[Discussion]

National Tax Association

[Discussion]Source: Proceedings of the Annual Conference on Taxation under the Auspices of the NationalTax Association, Vol. 15 (SEPTEMBER 18-22, 1922), pp. 116-126Published by: National Tax AssociationStable URL: http://www.jstor.org/stable/23399732 .

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116 NATIONAL TAX ASSOCIATION

Mr. Hallanan : That is the only tax applicable to corporation

activity, except the charter tax, which is a very nominal tax, based

upon the capital stock, a very nominal tax. In other words, any

corporation under fifty thousand dollars pays a tax of thirty dollars

a year for its charter.

Mr. John Harrington of Wisconsin: What about general prop

erty taxes?

Mr. Hallanan : That is applicable for local purposes, of course.

Chairman White: I suppose there is some exemption to the

clergy under that, and school teachers ?

Mr. Hallanan : The clergy usually do not get over ten thou

sand dollars in West Virginia.

Chairman White: That applies to the lawyers also, I suppose.

Mr. Buell : If there is time, I should like to point out the dis

tinction between the tax on coal and oil, and so forth that the

gentleman has just described in West Virginia and the tax that the Minnesota legislature levied at its last session upon iron ore.

Chairman White: Pardon me a moment; I think it should be

confined to asking the gentleman questions.

Mr. Buell : Beg your pardon ; I understood the rules provided for discussion not to exceed five minutes.

Chairman White: Only discussion upon the points raised in

the paper.

Mr. Buell : And that is exactly the point I am discussing. The

point is the difference between their tax on coal and minerals and our tax on iron ore.

Chairman White: Yours is not a sales tax.

Mr. Buell : It is exactly the sales tax.

Chairman White: I think the discussion should be confined to questions pertaining to the sales tax.

Mr. Buell: Then I have nothing to say, because the Minne sota tax is so totally different in its character, and to my mind so far superior to the West Virginia tax, that I think this conference

ought to be enlightened as to what we havè done in Minnesota, but if the conference does not want to know what we have done in

Minnesota, then I will keep still.

Mr. H. C. Mackenzie of New York : I move the gentleman be

granted the privilege of the floor for five minutes to explain.

Chairman White: Does the motion receive a second?

(Motion seconded) 1



WEST VIRGINIA SALES TAX 117

Chairman White: Very well, you have five minutes.

Mr. Buell: I think the conference should know that the Minne

sota iron ore tax is based on the principle of not taxing the gross value of the ore. If we were to tax the gross value of the ore

taken out of our mines up here, even one per cent, some of the

mines would be bankrupted the first year, because the one per cent

tax on gross value of the ore would be more than their entire

profit. If we were to tax the gross value of the ore on some of

the mines ten or fifteen per cent, they would not be hurt hardly at

all. That is the reason why the legislature of Minnesota aban

doned the idea of taxing the gross value.

In the year 1918 the M. A. Hanna company took out in this

state nearly one million tons of ore and took it out in such a way that their total net profits reported to the federal government was

only eighteen thousand dollars. If we had had the gross value

tax, which was once attempted to be put over in this state, of two

per cent on the gross value, their tax that year would have been

fifty-four thousand dollars, three times their entire net profit. Those facts led the legislature to adopt a different principle en

tirely, and the tax that is now on the statute books, and has been

sustained by the United States lower court—and we think it will

be sustained in the supreme court without any question—is derived

by reducing or by subtracting from the total value of the ore at

the mouth of the mine, first, the entire labor cost of separating the

ore from the matrix and bringing it to the surface ready to be taken away; secondly, a proportionate share of the cost of sinking the shaft and running the drifts in underground mines; third, a

proportionate share of the cost of removing the over burden in

open pit mines. The whole thought is, that the tax should not be

levied upon the business or occupation or labor involved in the

mining of the ore, but it should be levied upon that value of the ore which is due to its location or its quality, that part of the value which Mr.. Ben Dickson very aptly called the heritage element in its value, and which some of the opponents of the bill very seri

ously objected to. Although while the bill is labeled an occupation

tax, and the United States court has said "

yes, it is all right, it is

an occupation tax," you will notice that the basis of taxation is not

to any considerable extent the occupation of mining ore but is to

almost the entire extent the heritage or natural value of the ore as

it lies there in its native position in the earth. Now, that is some

thing that is entirely new, in the United States, so far as I have

been able to learn, in all attempts to tax natural resources of this

character, where the natural resources are destroyed in the process of production. The rate of the tax is six per cent, in my opinion not nearly enough.




The first thought was that the tax should be ten per cent, but

the commission would not let it go out with anything more than six.

Just one word more. In order to show you that we have not

finished the job yet but expect to do so at the next session of the

legislature, this tax only applies to those owners of mineral lands

who operate their own mines, and you notice that they secure this

value because their mines are rich, because the ore is high-grade, or lies near the surface so it can be shoveled up easily. There is

another group of land owners in Minnesota who do not operate their mines at all. They lease them on a royalty, and they collect

all the royalty that the traffic will bear. That is a habit that land

owners have, you know ; and we had a bill to tax the royalties that

those land owners collect, so as to have two groups of land owners

on the same general basis. That bill passed the house with only fourteen votes against it out of one hundred and thirty-one, but

was lost in the senate by a very few votes. I may remark that

thirteen of the senators that voted against it are not now in the

running, and in my opinion six or seven more won't be after

November.

It is perfectly plain, of course, that those two groups of land

owners should be treated alike, that if you tax the roya'.ties col

lected by one group six per cent, you should tax the net clean-up, the net profit, which has exactly the same economic character, six

per cent. If you tax one ten per cent you should tax the other ten

per cent.

Captain White: Are these properties that pay other taxes

beside ?

Mr. Buell: Oh, yes, that is outside of all this. This is a special tax at the time they sever the ore and get away with it, on the

theory that they are destroying the natural resources, which will never be there again. The state will never get another whack at

it under any circumstances, and for that reason it is entirely proper that a part of the profit should be yielded up to the state.

Perhaps it will be interesting to you to know that the net clean-up in Minnesota by iron mine owners in normal years will run from

sixty-five to eighty-four millions of dollars, clean velvet over and above all expenses, everything—their net profits.

Captain White: How much did the Hanna company pay on

that basis ?

Mr. Buell: On the basis of six per cent the Hanna company would pay six thousand dollars out of their eighteen thousand dol

lars, but the big fellows clean up six or eight millions on ore, where there is two or three dollars profit in every ton they dig out.

They would pay six per cent on the profit.




Mr. Hallanan : Do you concede that a company in mining one

million tons made eighteen thousand dollars net ?

Mr. Buell : I don't concede anything of the kind. That is the

report they made to the federal government, and they were not

penalized or prosecuted in any way.

Mr. Hallanan : If the Hanna company mined one million tons, what would they have paid the State of Minnesota on a basis of

six per cent or any other flat rate? I am asking that in order to draw a conclusion, as to what they would have paid if the taxes

had been similar to the West Virginia tax.

Mr. Buell: Well, your West Virginia tax, as I understand, is

on the gross sales. A two per cent tax would have raised fifty-four thousand dollars, a six per cent tax would be three times fifty-four thousand dollars, which would be one hundred and sixty-two thou

sand dollars.

Mr. Hallanan: Now, is there anything in your proposed tax, which you are discussing now, which would prevent or prohibit the Hanna company from making a like return to the government of

the State of Minnesota?

Mr. Buell : I assume that their return to the government at

Washington was an honest and correct return. There is very

specific provision for making their returns, and the tax commis

sion has very wide authority to get correct information in case

they suspect that there has been any skulduggery.

Mr. Hallanan : That would have to be very wide authority.

Mr. Buell : Oh, yes, I think the bill covers the ground very

carefully. It was drawn with very great care by the attorney gen eral and the tax commission, after we got the idea based on the

principle of taxing" only the natural element and not the gross value. That is the kernel of the whole question. We do not tax the gross value of the ore, because it would ruin all the small men. We do tax their net clean-up.

Mr. Hallanan : Don't you think it is more difficult to deter mine what the net clean-up is than it is to tax the gross sale value ?

Mr. Buell : More difficult, oh yes ; more difficult but much more

just. Taxation should be fairly just, you know, even if it is a little more difficult.

Mr. Hallanan: Well, it is a problem then of administration.

Mr. Buell: Largely, yes.

Mr. Douglas Sutherland of Illinois : May I ask Mr. Hallanan a question? Do I understand that the revenues from your sales




tax go entirely to the state treasury? They are not distributed at

all to the municipalities?

Mr. Hallanan : Exclusively state revenue.

Mr. Sutherland: And personal property that may be involved

is then subject to any local ad valorem tax that may be levied?

Mr. Hallanan : Yes, sir.

Question : Isn't it a fact, Mr. Hallanan, that part of the moneys received from those sources go back to the local districts through

appropriations for schools and other purposes?

Mr. Hallanan: Well, that is true, because of the fact that the

state appropriates money for the support of local schools, but the

essential fact remains that the tax collected by the state on the

sales tax goes into the state fund and then is distributed by legis lative appropriation.

Mr. John E. Brindley of Iowa: I don't think the cost of ad

ministration was brought out in the paper. What is the cost of

administration of this tax, Mr. Hallanan?

Mr. Hallanan : That was included in the paper but by reason of the time restriction I was compelled to go over it. The cost of administration is about one and one-fifth per cent.

Mr. John F. Case of Missouri: You said that the sentiment of

West Virginia you thought was favorable to the continuance of the West Virginia sales tax. How about the attitude of the farmers of your state?

Mr. Hallanan : In reply to that question, Mr. McKenzie is here. He represents the farm bureau, and he has been down

through West Virginia, and if I may be permitted I should like him to respond to that question, because he has been in direct touch with the West Virginia farm bureau federation. May I ask Mr. McKenzie to reply to the question ?

Mr. H. C. McKenzie : I don't know that I would like to give a definite answer as to the sentiment of all the farmers in West Vir

ginia. I might give some indication, though. As Mr. Hallanan has said, I have been in West Virginia recently

and in consultation with their tax committee, and I find they have a very able tax committee, as I conclude, and that they have an

open mind ; they have not drawn any definite conclusions yet as to this so-called sales tax, which in reality is not a sales tax as we

ordinarily consider it.

The situation in West Virginia is, as to the farmer, very much as in many other states, and that is the greater proportion of the tax has come to be centered on real property, both through the




escape of tangible and intangible personal property and througli the exemption of some real estate, so that the base has become

narrow there as it has in many other cases. I don't think the far

mers of West Virginia are inclined to condemn on the evidence

they have at present. They have a committee which is now work

ing, and which has been to see Mr. Hallanan. They have been to

see the former tax commissioner, and they are out now looking for

light, and within the next three or four months their position will

be formulated so that they will have a definite position. Mr. Halla

nan called your attention to the fact that on coal that is shipped, for instance, outside of the state, the tax won't be shifted to the

consumer, because the same tax is not employed in Ohio, Penn

sylvania or any other state, but I don't think that is true as to many of the other elements in the tax. You take all other wholesalers, all other people who do business exclusively within the state of

West Virginia, and I apprehend that the tax will be very much more largely passed on to the inhabitants of West Virginia than

the part that goes outside of the state. You will find the farmers

of West Virginia and all over the United States opposed to the

principle of a sales tax or a tax on gross production, which is not a real measure of a man's ability to pay taxes. In that respect I am

much more inclined to think our friend from Minnesota has come

nearer to the true idea of what a tax should be.

Mr. Hallanan : May I ask this question : Is it not true that in

the information which was conveyed to the taxation committee of the West Virginia farm bureau federation, it was shown that less than two per cent of the farmers of West Virginia were paying a tax under our present law?

Mr. McKenzie: You mean the sales tax?

Mr. Hallanan : Yes.

Mr. McKenzie: Yes, I think that is true. As I got the figures, it was almost.an infinitesimal part of this tax. I don't think the farmers would have any reason to complain of the part of the tax that they pay directly. The injustice, if any should exist, would be through the passing on of the tax on the proportionate business done in West Virginia.

Mr. Hallanan : Wouldn't that be negligible to the tax on the

product of West Virginia transported to some other state?

Mr. McKenzie : The great bulk of that tax will be collected from some parties outside of the state ; no question about that.

Mr. Buell: Will you kindly permit me to call attention to one

point I overlooked. I hope you have all noticed that the Minne sota iron ore tax is a tax that will not be passed on in any way




whatever. If you haven't, that is a good problem to study on be

tween now and the next meeting of this association.

Mr. Hallanan : The rates were arrived at by the legislature as

a matter of public policy, to determine the cost to the state of the

protection of the industry. First I refer to the coal industry which is peculiarly expensive to the state, in ■ this sense, that by reason of West Virginia's coal development there must be main

tained a system of state supervision of mines, which costs some

three to four hundred thousand dollars per year ; also a state system of miners' hospitals established for the benefit of those who may be injured while engaged in the hazards of the mining industry, and which costs the state some three to four hundred thousand dol

lars a year; and finally, the fact that the coal industry has been

developed in many communities where there is no local police pro

tection, they expect the state to furnish protection through the

state constabulary department, which is maintained at an extra

ordinary expense of some half-million dollars per year. For that

reason the production industries were put into a separate class and

that business activity was taxed double the rate of general business

activities. The other classes, generally fixed at one-fifth of one

per cent, contributed their proportionate share to the cost of state

government. There are some inequities, such as I pointed out in

connection with the taxes on wholesalers and jobbers, which are

relatively small, and which I anticipate the next legislature will

correct. The main point I desire to make is this; that the produc tion'industries give to the state certain special expenditures, and

for that reason those particular industries are taxed at double the

rate of ordinary and general business activities.

Mr. Rothschild of New York: I should like to ask the gentle man from Minnesota why it would be impossible for the miners ot

iron ore to pass on a substantial tax.

Mr. Buell: I will try to answer that. I was in hopes I would

be asked to answer that because it would be a good problem for you to mull over the next year. Here is the point: The gentleman from New York, I guess, will admit that if we were to tax royal ties that are collected by the group of mineral land owners who do

not operate but collect royalties—if they were to tax their royalties to any extent, we see right off it would simply come out of their

pockets.

Mr. Rothschild: I don't admit it. If you tax the royalties

enough and the contract for royalties is one which can either be

changed or new contracts made, why they will have to get that

much more royalty.

Mr. Buell: Have to? They can't. They are getting all the




traffic will bear now. The man who owns the land out of which

the ore is taken all the while gets every cent there is in it in royalty,

every minute, and don't you forget it. He has an economic law

there that is more powerful than any law any nation could make, that enables him, before he will let the ore be taken out, to collect

all the royalty there is in that ore ; he gets every bit of it all the

while, just as the landlords who own the City of New York get the entire rental value in land of New York all the while.

Mr. White : Well, they don't. You are in error about that.

Mr. Buell : The rents don't go up unless your population in

creases.

Mr. White: Taxes go up.

Mr. Buell: I think it will be pretty generally conceded that a

tax on mining royalties will be a tax that the land owner who re

ceives the royalty will have to pay. At any rate the land owners

that were receiving royalties were the owners that got extremely

busy in an attempt to defeat the royalty tax at the last session of

the legislature of Minnesota, and I think they knew what they were

doing. Now then, this tax on the heritage element in the value of the

ore taken out by those land owners who operate their own mines,

is of the same economic character, exactly. If they do not see fit

to operate their mines, then they lease them on a royalty and get that value in the form of a royalty, so that substantially our iron

ore tax of six per cent on the net value of the ore is a tax on

potential royalty.

Probably the Minnesota iron mines are the richest mines in the

-world. They can produce ore in Minnesota cheaper than any other

place in the world.

Mr. Rothschild : How about the corporation which produced a

million tons and made a profit of only eighteen thousand dollars.

Mr. Buell: Don't you see the point? The costs of operation of that company were excessive. Their ore was deep down in the

ground, or it was subject to some specially difficult process of opera tion. We had the Bangor company up there, that operated for

four years, dug ore right along for four years, and lost over four

million dollars on the process. Their ore cost them more than they could sell it for on the market.

Mr. Rothschild: Did they stop operating?

Mr. Buell: They did stop operating and they have not oper ated at all for a number of years. Now, under our tax they would

not pay any tax at all.

Mr. Rothschild: They would not operate.




Mr. Buell : But if they did operate they would not pay any tax.

Mr. Rothschild: Why should they operate at a loss? Busi

ness is not carried on that way.

Mr. Buell : Certainly they will not operate at a loss ; they will

quit; but if they were operating at a loss and our tax were en

forced, they would pay nothing.

Mr. Rothschild : Consider this one corporation which turned

out one million tons, with an eighteen thousand dollar profit, with

reference to the condition which would be brought about if they had a sales tax — something they could not pass on because the

sales tax would be more than the profit. Of course your answer is

that they could not afford to operate, that that is the kind of organ ization which would have to close down. The rich concerns which

make so much money on their ores certainly could pay the sales

tax if you passed one. In other words, the smaller the profit, the

more the necessity would arise of passing it along. With a large

profit, of course, a corporation could absorb the tax, a tax of one

per cent or less than one per cent.

Mr. Buell: The whole thing hinges on this: there are a lot of

miners up in the iron country of Minnesota working on a very close margin. There is very little profit in the business. They continue to work at a very small profit, but if we were to put a

gross tax upon them—we proposed a two per cent tax on them—

and the fact is it figured out that the tax would be heavier than

their profits. That was the principal reason we induced the author

of that bill to withdraw it from the committee and had it made

over so it would be a tax not on their gross profits, not on the

gross value of their ore at all, but upon the net profits. Now, the

net profit, of course, in the case of iron ore is the economic equiva lent of royalty. That is, if they did not operate as owners, they could not get it in the form of royalty.

Mr. Rothschild: Could they get it from a mine so situated

that it was not a paying mine ?

Mr. Buell : No, we are not discussing that at all.

Mr. Rothschild: A mine which turned out one million tons

and then turned out eighteen thousand dollars profit is not a pay

ing mine, and then the other mine that worked for four years and

did not make a profit, those are not paying mines.

Mr. Buell: I hope the gentleman won't get it into his head

that most of our mines are of that character. The most of them

are not of that character. We have, thousands of acres of iron

land in northern Minnesota that would not pay to operate at all at

the present time, if there were any tax or any burden upon them




whatever. They may be some day. Then we have mines up there

where it does not cost at present over twenty-five or thirty cents a

ton to shovel the ore by the steam shovel into the car to ship it to

the terminal point, ore worth three, four and five dollars a ton,

according to quality. This tax was designed to reach those fel

lows—the fellows cleaning up a very large profit by destroying the

natural resources up there, taking it away from the state. Nobody had any design to reach the small man not making any profit, and

this tax is so designed that for practical purposes it won't reach

the small man making no profit or only a very little profit. That is

the merit of the proposition.

Mr. Rothschild : It seems to me that in mining, as in all other

business, there are a number of highly watered plants. Those

plants can only work at a profit under the very best conditions.

They are a very small percentage, however, of the plants in busi

ness or in the mining world, and therefore on the question of a tax

system, which is necessary to get income in these days when large sums are necessary, it seems to me too much regard ought not to be

paid to that very, very small percentage of dead ones in all lines

of business.

Mr. Buell : This gentleman thinks we are not going to get revenue enough. We are going to get out of our iron ore tax

more revenue than in West Virginia.

Mr. Rothschild : It is not that you are not going to get revenue, but I am afraid that the political influence of a very, very small

percentage of unsuccessful operations in the country is used and

will be used to discredit a perfectly fair system of taxation.

Chairman White: I think that is enough discussion on that

point. I think probably' the rest of you are in the same position that I am ; you have mining stock that has never paid any dividend.

Gentlemen, your permanent chairman will take charge of the

meeting.

Chairman Lord: I should like to ask Mr. Sneed if there is to

be a meeting of the committee on resolutions immediately after

adjournment.

Mr. Sneed: Yes, Mr. Chairman, just long enough to effect an

organization, to see how near complete that committee is. I un

derstand that all the names have not been handed in up to now.

Chairman Lord: Perhaps the secretary might read the list of

states that have not reported their selection for the committee on

resolutions.

(Roll call by the secretary of states who have not supplied the

name of the member of the resolutions committee)




Secretary Holcomb: I have a resolution that has been handed

in. It relates to bank taxation. It is submitted by C. J. Tobin of

New York.

(Resolution read by the secretary)

Chairman Lord : The resolution will be referred under the

rules.

Secretary Holcomb : The committee on taxation of public utili

ties is requested to meet at the close of tonight's session. The

committee on nominations of the National Tax Association is re

quested to meet in this room at the end of the sixth session. That

is Wednesday afternoon—tomorrow afternoon.

Chairman Lord: Are there any other announcements from the

floor ?

Mr. C. T. Moffett of Minnesota: I want to call attention to the

fact that tomorrow at two o'clock we have provided a trip for the

ladies. There are not many ladies here now, but I hope the men

will tell them that we are all ready for that trip. The Minneapolis institute of arts has invited all the gentlemen and the ladies, either

severally or together, to visit the institute, and all you have to say is you are from the national tax association, and that is your open sesame. The Minneapolis institute of arts is on 24th Street and

Third Avenue south. We will provide some means of getting you to the building.

Mr. White: I should like to say to the members who are assem

bled that we all manage to catch trains on time. Most of you are

public officials. Now, if we cannot begin our convention sessions

at the time appointed, it does not speak very well for public officials.

Chairman Lord: That is very timely and appropriate and ap

plies and has applied so far, to the meetings of the conference.

Now, if there are no other announcements the convention will re

cess until eight o'clock this evening.

(Adjournment)



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