 700,000 251.000 1915 : 3,837,000 1,825,000 700,000 105.000 Totals $15,549,000 $7,228,000 $2,800,000 $753,000 Total income tax assessed.. $15,549,000 Personal tax offset $7,228,000 Total personal and delin- Est. tax on exemptions 2,800.000 quent 10,78-2,000 Deliquent 753,000 Total excess $4,767,000 , Total $10,782,000 Average excess 1,191,000 * Wisconsin Tax Commlssipn, Report, 1916, p. 68. 122 In commenting upon this table the commission states that a large part of the amount shown here as delinquent tax was really collected later by the county treasurers, and that in consequence the excess of mcome tax over offsets should be greater than is actually shown. The published statistics for 1918 are very meager, but some of these items may be extend : 1916 igi^ Total tax assessed $5,32^,000 $9,4^2.0'M) ^^^^^ • 2,211,000 3,307.000 • , : $3,118,000 $6,175,000 These figures are indicative of the extent to which war inflation has overthrown all established price and money standards. The total tax assessed for 1918 was $11,830,000. On the other hand the personal property tax offset reveals no surh elasticity, even with advancing prices, and the mar^^ of excess has widened greatly. These figures suggest also the remarkable flexibilty which is characteristic of direct taxation in general and of the income tax in particular. The tax commission has always ccmtended that the income tax was very inexpensive, relative to the yield. It happens that there are several bases <»i which to measure or compare the cost, and the results are affected by the selection. The cost of the income tax division relative to tax assessed and cash collections are shown herewith : % Ket Cost to % Net Cost to ^ Tax Assessed Cask CoUectioHs 1^12-13 1.31 1913-14 1.11 2.33 1^14-15 1.06 2.20 191^16 * 1.30 2.32 The net cost is obtained by subtracting, in each year, the cost of the former supervisors of assessment from the outlay for the income tax division. These officials had cost the state $54,000 in 1910. The assess- ors of incomes replaced them and are now performing their duties ; it is not improper to divide the total expense in this way. but it is hardly a fair guide for another state, for the income tax would cost practically as much in Wisconsin today if there had never been supervisors of assessment. The conisensus of opinion in the East was that such a tax would cost about 2% of the tax assessed. The Wisconsin commission has ordinarily been very lavish in the compilation and publication of statistics. From the wealth of material the 123 following table is selected, as the one best suited to reveal the general character and distribution of the income tax. It shows the income assessed, the tax assessed and the per capita tax, for groups of counties in 1914 and 1916: Year. The State, Group I. Group II. Group III. 1914 . 100% 47.12% 34.51% 18.37% 1910 100 44.01 36.03 19.95 100% 42.55% 26.78% 30.67% 1916 100 41.42 35.45 23.13 Per capita tax 1914 $1.77 $4.50 $1.84 $0.68 1916 2.29 5.43 2.48 .95 1007o 18.36%. 33.21% 48.23% Group I consists of one county, Milwaukee. With only 18.56% of the population, it was assessed for nearly half of the total tax in 1914. Group II included 16 counties, containing cities of tht second and third classes, and Group III comprised the remaining 54 counties, the essenti- ally rural portion of the state. During this period Milwaukee county lost slightly in the relative amount of income assessed, and somewhat more heavily in the amount of tax ; but it remain true, as the commis- sion has pointed out, that the modem income tax is primarily and characteristically an usban tax. In 19 14 the per capita levy in Milwaukee City was $4.50 but in group III it was only .68. The commis- sion sums up its discussion of this fact fact by saying that "a smaller portion of the people pay, and they pay lower average rates on lower average incomes, in the country than in the city." This recalls Professor Seligman's statement regarding the federal income tax on persons of igicS that about 37% came from New York state, and 87% of this quota came from New York City. These results are an inevitable consequence of the enormous concentration of wealth in the present age.' They constitute a formidable argument against the return of tfie whole of the tax, or even of any large percentage of it, to the district of source. They would appear also to refute the idea that an income tax alone, with complete exemption of personal property, is an ideal revenue system. The cities would find such an arrangement satisfactory enough perhaps, but the rural sections would find it more difficult to provide adequate revenues. It will be to the interest of the latter to retain the property tax on tangibles, with proper care in adjusting the rates through classi- fication. Since no state is wholly eitiier urban or rural the practical working ideal becomes 9 suitable combination of income and classified property taxes, ' 124 The relatively greater revenue needs of the large municipalities arc recognized in Ohio in the constitutional provision which requires 50% of the collection to be returned to the source. But the social obligations of wealth must be recognized as well as the state's obligation toward certain state-wide problems. And a considerable portion if not all of the remainder sould be distributed or used in such a manner as wiU affect a jomt discharge of these obligations. This overlong report may be concluded with some general observa- tions and conclusions with r^rd to the income tax and its applicability tf> Ohio. 1) The inccmie tax is fiscally adequate. Under proper conditions It wi:i produce probably more revenue for the state as a whole than it is possible to obtain from intangibles under the general property tax. We may therefore confidently expect to add to the state and local revetiues by introducing such a tax. The necessary condition is the adoption of such a system of property taxation as will permit the exemption of intangibles and the use of a properly graduated tax on incomes. 2) We know, too, from a survey of the experience elsewhere, what the general form of such a tax should be. The definition of gross' mcome and the proper deductions therefrom, have been quite satisfac- torily developed by the federal practice as well as by some of the states. We are quite clear also as to the necessary administrative organization which must be adopted. The two most difficult points in the framing of sudi a measure will be a satisfactory plan for the proper apportionment of mcimie to the state and the proper distribution of such portion as the amstitution leaves to legislative discretion. In Massachusetts and New York the educational situation was apparently in greatest need of cor- rection, and such is doubtless the case in Ohio. In any event it is prob- ably not wise to return more than the constitutional minimum percentage to the district of source unless the local needs compel such disposition. 3) The experience of other states makes it clear, too, that the per- sonal income tax cannot stand alone, but must be correlated with the Otficr parts of the tax system. The final word on this very important subject is the report on the Model System, which proposes the combination of personal income cax, business tax, and local tax on tangibles. These proposals are clearly influencing the trend of legisla- tion in several states, and in some cases it is possible to note appreciate progress in conforming at least to the outlines of the plan. In Ohio espeoBl attention should be given to the possibility of a business tax, for our n^od of taxing ordinary business corporations is notoriously in- ailequate. I am assuming the exemption of intangibles, though I realize that this is a contingent event, It must be made possible, or tb^ smes^ of our income tax is very uncertain. If, in addition, we shou'd intro- duce the ru'e of taxincr tang^ibles in situ, we could, at a single stroke relieve the municipalities and free a larger portion of the proceeds of the income tax for important general uses, such as education. We must realize, too, that we are now riding the wave of income tax popularity. A few vears ago separation of the sources of revenno was our revenue pariacea. Todr.y, there is some danger of placing too great reliance upon the income tax as the chief agent of our fiscal salva- tion. Such expectations are doomed, and this failure will react unfav- orabV against the income tax in its proper p'ace. It is more true today than ever that no one system will prove a cure-all. We must diversify the revenue system, combine property and income taxation, and sTive toward a genuine and effective co-ordination of the widely di- erse and different sources of revenue. On this point some remarks by Professor , Bullock are worthy of consideration.^ . "The foregoing discussion leads to the conclusion that neither the income tax nor the classified property tax is always and at everv point to be pre^'erred to the other; that these taxes are. to a large extent, merely different methods of doing tbe same thing ; and that they ought to be regarded as imposts, not mutually exclu- sive, but capable of being combined in a logical and practicable scheme of taxation. In choosing between them at any point, we need to weigh all the circumstances of the case and then determine on which side the balance of advantage lies. No gen- eral pronunciamento in favor of either tax will solve any practical problem of taxation. •This conclusion, however, needs one qualification. The two taxes are not equally well adapted to the needs of every state. The income tax works much better in manufacturing and commercial communities than in rural, on account of the difficulty of computing farmers* incomes and because the high exemptions usually inseparat>le from an income tax, permit the average farmer to s'ip throu^rh the net and diminish greatly the revenue secured. It also involves a greater de- parture from established ideas and practices ; and probably requires, at least when first introduced, more skillful administratk>n. A state that is almost wholly devoted to agriculture would, therefore, do well to adopt the classified property tax; and one that is not prepared to centralize the machinery of assessment as Wisconsin and Massachusetts have done, certainly will achieve no great success with the income tax. The last statement, however, is almost as true of the classified prop- erty tax. as Iowa's experience shows ; so that we need alwyas to insist that a con- siderable degree of centralization is a fundamental reqwsite in mof plan of tax reform." 4) The importance of the administrative measures caiftiot be too strongly emphasized. As Professor Bullock says, they are indispensable to any plan of tax reform. A partizan truce should be declared on this * Proceedings of the National Tax Association, IQlfi, 126 subject and such standards of selection, tenure of office and compensation for the administrative staff should be set up as will cwnmand the respect and the support of all classes and all factions. The inauguration of an income tax is a gigantic task under the best conditions. The burden should not be unduly increased. 5) It is especially important and valuable that the income tax law should come into effect with the people favorably disposed toward it. This has been appreciated elsewhere, and elaborate plans have been car- ried through in order to "sell" the idea to the public. To this end it is suggested that the early draft of the bill be given extensive publicity in every possible way, and especially by conducting a series of hearings at different points in the state. Hearings at Columbus are not enough- only the specially interested people will attend. The bill must be taken to the people. This educational campaign should be continued by those chosen to administer the law after it is passed, but there will be less friction and criticism if the objections are met before the final enact- ment. 6) Finally, we must recognize that the problems of taxation, while serious and important, are not unrelated to the other phases of public finance, such as expenditures, debts, and financial control. This ccMnmittee may not consider that it now has jurisdiction over such questions ; but un- less they are adequately dealt iwth, the work of this committee may result simply in increasing the taxes without reducing the burden. The need may be stated succinctly as one of a more adequate budget system for the state and the local units. Such problems as control of expenditures, tax limits, and debt limits can only be properly dealt with under a budget system. The Smith law may be r^rded as an earnest attempt to limit expenditures. But it imposes external, rigid, medianically determined limits, and as such is essentially a failure; for while it has nominally kept rates down it has not restricted expenditures and it cannot do so, for it provides no adequate control over municipal deficit financiering. Such control over tax levies, rates and expenditures should be vital, not mechanical; flexible, not rigid; carefully calculated by an authority on which responsibility can be fixed, and not imposed from the outside in utter disregard of the whole financial system. Taxation has been by far the most popular branch of public finance and in recent years most attention has been given to it; today these other phases of the subject are of even greater importance, and attention to them will afford evai richer results for the public good. 83d General Assembly, Regular Session, 1919. THE SPECIAL JOINT COMMITTEE ON TAXATION. A BILL Providing for levy and collection of a tax on the operation of motor vehicles on^hc public roads and highways of this state and tor such STIonf^r^* ^2^1' 6292, 6293. 6294, 6294-1 6'^95 em. 6301, e309, I26I8. 12020, 12021 of the General Code, and enacT: vmt'^^ Tr'l^ ^^"^TX ^-2' 12618-1, 12618-2 and i4oieKi of the General Code. Be U enacted by the General Assembly of the State of Ohio: SECTh-o« I Sections 6290, 6291, 6292, 6293, 6294, 6294-I, 6295, 6301, 6309, 12618, 12620, and 12621 of the General Code^e hereby T^S ^nd supplementary sections 6309-1, 6309-2, 6309-3, 12618-1, bee. 6290. * ♦ ♦ As used in this chapter and in the penal laws, except as otherwise provided. * * * {I) -Motor vehicle'' means any vehicle propelled or drawn by power other than muscular power and notjperated exclusiveh upon rails or tracks, except road roHers, traction engines, tractors, trailers designed to be draum by antn^l po^ver and us.d .r.ncipallyf or agricultural pur- poses, * * * public ambulances, * * ard vehicles * * * bdongmg to any police department, municipal fire department, volunteer fire company ors alvage company, organized under the laws of Ohio or used by such * * * department * ♦ * or * ♦ * com^nv m the discharge of its functions. » * ""'pany 'J''*^'^' ^^nd ^'traction engine'' mean any self-propelled vehicle designed or used for dra^^ng other vehtcles or wheeled machin^ 2erZJ::^:' ^^^^ independently Tsl^h (3) -Passenger car^' means any motor vehicle designed and used for carrying not more than seven persons, (4) yommercial car'' means any motor vehicle having motive pouter, designed and used for carrying merchandise or freight or for carrying more than seven persons. ' 127 S. B. No. 191 128 (5) "Oztmer" includes any person, firm or corporation having title ' to a motor vehicle or the exclusive right to the use thereof for a period of greater than thirty days, other than a manufacturer or dealer. (6) "Manufacturer^' and "dealer" include all persons, firms and corporations engaged in the business of manufacturing, selling or leasing motor vehicles. (7) ''State" includes the territories and federal districts of the United States, and the provinces of the Dominion of Canada. (8) ''Public roads and highways" include all public thoroughfares for vehicles. Sec. 6291. An annual license tax is hereby levied upon the opera- tion of motor vehicles on the public roads or highways of this state, for the purpose of enforcing and paying the expense of administering the law relative to the registration and operation of such vehicles and of maintaining and requiring improved roads and highways and streets. Such tax shall be at the rates specified in this cfmpter and shall be paid to and collected by the secretary of state at the time of making applica- tion for registration as herein provided. Sec. 6292. Each owner of a motor vehicle shall pay or cause to be paid tares as folloivs: For each motor bicycle or motorcycle, two dollars ad fitfy cents; and for each side car, one dollar and fifty cents. For each passenger car hamng twenty- five horse-pow^ or less, eight dollars; for each such car having more than twenty- five and not more than thirty-five horse-power, twelve dollars; for each such car having more than thirty- five horse-poiver, twenty dollars. For each commercial car, the same tax based on horse-power, and in the same classificatiotts as are herein provided for passenger cars, and in addition thereto twenty cents for each one hundred pounds gross weight of vehicle and load, or fractional part thereof. For each trailer, the same tax based on gross weight of vehicle and load, herein provided for commercial cars. The minimum tax for any vehicle having motive pozver other than a motor bicycle or a motorcycle shall be five dollars; and for each trailer, two dollars and fifty cents. Each manufacturer or dealer .^hall pay or cause to be paid a tax of twenty dollars for each place of business in this state. Sec. 6293. In determining the gross weight of vehicle and load, in the case of commercial cars designed and used for carrying passengers, the weight of passengers shall be computed at one hundred and tzventy- five pounds for each passenger, according to the number of seats for adults actually provided, and such weight so computed added to the 129 weight of the vehicle fully equipped. In determining the gross weight of vehicle and load in the case of motor trucks and trailers the manu- facturer's rated carrying capacity shall be added to the weight of the. vehicle fully equipped. The horse pozver of all vehicles propelled by internal combustion engines shall be computed upon the following formula: Square the diameter of the cylinder measured in inches, multiply by the number of cylinders and divide by two and one-half. For all motor vehicles pro- pelled by steam engines the rating of the horse power thereof shall be based on the system of rating adopted by the United States government. For all motor vehicles propelled by electricity the rating of the horse power thereof shall be the normal horse-power of the electric motor therein, to be ascertained by the secretary of state. Sec. 6294. Every owner of a motor vehicle which shall be (grated or driven upon the public roads or highways of this state shall * ♦ * before the first day of January of each year, except as herein otherwise expressly provided, cause to be filed, by mail or otherwise, in the office of the proper deputy registrar of motor vehicles a written application for registration for the following year, beginning the first day of January of such year, on a blank to be furnished by the secretary of state for that purpose, containing the following information: (1) A brief description of the motor Vdiicle to be r^;ist6red, including the name of the manufacturer, the factory number of such vehicle * * *, the amount of motive power, any, in figures of horse power, according to the formula prescribed in this chapter, and, in case of commercial cars the gross weight of vehicle and load, computed according to the formula prescribed in this chapter. (2) The name and address of the owner, * ♦ (3) The district of registration, which shall be determined as follows: (a) In case the motor vehicle to be registered is used for hire or principally in connection with any established business or branch business, conducted at a particular place, the district of registration shall be the mtmicipal corporation in zvhich such place is located; and if not located in any municipal corporation, the county in which such place is located. (b) In case such vehicle is not so used, the district of rcg'stration shall be. the municipal corporation or county in 7vhich the owner resides at the time of making application 130 Sec. 6294-1. Upon the transfer of ownership of a motor vehicle its registration shall expire, and it shall be the duty of the original owner to immediately notify the secretary of state of the name and address of the new owner and return to the secretary of state the r^stration cer- tificate for cancellation. The original owner shall also remove number plates from a motor vdiicle upon transfer of ownership of such vehicle. Should the original owner make application for the registration of another motor vehicle within thirty days after such cancellation, he may file a new application accompanied by a fee of one dollar, and pay the tax thereon, less the amount of the tax that would be collected on account of the vehicle transferred, on the date of such application * * *. Sec. 6295. Every owner of a motor vrfiicle ♦ ♦ * before operating or driving such motor vehicle upon the public roads or high- ways of this state, or permitting the same to be driven, shall file a like application. On all applications required by this section the taxes payable shall be as follows : ^ (1) // said application be made prior to April first, the nor- mal tax. (2) // made on or after April first and prior to July first, three-fourths of the normal tax. (3) // made on or after July first and prior to October first, one-half of the normal tax; and (4) // made on or after October first one-fourth of the nor- mal tax. Publicly owned and operated motor vehicles shall be registered as provided m this chapter, without charge of any kind; hut this provision shall not be construed as exempting the operation of such vehicles from any other provision of this chapter and the penal laivs relating thereto. The secretary of state shall accept any application to register a motor vehicle ozvtied by the Federal Government which may be made by any officer, department or agent of such gozrernment. Sec. 6298. Upon the filing of «uch application * ♦ * and the payment of the tax imposed by this chapter, the secretary of state shall assign to such motor vehicle a distinctive number, and, without expense to the applicant, isue and deliver to the owner in such manner as the secretary of state may select a certiticate of registration, in such form as the secretary of state shall prescribe, and two number plates, duplicates of each other, at the post or express oflice within the state of Ohio named in said application. Sec. 6301. A manufacturer of or dealer in motor vehicles, shall make application, in like manner, as hereinbefore provided, for each gasoline, steam, electric or other make of motor vehicles, so manufac- tured or dealt in * ♦ *, to be determined by the motive power of such vehicles; excepting that for the purpose of such application the dis- ^ irict of registration shall be stated for each place in this state at which the business of mannfaciurinc or dealing in motor vehicles or any branch thereof is carried on, and the application shall show the make, or mafc/s so manufactured or dealt in at each such place. Upon the filing of such application, and the payment of the tax imposed by this chapter * * * the secretary of state shall assign to each make of motor vehicle therein described a distinctive number which must be carried and displayed by each motor vehicle of such make in like manner as provided in this chai>- tcr while it is operated on the public highway until it is sold or let for hire. Such manufacturer or dealer, so registering a make of motor vehicle, may procure certified copies of such registration certificate upon ^ the payment of a fee of five dollars. With each of such certified copies the secretary of state shall furnish two placards with the same number- ing im>vidpd in the orignal registration certificates, and may add thereto such special desigtiation as rnay he necessary to distinguish one set thereof from another. Nothing in this section nor in section six thou- sand turo hundred and ninety-two of the General Code shall be so con- strued as to exempt any manufacturer or dealer from registration or taxaiwn w respect of any other motor vehicle of which he is the oumer ,or any purpose other than sale, lease or other like disposition. Sec. 6309. The comity auditor of each county in this state shall be '■'xofficio a deputy registrar of motor vehicles, and in such capacitv shall h act for the secretary of state in the discharge of the duties inmtosed upon such secretary by this chapter in the follonmg particulars, and no other: (1) The receipt of applications for registration and for certi- fied copies of registration cerHficates. All applications shall be made to the deputy registrar for the county in which the applicant resides, unless the applicant is a corporation or a non-resident of this state, in which event application may be made in any county in zvhich the applicant maintains a place at which the business is con- ducted, in connection with which the motor vehicles, or makes of motor vehicles, requiring registration are used. All applications > shall be forwarded to the secretary of state for registration. (2) The collection of taxes payable on applications made to htm, and fees payable on like applications, under the provisions of section 6294-1 of the General Code. From the proceeds of collec^ twns made by him such deputy shall be entitled to retain the fees ^ provided herein which shaU be paid into the county treasury to the 132 credit of the county auditor's fee fund. The remainder of such registration and duplicate registration fees he shall remit weekly to Jhe secretary of state. From the remainder of such taxes collected he shaU retain the portion of the revenue due to any district of reffistfittion located in whole or in part in his county and immediately certify the same into the county treasury to the credit of the un^ diznded tntinue to be applied to the net bonded indebtedness of such subdivision in the manner prescribed by such amendment until the net bonded indebtedness thereof becomes reduced to the amount of such indebtedness permitted by the strict application of the limitations of the foregoing amendment to such subdivision. For the purpose of in- creasing the sinking fund on account of such bonds, the taxing authori- ties of such subdivision may levy taxes upon the taxable property therein 138 in any year within the period in which the temporary limitation provided for in this schedule shall apply, in addition to such taxes as would be required to pay the interest and provide strictly for the sinking fund cm acommt of such bonds; the rate of such levy shall not exceed one mill, but such levy shall not be subject to any statutory limitation on tax rates, nor be ccuisidered in applying any such limitation. 83RD General Assembly Regular Session 1919 S. B. No. 202. THE SPECIAL JOINT COMMITTEE ON TAXATION. A BILL Providing for the levy and distribution of taxes on the taxable propotf of the state for the support of common schools, the adjustment of tax Hmitations applicaWe to levies for local school and township purposes, the repeal of the laws relating to state aid for weak school districts, and the abolition of state levies for sinking fund, university and normal school purposes ; and to such ends amending sections 5659-3a, 5649-4, 7575, 7582, 7587, 7595, 7596, 7597, 7600, 7608, 7613, 7736, 7747, 7751, and 7787 of the General Code, enacting a supplementary section to be designated as section 7600-1 of the General Code and repealing sections 3204, 7594-1, 7595-1, 7595-2, 75»5-8, 7595-4, 7802, 7804, 7924, 7925, 7926, 7927a, 7927b, 7928 7929. and 7966 of the Genetal Cbde. Be it enacted by the General Assembly of the State of Ohio; Section i. Sections 5649-3ay 5649-4, 7575, 7595, 7596, 7597, 760D, 7003, 7613, 7736, 7747, 7751, and 7787 of the Gemral Cade are hereby amended and a suj^ementaiy se Sec. 7603. The certificate of apporticwiment furnished by the county auditor to the treasurer and clerk of each school district must exhibit the amount of money received by each district f romj the state, the amount re- ceived from any special tax levy made for a particular purpose, and the amount received from local taxation of a general nature. The amount received from the state * * * and the proceeds of the levy retained in the county under section seven thousand five hundred and seventy-fwe of the General Cade, and the common school fund shall be designated the tuition fund" and be approfwiated only for the payment of superin- tendents and teachers. Funds received from special levies must be desig- nated in accordance with the purpose for which the special levy was made and be paid out only for such purpose, except that, when a balance re- mams m such fund after all expenses incident to the purpose for which It was raised have been paid, such balance wiU become a part of the con- tingent fund and the board of education shall make such transfer by ^uticm. Funds received from the local levy, for general purposes must be deagnated so as to correspond to the particular purpose for which the levy was made. Moneys coming from sources not enumerated herein shall be placed in the contingent fund. Sec. 7613. In any school district having a bonded indebtedness, for the payment of which, with interest, no provisiwi has been made by a special tax levy for that particular purpose, the board of education of such district annually, on or before the thirty-first day of August, shall set aside frcmi its revenue a sum * ♦ * sufficient in amount to provide a smkktg fund for the retirement of such indebtedness together with a sum sufficient to pay the annual interest thereon. Sec. 7736. Such tuition shall be paid from either the tuition or the contingent funds and the amount per capita must be ascertained by dividing the total expenses of oMiducting the dementary scluxAs of the district attended, exclusive of permanent improvements and repairs, by the total enrollment in the elementary schools of the district, such amount to be cmnputed by the month. In computing such total expenses of con- ducting the elementary school of such district, the amount of the state 145 common school fund and the proceeds of the state school levy retained »if the county, apportioned to such district on account of teachers em- •ployed m such elementary schools, and the amount of such funds appor- iioned thereto on account of aggregate days of attendance of pupiU shaU 'be deducted from the gross expenses of conducting such schooU. An attendance any part of a month will create a liaWlity for the whole month. Sec. 7747. The tuition of pupils who are eligible for admission to high school and who reside in rural districts, in which no high school is maintained, shall be paid by the board of education of the sdio(ri district m which they have legal school residence, such tuition to be computed by the month. An attendance any part of the month shall create a liabil- ity for the entire month. No niore shall be charged per capita than the amount ascertained by dividing the total expenses of conducting the high school of the district attended, exclusive of permanent improvements and repair, by the average monthly enrollment in the high school of the dis- trict. In computing such total expenses of conducting such high school the amount of the state common school fund.and the proceeds of the state scHool levy retained in the county, apportioned to such district on account or teachers employed in such high school, and the amount of such funds apporttoned thereto on account of aggregate days of attendance of pupils shaUbe deducted from the gross expenses of conducting such schools. The district superintendent shall certify to the Munty superintendent each year the names of all pupils in his supervision district who have con*plet6d the elementary school work, and are eligible for admission to high school. The county superintendent shall' thereupon issue to each pupil so certified a certificate of promotion which shall entitle the holder to admission to any high school. Such certificates shall be furnished by the superintendent of public instruction. Sec. 7751. Such tuition shall be paid from eittier the tnitim or contmgent funds and when the board of education deems it necessary it may levy a tax * ♦ * for * * * such purposes. The proceeds of such levy shaU be kept m a separate fund and. applied to the payment of such tuition. Sec. yySy. The board of education of each district shall make a re- port to the county auditor, on or before the first day of September in each year, containing a statement of the receipts and expenditures ef tfie board, the number of schools sustained, the length of time they were sustained, the enrollment of pupils, the average monthly enrollment and average daily attendance, the aggregate days of attendance of pupils the nimiber and qualifications of teachers employed, and their salaries the number of school-houses and school rooms, and such other items as' the supenntendent of public instruction requires. The board af educoHon af a school district situated in two or more counHes shall also report the enrollment of pupils residing in each comity; and the board of education of a school district situated partly in an original surveyed township or other district of country entitled to an apportionment of the interest on the common school fund or to a dividend of the rents and profits of school lands shall report the enroU- ment of pupils residing in such original surveyed township or district of country. The aggregate days of attendance of pupils in a school which is • dosed for more than five consecutive school days during the year on account of an epidemic of disease or other emergency requiring such closing shall be ascertained by multiplying the average daily attendance at such school by the number of days such school would have been in session, but for such emergency. When a school district is situated in two or more counties, the re- ports required by law shall be made to the auditor of each county. Sec. 2. Said original sections 5649-3a, 5649-4, 7575, 75^2, 7587, 7595, 7596, 7597, 7600, 7603, 7613, 7736, 7747, 7751 and 7787 of the ^eral Code and sections 3204, 7594-1, 7595-1, 7595-2, 7595-3, 7595-4, 70Q2, 7804, 7924, 7925, 7926, 7927, 7927a, 7927b, 7928, 7929, and 7986 of the General Code are hereby repealed. Section 3. This Act shall take effect upon and with respect to the making of tax levies for the year nineteen hundred and twenty-one on the tax list made up in the year nineteen hundred and twenty, and all official acts with respect to such tax levies shall be governed thereby. This Act shall not affect the distribution of state aid to weak school dis- tricts for any part of the school year ending in the year nineteen hundred and twenty nor the amount of tuition payable by one school district to another for any part of such year, nor the distribution of income from school lands or interest on the common school fund for and on account of such school year, nor the collection and distribution of taxes levied on the tax list current when it takes effect, nor the inclusion in or exclu- sion from the limitation on the combined maximum rate for all taxes levied in a taxing district of any levy for any purpose other than such purposes as with respect to which section 5649-4 of the General Cotle is herein expressly amended. 83D General Assembly, liEGULAR Session, 1919, THE SPECIAL JOINT COMMITTEE ON TAXATION. A BILL Providing for levying and collecting an annual tax on the net incomes of persons residing in this state and for that purpose enacting Chapter 1« of Title I, Part Second of the General Code of Ohio, consisting of supplemental sections 5773-1 to 5773-42 inclusive thereof, amend- ing section 6778-1 of the General Code and repealing section 1 of the act of May 10, 1910, 101 O. L. 399, designated as section 5445 of the General Code. Be it enacted by the General Assembly of the State of Ohio: Section i. Chapter 16 of Title I, Part Second of the General Code of Ohio, consisting of sections 5773-1 to 5773-42, inclusive, is hereby enacted as follows : Chapter 16. INCOMES OF PERSONS. - Sec. 5774-1- For the purpose of this chapter and unless otherwise required by the context: ( 1 ) The word "conunission" means the tax commission of Ohio. (2) The word "taxpayer" includes any person, trust or estate sub- ject to the tax imposed by this chapter, or whose income is in whole or in part subject to the tax imposed by this chapter and does not include corporations. (3) The words "mihtary or naval forces of the United States", mclude the marine corps, the coast guard, the army nurse corps, female, and the navy nurse corps, female, but this shall not be deemed to ex- clude other units otherwise included within such woMs. (4) ^ The words "taxable year" mean the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this chapter. The words "fiscal year" mean an accounting period of twelve months ending on the first day of any month other than December. (5) The word "fiduciary" means a guardian, trustee, executor, administrator, receiver, or any person whether individual or corporate, acting in any fiduciary capacity for any taxpayer. S. B. NO. 196 147 (6) The word "paid" for the purpose of the deductions and ex- emptions under this chapter meaiis "paid or accrued" or "paid or in- curred", and the terms "paid or incurred" and "paid or accrued" shall be construed according to the method of accounting upon the basis of which the net income is computed, under this chapter. The term "re- ceived" for the purpose of the computation of net income under this chapter, means "received or accrued" and the term "received or accrued" shall be according to the method of accounting upon the basis of which the net income is computed under this chapter. (7) The word "resident" applies only to natural persons and in-* eludes for the purpose of determining liability to the tax imposed by this chapter upon or with reference to the income of any taxable year, any person who shall, at any time within the first six months of the next succeeding year, be or become a resident of the state. (8) The word "dividend" means any distribution made by a cor- poration out of its earnings or profits to its shareholders or members, whether in cash or in other property, excepting stock of the corpor^ticm. (9) The words "foreign cotmtry" or "foreign government" mean any jurisdiction other than one ^braced within the United States. The words "United States" include the states, the territories of Alaska and Hawaii and the District.of Columbia. (10) The term "net income" means the gross income of a taxpayer computed according to the provisions of this chapter, less the deductions herein allowed. The definitions set forth in Chapter i of this title shall not apfdy for ^ ptuposes.of tfiis chapter. ^ Sec. 5773-2. An annual tax is hereby levied upon the net income of every resident of this state, at the rate of one per centum of the first four thousand dollars of such net income as defined in this chapter, over and above the exemptions herein provided for, and two per centum of the remainder, if any, of siich net inomie. Seventy-five per centum of such tax shall be for the use of the general revenue fund of the mtmicipal oorporatioa 1^ township in which the same originates, as defined in this diapter, ilHf the remainder thereof shall be for the use of the general revenue of the state. Sec. 5773-3. The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year as die cue may be) in accordance with die method of accoonting r^^ulariy enjoyed in keeping the books of such taxpayer. But if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the commission does dearly re- »49 dect the inamie: If the taxpayer's annual accounting period is other than a fiscal year as defined in this chapter, or if the taxpayer has no annual accounting period or does hot keep books, the net income shall be com- puted on the basis of the calendar year. If a taxpayer changes his accounting period from fiscal year to calen- dar year, from calendar year to fiscal y6tr, or from one fiscal year to another, the net income shall, with the approval of. the commission, be computed on the basis of such new accounting period, subject to the further provisions of this chapter. Sec. 5773-4. The term "gross income" : (a) Includes gains, prc^ts and income derived from salaries, wages or compensation for personal service, of whatevier kkul and in whatever form paid, or from profesMons, vocations, trades, business, commerce or sales or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property ; also from interest, rent, dividends, securities, or the transaction of any business carried on for profit, or gains or profits and income derived from any source what- ever. The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless under the methods of accounting permitted in this chapter, any such amounts are to be properly accounted for as of a different period ; but (b) Does not include the following items which shall be exempt from taxation under this chapter: 1. The proceeds of life insurance policies and contracts paid upon the deatii of the insured to individual beneficiaries or to the estate of the iiisured. 2. The amounts received by the insured as a return of premium or premiiiuns paid by him under life insurance, endowment or annuity con- tracts either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. 3. The value of property acquired by gift, bequest, devise or descent (but the income from such property shall be included in gross income). 4. Interest on the obligations of the United States or its posses- sions ; or securities issued imder the provisions of. the federal farm loan act of July seventeen, nineteen hundred and sixteen ; or bonds issued by the war finance corporation; or the obligations of the state of Ohio or of any municipal corporation or political subdivision thereof heretofore issued; provided, that every taxpayer owning any of the obligations, securities, bonds or investments enumerated in this paragraph, shall, in the return required by this chapter, submit a statement showing the number and amount of such obligations, securities, bonds or investments ISO etuinierated in this paragraph, and the income received therefrom, m such form and with such information as the commission may require. 5. Any amount received through accident or health insurance or under workmen's compensation acts, as compensation for death, personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness, or through the war risk insurance act or any law for the benefit or relief of injured or disabled members of the military or naval forces of the United States. 6. Pensions received from the United States or from the state of Ohio or any subdivision thereof. 7. Salaries, wages and other compensation received from the United States by officials or employes thereof, including persons in the military or naval forces of the United States. 8. Income received by any officer of a religious denomination or by any institution, or trust, for moral or mental improvement, religious, Bible, tract, charitable, benevolent, fraternal, missionary, hospital, in- firmary, educational, scientific, literary, library, patriotic, historical or cemetery purposes, or for the enforcement of laws relating to children or animals, or for two or more of such purposes, if such income be used exclusively for carrying out one or more of such purposes; but nothing herein shall be construed to exempt the fees, stipends, personal earnings or other private income of such officer or trust. Sec. 5773-5. For the purpose of ascertaining the gain derived or loss sustained from the ownership, or the sale or other disposition of property, real, personal or mixed, the basis shall be first, the fair market price or value of such property as of the first day of the third taxable year preceding the year in which the gain or loss is computed, but not prior to January first, nineteen hundred and nineteen, and second, in case of property acquired within such period of three years or over and after said date ,the cost thereof; unless such property was acquired, in whole or in part, as a gift, devise, bequest or by descent, in whidi event such basis shall be the fair market value thereof as of the date of acquisition; but if, in either case, an inventory has been made in a pre- vious year or years within such period, under authority of this chapter, and a value has been assigned to such property in such inventory for the purpose of computing the gross income of such year or years, the basis of such ascertainment shall be such inventory value so ass^ed to such property in the last previous year in which such inventory has been made and such value has been assigned. Whenever a gain or loss is ascertained under this section on the basis of a value determined as of a date more than one year prior to the first day of the taxable year in which such gain or loss is computed. it shall be conclusively presumed to have accrued uniformly during the taxable years so intervening, and the taxpayer, if he so elect, may file returns or amended returns for each of such taxable years, in which the proportional part of such whole gain or loss so attributable to such year shall be shown ; and in such event only such part as is attributable to the year in which the omiputation is made shall enter into the gross income of that year and the assessments of the previous 3rear or years shall be corrected accordingly in the manner provided in this chapter for the correction of errors ; and if no such assessments have been made, and the returns for such year or years show taxable net income, or if the result of such correction is to increase any assessment previously made, an assessment of such net income or increase shall be made at the rates respectively applicable to such year or years, in the manner provided in this chapter for assessing omitted taxable incomes, but without notice. Sec. 5773-6. When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any; but if it has no ascertainable market value, then it shall be treated as cash to the amount of its estimated actual value. Sec. 5773-7. In computing net income there shall be allowed as deductions: 1. All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a rea- sonable allowance for salaries or other compensation for personal services actually rendered, and including rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking, title or in which he has no equity. 2. The same proportion of interest paid or accrued within the tax- able year on indebtedness which the amount of gross income, as herein defined, bears to the gross amount of his income from all sources. 3. Taxes paid or accrued within the taxable year, imposed by or tmder authority of this State, excepting under this chapter, or by the United States, or any of its possessions, or any foreign governmen,t or by any other state, or territory, or any taxing subdivision of this or any other state or territory, not including special assessments on account of local benefits. 4. Losses sustained during the taxable year and not o^pensated for by insurance or otherwise, if incurred in trade or business or dis- closed by the inventory. 5. Losses sustained during the taxable year of property not con- fleeted with ti^ pf lt>nsi»^§ pr n9t disdosed by the inventory if aris- IS2 ing from fires, storms, shipwrecks, or other casualty or Iran theft, and not compensated for by insurance or otherwise. 6. Dcbt^ due the tsuspaytr and ascertained to be worthless and charged off within the taxable year. 7. A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business or included in the inventory in- cluding a reasonable allowance for obsolescence. 8. In the case of mines, oil and gas wells, other natural dqxwits and trniber, a reasonaWe aUowance for depletion and for depreciation of uiq>rovciiicnts, according to the pecuKar conditions in each case, based upon cost including cost of development not otherwise included ; pro- vided, that in the case of such properties acquired prior to January first, nmeteen hundred and nineteen, the fair market value of the propert)^ (or the taxpayer's interest therein) on that date shall be taken in lieu of cost up to that date; provided, further, tiiat in the case. of mines, ofl and gas wells, discovered by the taxpayer on or after January first, nine- teen hundred and nineteen, and not acquired as the result of a purchase of a proven tract or lease, where the fair market value of the property IS materially disproportionate to the cost, the depletion allowance shaU be based upon the fair market value of the property at the date of the discovers pr within thirty days thereafter; such reasonable altewance m all the above cases to be made under rules and relations to be pre- scribed by the commission. In the case of leases the deduction allowed by this paragraph shall be equitably apportioned between the lessor and lessee. 9. G>ntributions or gifts made within the taxable year to or for the use of the state or any of its subdivisions for exclusively public purposes or to or for the use of institutions exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, the activities of which are carried on in whole w in substantial part within this state, and no part of the earnings of which inures, to the benefit of any private stockholder or individual, to an amount not in excess of fifteen per centum of the taxpayer's net in- come as computed without the benefit of this paragraph. Such contribu- tions or gifts shall be allowed as deductions only if rq)orted under rules and regulations prescribed by the commission. Sec: 5773-8. In C(Hnputing net incmne no deduction shall in any case be allowed in respect of : 1. Personal, living or family expenses; 2. Any amount paid out for new buildings or for permanent im- provements or betterments made to increase the valu^ of any property or estate ; 3. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made ; or 4. Premiums paid on any life insurance policy, covering the life of any officer or employe, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirecdy a benefidaiy under such policy. 5. Any expense not specifically enumerate in the next preceding section. Sec. 5773-9. The following exemptions shall be allowed to any tax- payer: 1. In the case jof a single person, a personal exemption of five hun- dred dollars, or in tfie case of the head of a family or a married person living with or contributing chiefly to the support of husband or wife, a personal exemption of one thousand dollars. A husband and wife living together shall receive but one personal exem'ption of one thousand dollars against their aggregate net income; and in case they make separate re- turns, the personal exemptions of one thousand debars may be taken by either or divided between them. 2. Two hundred ddlars for eadi person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer, if such dependent person is under eighteen years of age or is incapable of self-support because mentally or physically defective. 3. A taxpayer receiving a salary, wages, or other compensation from the United States exempt frwn taxation under this chapter shall be entitled to only so much of the personal exemption imvided for in this section as is in excess of the aggregate amount of such salaries, wages, or other compensation. Sec. 5773-10. Individuals carrying on business in partnerships shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, or, if his net income for such taxable year is com- puted upon the basis of a period different from that upon the basis of which the net income of the partnership is computed, then his distribu- tive share of the net income of the partnership for any accounting period of the partnership ending within the fiscal or calendar year upon the basis of which the partner's net income is computed. Taxpayers who are members of partn«^hips may be required by the commission to make a return stating the gross receipts and net gains or profits of the partnership for any taxable year. The net income of the partnership shall be computed in the same manner and on the same basis as pro- vided in computing the net income of individuals except that the deduc- tions provided in paragraph nine of section 5733-7 of the General Code shall not be allowed and the personal exemptkms provided for in section 5773-9 of the General Code shall be allowed only to the individual part- ners. Sec. 5773-11- The tax imposed by this chapter shall apply to the income of estates or of any kind of property held in trust, including : 1. Income received by estates of deceased persons during the period of administration or settlement of the estate ; 2. Income accumulated in trust for the benefit of unborn or unas- certained persons or person with contingent interests; 3. Income held for future distribution under the terms of the will or trust ; and 4. Income v^hich is to be distributed to the beneficiaries period- ically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct. Sec. 5773-12. The net income of an estate or trust shall be com- puted in the same manner and on the same basis as provided in this chapter for individual taxpayers, except that there shall also be allowed as a deduction any part of the gross income which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid to or permanently set aside for the state, or any political subdivision thereof, for exclusively public purposes or for any institution used exdusivdy for religious, charitable, scientific or educaticmal purposes or for the IMwenticMi of cruelty to children or animals, the activities of which are carried on in whole or in substantial part in this state, and no part of the net earnings of which inures to the benefit of any private stockholder or individual ; and in cases under paragraph four of the next preceding section, the fidudiary shall make return as provided in this chapter, in- cluding a statement of each beneficiary's distributive share of such net inamie, whether or not distributed before the dose of the taxable year for which the return is made. In cases under pargraphs one, two and three of the next preced- ing section, the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary except that in determining the net income of the estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir or other 4)eneficiary. In such cases, the estate or trust shall be allowed the same exemptions as are allowed to single persons . under section 5773-9 of the General Code. In cases under ])aragraph four of the next preceding section and in the case of any income af an estate during the period of administration IS5 or settlement permitted by this section to be deducted from the net in- come upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary his distributive share whether distributed or not, of the net income of the estate or trust for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the estate or trust is computed, then his distributive share of the net income of the estate or trust for any accounting period of such estate or trust ending within the fiscal year or calendar year upon the basis of which such beneficiary's net income is computed. Sec. 5773-13. Every taxpayer having a fiet income for the taxable year of five hundred dollars or over if single or if married and not living with husband or wife, or of one thousand dollars or over if married and living with husband or wife, shall within forty days after the expira- tion of the taxable year make under oath a return stating specifically the items of his gross income and the deductions and exemptions allowed by this chapter; provided, however, that the county auditor may, for good cause, extend such time a specified number of days. If a husband and wife livii^ together have an aggregate net income of one thousand dollars or over, each shall make such a return unless the income of eacli is included in a single joint return. If the taxpayer is unable to make his own return the return shall be made by a duly authorized agent or by the guardian or other person charged with the care of the person or property of such taxpayer. Sec. 5773-14. Every partnership shall when required by the county auditor of the county wherein any partner resides, make a return for any taxable year, stating specifically the items of its gross income and the deductions allowed by this chapter, and shall include in the return the names and addresses of the individuals who would be entitled to share in the net income if distributed and the amount of the distributive share of each individual. Sec 5773-15. Every fidudary (except receivers appointed by au- thority of law in possession of part only of the property of a taxpayer) shall make under oath of such fiduciary, if a person, or that of its presi- dent or secretary, if a corporation, a return of the amount of income received by the estate or trust, or for each beneficiary, stating Fpecifica'.ly the items of the gross income and the deductions and exemptions allowed by this chapter. But such returns need not be made in cases under paragraphs one, two and three of section 5773-11 of the General Code unless the taxable net incxKme of the estate or trust is five hundred d^^'- lars or over, nor in cases under paragraph four of said section, wlierein 156 the entire income of the beneficiary or beneficiaries from all sources is received and administered by the fiduciary, unless the taxable net income of each beneficiary is five hundred dollars or over if single, or if married and not living with husband or wife, or one thousand dollars or over if married and living with or contributing chiefly to the support of husband or wife. Under such regulations as the commission may prescribe, a return made by one of two or more joint fiduciaries and filed in the office of the proper county auditor shall be sufficient compliance with the above requirement. Such return shall show the address of each ben^ciary , and contain a statement that the fiduciary has sufficient knowledge of the affairs of such beneficiary/ estate or trust to enable him to make the return and that the samejs, to the best of his knowledge and belief, true and ccMTect. Fiduciaries required to make returns or statements under thiis chapter shall be subject to all the provisions of this chapter which apply to taxpayers. Sec. 5773-16. Whenever in the opinion of the commission the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the commission may prescribe, conforming as nearly as may be to the best accounting practice in the trade or business of the tax- payer and most clearly reflecting his income. Any taxpayer may, with the approval of the commission, use inventories in making his returns, and compute his taxable inccmie upon the basis of such inventories, but the form of such returns shall be prescribed by the commissicm. Sec. 5773-17. If a taxpayer, with the approval of the commission, changes the basis of computing net income from fiscal year to calendar year, a separate return shall be made for the period between the close of the last fiscal year for which return was made and the following Decem- ber thirty-first. If the change is miade from calendar year to fiscal year, a separate return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the last fiscal year. If the change is from one fiscal year to another fiscal year, a separate return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year. If a taxpayer making his first return for in- come tax keeps his accounts on the basis of a fiscal year, he shall make a separate return for the period between the beginning of a calendar year in which such fiscal year ends and the end of such fiscal year. In all of the above cases the net income shall be computed on the basis of such period for which s^rate return is made, and the tax shall 1»e paid thereon at the rate for the calendar year in which such ix?riod is iiuhu'ed; and the exemptions allowed in this, article shall be reduced 157 respectively to amounts which bear the same ratio to the full exempticms provided for as the number of months in sudi period bears to twelve months. ADMINISTRATION. Sec. 5773-18. The commission may designate such of its examiners, experts, accountants and other assistants as it may deem necessary for the purpose of aiding in the administration of the provisions of this chap- ter, which shall be deemed and held to.be a law which the coiranission is required to administer for the purpose of sections 1465-9, 1465-12 to 1465-30 inclusive, 1465-32 and 1465-34 of the General Code. It shall be the duty of the commission in the administration of this chapter to super- ' vise the work of the county auditors to the end that a uniform and effec- tive enftly, to the end ihsA, if practicaWe all such appeals shtU be di^x>sed of prior to the next succeeding collection period. Sec. 5773-29. An appeal under this chapter shall stay proceedings for the collection of the tax appealed from. The commissiogti and the county auditor shall be parties to the appeal. If the court finds that the taxable net income is greater in amount than that conceded in the petition, the decree shall include m the amount of tax assessed interest thereon at the rate for any period of time that may have elapsed between the latest date at which the tax would have been payable, if no appeal had been taken, and the date of the decree. The county auditor shall correct the income tax lists and duplicate in the manner provided in this chapter if necessary in order to comply with the decree. Sec. 5773-3a The county treasurer shall collect the taxes charged on the dujdicates certified to him under this chapter at the next period for the collection of taxes assessed on personal property, and in the same manner as such personal property taxes are collected, excepting that the entire amount of taxes under this chapter shall be due and payable at one time. In making such collection, the county treasurer shall have and ex- 161 erase all the powers, duties and remedies in him vested or imposed by law for the collection of such personal property taxes ; provided, however, that the treasurer's power to proceed by distress or otherwise shall arise immediately at the dose of the coUection p«iod herein referred to. Sec. 5773-31- The county auditor shall have and exercise with re- tpect to taxes delinquent under the provisions of this chapter, the powers and duties provided for in section five thousand six hundred ninety-four of the General Code, to be exercised, however, immediately after such semi-annual settlement, instead of annuaUy, as therein provided. He shall certify the delinquent list made up after the February settlement ns and corrections to the next assessment as he may deem true and just. Whenever the county auditor shall so increase or assess any income, he shall give notice in writing to the person liable l62 for the payment of the tax thereon of the amount of the assessment. Stich notice may be served by r^stered mail. Omitted taxable inccmieB so added to th^ assessment of a subsequent year shall* be subject to the rate belonging to the year or years in which they were taxable, and in case of fraud of wilful failure or neglect to twice such rate. Sec. 5773-5. In addition to its power to require the furnishing of information in the form of returns made to it by companies, firms, cor- porations, persons, associations, co-partnerships or public utilities, which power is hereby specifically made api^icable to the securing of informa- tion to enable the commission to carry into effect the provisions of t]|i9 chapter, the commission may prepare interrogatories and blank forms to be attached to the forms of reports, statements or returns required by law to be made to any other state officer, board of commission for the securing of such information. Any such state officer, board or commis- sion shall, upon request of the commission, attach such interrogatories and forms to ^e forms of sudi reports, Elements or fetums, and the perscms, firms or corporations required to make such reports, statements or returns shall make specific answers to such interrogatories and fill out such blanks, and the same are hereby made a part of all such reports, statements or returns for all purposes. The information thus acquired shall be transmitted by the officer, board of commission to which the reports, statements or return is made to the commission for its use as provided in this sectkm. Sec. 3773-3^' county auditor may correct all errors and mis- takes of a clerical nature which he discovers in the income tax lists and duplicates. If the correction is made after the duplicate is delivered to the treasurer, the correction shall be made on the margin of the income tax list and duplicate without changing any name or figure in the dupli- cate as delivered, or in the original tax Ust, which shall always corre- ^ond exactly with each other. Sec. 5773-37. If at any time the auditor discovers that taxes under this chapter have been erroneously charged and collected, he shall call the attention of the ocmmission thereto. If the commission finds that such taxes have been so erroneously charged and collected, it shall order the proper coimty auditor to draw his warrant on the county treasurer in favor of the person paying them for the full amount of the taxes so ernmeoasly duurged and collected. The county treasurer shall pay such ' warrant from the general revenue fuHd of the county. At the next semi-annual settlement with the auditor of state after the refunding of such taxes, the county auditor shall deduct from the amount of taxes due the state the amount of such taxes that have been paid into the state tmsiiry ; and at the corresponding settlement between the county auditor 163 and the county treasurer the amount of such taxes that have been paid to any city, village or township shall be charged to and retained from the taxes then due such city, village or township. The amounts so retained shall be credited to the general revenue of the county. No such taxes shall be so refunded except as have been erroneoudy collected in the three years next prior to the discovery thereof by the county auditor. Sec. 5773-38. The county auditor shall preserve in his office the original reports, statements and returns made to him for a period of three years, after which, unless otherwise ordered by the commission, they shall be destroyed. Sec. 5773-39. All contracts or agreements whereby one person di- rectly or indirectly assumes or promises to pay or bear the burden of any tax payable by another person under this chapter shall be illegal, null and void. Sec. 5773-40. The prosecutinfr attorney of the county in which any action or proceeding authorized by this chapter is pending or in cohtem- platicMi shall advise and represent any officer charged with the per- formance of any duty or invested with any power with respect thereto. Upon the written request of the commission, the attorney general shall appear and act for the con^ission or any of such officers in any such action or proceeding. ^ Sec. 5773-41. Whoever being a taxpayer having taxable net income in any year or being charged by law with the duty of making an income tax return in any capacity refuses to make a return at the time requirerl by law or knowingly makes a false or fraudulent return shall be guihy of a misdemeanor and upon conviction thereof shall be fined not to exceed five hundred dollars, or be imprisoned riot to exceed six months, or both. Sec. 55773-42* Whoever, being a county auditor, or deputy, as- sistant, clerk, or other employe of a county auditor, divulges ^r makes known in any manner, except in accordance with an order of court or as otherwise provided by law the amount of income or any particulars set forth or disclosed in any report, statement or return required by or under this chapter, or permits any unauthorized person to have access to such reports, statements or returns, shall be deemed guilty of a misdemeanor and upon conviction thereof shall be fined not more than one thousand dollars and imprisoned not more than one year, or both, and shall forfeit his office or employment. Nothing in this section shall be so construed as to prevent the publication of statistics so classified as to prevent the identification of particular reports, statements or returns and the items tliereof , or th^ inspcfction by the attorney general of the proper prosecut- i64 log attorney o£ the report, statement or return of any taxpayer who has l^>pealed, or agains whom a prosecution is pending under this chapter. Section 2. Section 1465-1 of the General Code is hereby amended to read as-foUcrws: Sec. 1 465- 1. The tax commission of Ohio shall consist of four com- missioners, not more than two of whom shall he of the same political party. Each commissioner shall hold his office for a term of six years beginning on the second Monday of February. The governor shall ap- point the commissioners by and with the advice and consent of the senate. Section 3. Original section 1465-1 of the General G>de, and sec- tion I of the act of May 10, 1910 (O. L. 399), designated as section 5445 of the General Code are hereby repealed. Section 4. The several sections of the General Code and parts diereof enacted in section i of this act and the provisions of sections 5 md 6 hereof are hereby declared to be so far s^Mtrate from and inde- pendent of each other that each of them would have been enacted without regard to the validity of any of the others, the intent and purpose of this act being to provide for the levy and collection of a tax on the incomes of persons residing in this state to the full extent that such tax may be constitutionally levied and collected, but no further, and to make such tax effective at the earliest possible date consistent with the constitution. Section 5. This act shall not affect the terms of office of the mem- bers of the tax commission of Ohio, in office when it takes effect, nor the term for which any vacancy in any such membership shall be filled. Im- mediately upon the taking effect of this act, the governor shall appoint, m the manner provided in section 1465-1 of the General Code as amended iKiielii, one mendier of the tax cononission of Ofno for a term ending on the day preceding the second Monday of February, nineteen hundred and twenty-one. The successor of such appointee shall be appointed for Ac full term provided in said section. Section 6. The tax levied by this act shall first be assessed and cdkcted iDpon and with re^wct to net inccmies for the calendar year nine- teen hundred and nineteen. The first return under this act of a taxpayer keefMng his accounts on the basis of the calendar year shall be made for the year nineteen hundred and nineteen within the period after January first, nineteen hundred and twenty prescribed by section 5773-13 of the General Code as herein enacted. The first return under this act of a taxpayer kee^mig his accotmts on the basis of a fiscal year ending between tiie first day of July and ^ end of the calendar year shall be made within die sam^ period, and ^lall be a separate rettmi for the period between January fifst, nineteeit hundred and nmeteen and the end of such fiscal i6s year ending in the calendar year nineteen hundred and nineteen, subject to the requirements of section 5773-17 of the General Code as herein en- acted. The first return of a taxpayer keeping his accounts on the basis of a fiscal year ending at any other time shall be made within the period after the of such fiscal year ending in the calendar year nineteen hundred and twenty, prescribed by section 5773-13 of the General Code as herein enacted and shall include the separate return prescribed by section 5773-17 of the General Code as herein enacted for the period beginning on Jan- uary first, nineteen hundred and nineteen. > Date Due 1 ^ 1 1 i j i 4 4 MAY 1 198i-- iC'^-HlAY 1 1 1934