DISCUSSION ON TAXATION OF PUBLIC SERVICE CORPORATIONS

National Tax Association

DISCUSSION ON TAXATION OF PUBLIC SERVICE CORPORATIONSSource: State and Local Taxation: International Conference under the Auspices of theInternational Tax Association: Addresses and Proceedings, Vol. 2 (OCTOBER 6-9, 1908), pp. 487-510Published by: National Tax AssociationStable URL: http://www.jstor.org/stable/41950661 .

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DISCUSSION ON TAXATION OF PUBLIC SERVICE CORPORATIONS

[The paper on the Tax Commission of Kansas and the paper of Mr. Maltbie on Taxation of Public Service Corpo- rations were not read to the Conference. Mr. Woodbury's paper was read and, by invitation, the discussion was opened by Mr. Harrison Williams, General Land and Tax Agent, Erie Railroad Company, and Mr. Frank P. Crandon, Tax Commis- sioner, Chicago and Northwestern Railway Company.]

Mr. Harrison Williams, General Land and Tax Agent, Erie Railroad Company, New York City: The heavy indictment which Judge Woodbury has read against the tax laws of the State of New York is pretty generally applicable, I think, to the laws relative to taxation of railroad property, and also applies to a greater or less extent to the tax laws of New Jersey, Pennsylvania, Ohio, and to some extent in Indiana.

The present system is chaotic, unscientific, inequitable and apparently generally impossible of enforcement. It has re- sulted from a variety of causes in the different States. In New York State we started it - and I speak particularly of the railroad situation - with the old ad valorem property tax, a law that has been patched and added to, not so much in the effort to create a scientific whole, but in a search for additional revenues to provide for the increasing expenditures of the State. Of course a tax which bears directly on the voters is an unpopular tax everywhere. It is the scientific and proper tax, I believe, but it is a universally unpopular tax, and in the effort to provide funds for the additional expenses, as these expenses came along, we have the full flower of the present New York railroad tax situation.

As I say, we start in with the ad valorem tax upon physical property of the railroad company. Every municipal subdivi- sion which contains the physical property of the railroad company sits through its Board of Assessors as an independent

487



488 STATE AND LOCAL TAXATION

tribunal upon the valuation for taxation of that property. As Judge Woodbury has properly said, by law the State Board of Tax Commissioners is presumed to exercise supervision of these assessments. That supervision is almost entirely formal. No matter how conscientious the efforts of the State Board of Tax Commissioners may be, they are without any substantial author- ity to enforce their mandates ; and though they may direct the local assessor to a given course, if the local assessor fails to obey their direction they are without power to enforce it.

Next after the ad valorem tax we have the capital stock tax imposed against railroad companies in common with other corporations in the State. In addition we have the gross earnings tax, we have the assessment of special franchises and the variety of local taxation imposed on those assessments. Finally, we have the mortgage tax.

In New Jersey they have sought to avoid this system of local taxation, and some twenty-five years ago they created a central body known as the State Board of Assessors empowered to assess all railroad property. For twenty years railroad property was so assessed. In the last five years the general effort of the State of New Jersey seems to have been to crush the centralization of assessment which they were so desirous of creating twenty-five years ago.

In Pennsylvania there is no ad valorem assessment of railroad property, which is entirely assessed through the media, first of a capital stock tax, second of a loans tax and third of a gross earnings tax.

In Ohio there is a quasi-centralization. Railroad property is being assessed there through the media of county boards of auditors, the auditor of each county through which the railroad passes being a member of the particular board sitting on the valuation of that railroad property, and the result being divided by the miles of railroad and then multiplied by the miles in each tax district, and returned to the district for the levy of the tax. In Illinois and Indiana we have a central body.

To-day I don't know of anything which more strongly im- presses me in the States with which I am more or less familiar than the dissatisfaction of those States that have the system, as the centralization of railroad assessment and their wish to



DISCUSSION AND CRITICISM 489

return to the distribution method or the local method, and the equal dissatisfaction in other States with the local method and the desire to get to a centralized method. I think a lesson to be learned from that general unrest is simply this, - that none of the methods are good, that they are unscientific, they are poorly thought out and, irrespective of whether they are centralized or local, they are bad in application.

The great objection to assessment by a central board we have found is this, - especially when that assessment is on an ad valorem basis, - local assessments are almost universally other than on full value, irrespective of what the law of the State may be. In one State there is a constitutional mandate that it shall be a true value. In another State there is a statutory mandate that it shall be at full value. But we find the condition almost universal that something else than full value is taken, and what that something is generally depends upon the indi- vidual discretion of the assessing official.

We find in those States with central bodies assessing upon the ad valorem basis that if an attempt be made to levy taxes at rates which are the result of underassessment of property by the local authorities on a 100 per cent assessment by State bodies, an obvious injustice results. If, on the other hand, there is a discrimination, and a tax at a fixed rate be levied upon assessments made by State bodies upon railroad property there is always dissatisfaction, and the matter becomes not a question of political economy, but is apparently an irresistible bait to every political party in search of a local issue. The ad valorem tax upon railroad property is impracticable to-day by itself. It is not equitably enforced; it cannot be under our general system of appointment of local assessors. There is an almost complete lack of equalization, and the methods of its enforcement are amazingly clumsy.

The capital stock method is almost as bad. It taxes not only property but management, even traffic agreements, and is after all in the last analysis more or less based upon stock gambling, if the value of the stock as shown by current markets is taken as the basis of assessment.

The gross earnings tax is highly inequitable. It bears always against the poor company operating under heavy physical




difficulties, and in favor of the rich company operating under few physical difficulties. To illustrate. If you have a gross earnings tax of say 3 per cent and apply it to two railway companies, one of which is operating at a cost of 70 per cent of its gross earnings, you are practically imposing a tax of 10 per cent upon its net. Another company is operating at a cost of 50 per cent of its gross earnings, and you are only taxing it at 6 per cent of its net. In other words, you are penalizing the poor company by taxing it 66 per cent more than the rich company which could better afford the tax.

The net earnings tax to-day is not practicable because until within the last year or two we had no uniformity of accounting systems, and to-day that uniformity has merely started with regard to interstate railways. With regard to intrastate railways or roads that have no interstate business there is no uniformity whatever and no possibility of telling what the so-called net earnings of the road are, as referred to by Judge Woodbury.

It is a thankless task to stand up and tear down. The iconoclast, the critic, has his uses, but of course they are not comparable to one who will offer some remedy. My remarks so far have been simply to show why I advance a remedy, and the conditions which I seek to cure. To begin with, it is extremely difficult to make radical changes, as we all know, and to get away from the ad valorem tax upon property in many States. In the East at least it will be frequently necessary to obtain constitutional changes.

The first thing that I propose is a strengthening of the methods of equalization where ad valorem taxes are in effect. Some five years ago the always smoldering tax dissatisfaction in New Jersey burst into one of its frequent flames, and the government appointed a legislative committee to investigate the whole subject. But although appointed to investigate the whole subject, it devoted nine tenths of its time to considering railroad taxation. An effort was then being made to apply local tax rates to the 100 per cent centralized assessments of the railroads to make up deficiencies caused by the underassessment made by local assessors.

The railroads generally took this position : they did not object to the application of the local tax rates to their 100 per cent




assessments if the local assessors would assess property upon a 100 per cent basis. The local assessors, or those who spoke for them, rose as one man and said, "We do"; whereupon the railroads at a very great expense of money, time and labor examined every transfer of real estate recorded in the State of New Jersey for the five years prior to 1905. There were, as I recall the number offhand, 180,000 of those in round figures. Of those a certain number were discredited at once because they simply gave a nominal consideration; there were also thrown out sheriffs' deeds, forced sales, deeds in settlement of estate, partition proceedings, etc. Finally we had left a residuum of about 89,000 or 90,000 deeds to cover the whole State. In every instance we went preferably to the local assessor, or if we were unable to get the local assessor to act, to the best real estate man we could find in the tax district, and in a column opposite the property we had the assessed value of that property in the tax district shown. This was the result throughout New Jersey; we found that the average assessment through those five years was 54 per cent of the selling price of real estate.

In an attempt to secure equalization these measures were proposed and adopted by the legislature - boards of county taxation for each county were created with jurisdiction over the assessment work of the local assessors in the several towns. They were charged with the correction of assessment rolls, with the insistence of assessment of property at 100 per cent. Over those boards of county assessment was the State Board of Equalization, which sat as an appellate tribunal for appeals taken from the local assessments through the county boards to it, and was also charged with power to remove local assessors if they failed to carry out the mandates of the county boards. Because of political considerations, those boards were not promptly appointed. They were well paid; they were paid fairly in view of the work demanded of them, and although the acts were passed perhaps in February it was not until May or June that the boards were finally appointed. The date as of which assessments are made in New Jersey is the 20th of May.

For the year 1905 the total real estate assessment of the State of New Jersey, which had been vociferously claimed to be 100 per cent by the people seeking the application of the local rates




to the railroad assessments, was $1,000,000,000. In three or four months of these county boards the real estate assessment of New Jersey was increased to $1,600,000,000, and has been going up ever since. Now, there is what I call a practical measure of equalization. At the same time - and it is worth while drawing the attention of the Conference to the fact - the tax rate of the State of New Jersey fell from $24 to $18 per thousand in spite of the fact that numerous local and municipal financiers took the opportunity to increase the aggregate budgets of New Jersey from $24,000,000 to $28,000,000; in other words, they got away with an additional $4,000,000 of taxes. (Applause.)

I became very much interested in this equalization measure because it was so effective in New Jersey, and I think their experience makes it a model for other States. There was an increase in the budget of four millions of dollars. That was made in this manner. The rates were based on the so-called Hillery Law, whereby in effect one year's grace was given to all municipalities to clean up their floating indebtedness. Thereafter they were obliged to cut down their tax levies year after year five mills at a time, as I recall, until in the larger cities it reached $1.75 per 100 for all purposes - State, county, municipal, school tax, and everything, and in the smaller ones $1.50 per 100, and when it reached those rates under no conditions could it be exceeded. Consequently, when they sought to raise their taxes, the only way would be to increase their assessments, and it results in a very lively watch upon those who are responsible for making up budgets. I want to say that many of the bad fruits of the system for which the tax assessors are blamed are not so much due to the assessor as they are to the expenditure of the taxes.

My remedy is this. It is not a remedy that I suggest for immediate application, but I think the method of assessment of railroad property as a whole in the East needs a very drastic change. I am a thorough convert to the so-called Purdy system of the taxing of public service corporations. Speaking very simply it is this - one tax instead of a multi- plicity of taxes; a mathematical rule instead of elements of discretion; a tax rate levied upon the profit declarations of the company, both stock and bonds, whether they be in the




form of dividends or interest. That is relatively simple for the intrastate roads. But we find in the East, where we have great terminals, that where an attempt is made to levy a tax on the property as a unit there is a great cry from those places where the terminals are, that they are losing taxation on the lands on which they are entitled to levy. To meet that case I suggest that property not of the main stem (or right of way) be separately assessed by the local assessor; that it be returned to the State Tax Board ; that they examine it and compare it to see that it is equalized with the other assessments in that tax district; that it then be taxed with other local property, and the total taxes on such property be paid by the State to the municipality and deducted from the taxes paid by the company to the State on the unit assessment.

How shall the taxes on the interstate roads be divided as between States ? On the basis of the main track mileage, plus side track mileage, your unit being one mile of main track and four miles of side track being taken to equal one mile of main track. As I study the situation, that seems the most equitable basis. (Applause.)

Mr. Frank P. Crandon, Tax Commissioner, Chicago and Northwestern Railway Company, Chicago : I wish to speak especially in reference to railroad taxation. That seems to have oc- cupied Mr. Williams's attention, and in his address there is much that is of value and suggestion. If, however, we are in search of some form of railroad taxation that will act automatically or mathematically, and be just in all cases, we are in as vain an effort as if we were searching for the philosopher's stone. That method does not exist and cannot exist. The various forms of railway assessment that have been proposed have each of them some special merit. I think that it would not be too much to say that almost any of them under a wise administration would produce a reasonably accurate result.

When I first began to know something about the system of taxation of railroads in the Western States, very much of the confusion and variety and infelicity which Mr. Williams has referred to as applying to Eastern roads applied to all our West- ern States. We first adopted a system of State assessment, treating the railroad within the State as a unit, and subdividing the assessment among the various taxing districts. That has




worked with fair satisfaction in many cases, but it did not answer the purpose in many cases for the reason that is almost self-obvious.

It is now nearly forty years since we first began to make railway assessments by central bodies. The Central Assessing Board has never to my knowledge at the time of the appointment of any member of it received the advantage of being com- posed of men, any one of whom at the time of his appointment had any previous experience or training fitting him to grapple with the question of railroad taxation. In the State of Illinois we had a very large board consisting of twenty-five members; in other States boards of various size consisting of from three to five members. The first board that was created to my knowledge was in 1873. The Northwestern Railroad which I represent has property in nine States. In all the years and in all the States it is still true that no man of railroad experience, either in construction or operation or administration, has been appointed to one of those boards of assessments. That does not mean that we don't have some good men. In spite of that fact, in many States we have excellent members of those boards, but they are men who became excellent by virtue of a long continuance in office, and giving their time and consideration to the matters before them, not because they had learned either from experience or training how to perform the duties to which they had been called.

What do we mean when we talk of an ad valorem system? Ordinarily I think it is supposed to apply to the physical property of the company. If I am wrong, I would be glad to be corrected. If by ad valorem we mean the value of the property, if that is what we are trying to get at, there is no other system that should be adopted except the ad valorem system. However, if we are going to limit the meaning of ad valorem to the ascertaining of the actual physical property, then there is no system more vicious, no system more difficult, no system that will result in such iniquities and injustice as what would come from such an extension of the term ad valorem.

It is impossible to value accurately or adequately the physical property of a railroad. Wisconsin tried it; Michigan tried it; with what result? The Board of Assessment used up a large




amount of money in the attempt to ascertain the physical value of the roads in the State. They were helped by a large corps of other valuators on the part of the railway companies. It cost the Northwestern Railway Company $30,000 and more to value its property in the State of Wisconsin by its engineers and experts. I don't know how much it cost the State. Judge Gilson, how much was it your experts made our valuation when we first started in ? It was about sixty-two millions, wasn't it ?

Judge Gilson (Wisconsin) : Yes. Mr. Crandon: And the experts of the company made it

about fifty-two millions or fifty-three millions. Am I right? Judge Gilson: I think so. Mr. Crandon : That is near enough, anyway. Judge Gilson: I think, though, that it was sixty-two mil-

lion new, but in its depreciated condition it was about ten million dollars less. [See subsequent correction by Mr. Gilson.]

Mr. Crandon: Very well. In the first place we would have had ten million dollars difference, and in the next place twenty million dollars difference, not by men who come to the subject as novices, not by inexperts, but by the men best qualified to judge of the value of that physical property that there were in the State or that could be found out of the State; and still the results of their valuations are apart to the extent of from ten millions to twenty millions of dollars, in the valuation of one road in one State. Taking the lowest amount it certainly was ten millions of dollars, and that in regard to a single road in a single State. Now, basing your judgment upon that fact, how is it possible that men who have no qualifications of that sort for that business, who come to the subject new, are going to give any intelligent or adequate valuation of the property? I don't think we have in the State of Wisconsin anything more difficult than we would have elsewhere. However, the problem becomes a great deal more complicated when you take into account the terminal properties of such roads as have their terminals in Chicago. I only speak of this as showing that a system which is attempted to be based upon the actual value of the physical property is absurd and vicious and impossible of just application. I find that I have got off on a subject that I didn't mean to touch at all.




The problem to which I was to invite your attention at this Convention in the hope that it may be a suggestion that will accomplish some result at some time is the question, "How shall we deal with assessing interstate railroads?" None of those large roads are intrastate; they are all interstate. The system is a unit which includes both interstate and intrastate parts; when, then, as in the case of the Northwestern Railway Company, we find our railroad line in nine different States, and also find that we have a different system for determining values in each State, how is the partition of the value of the property to be made between the different States so as to be equitable to the public and fair to the company?

For the first proposition we want a uniform law for valuing railroads in all the States. I suppose that could only be got by agreement; but we have taken the first step towards a fair distribution of the valuation on the system of railroads between the States when we have got the same law of valuation in all the States. What that law shall be, what it shall include, is not a matter that can be determined here, nor determined easily anywhere, or be determined except by the most careful consideration of all the facts connected with the value, and through a period sufficiently long to test the equity of the scheme that shall finally be devised.

Reference has been made to the stock and bond theory of assessment. If there is one system more vicious than all the others that is the system. I would like to elaborate that question, but I have not time. A single illustration with regard to its effect would be afforded by the Northwestern Railway Company whose terminals in Chicago have been estimated to be worth from thirty millions of dollars to forty millions of dollars, and whose line extends through nine different States. If we arrive at the value of the property accurately by the stock and bond theory, how are we to apportion it among these different States so that they would share equitably the aggregate value ? By the stock and bond theory you simply arrive, at the best, at a lump sum valuation, which must then be divided upon some other basis than that which you have taken for finding your valuation. But you don't get the correct value by any stock and bond method. It is evil and only evil, and that continually.




I am more inclined to the idea that the railroad is a machine for earning money. It may extend through one State or ten or twenty. It is valuable simply as it accomplishes the purpose for which it was made - to earn money. In some form the earning capacity of a corporation of that sort is the measure of its value. It seems to me when it is properly defined and adequately guarded that this is the best method of valuing a corporation. If we had only the elements which make gross earnings, if you eliminate those earnings which come from other sources than the operation of the railroad, - those earnings that come out of its investments, its owning of other properties, - and could find accurately just what it earns as a railroad, you have then a substantial basis on which you could make up the value of the entire road.

Now, just how you are going to apply that knowledge when you have got it so that you can justly and fairly distribute the value to the various taxing districts, presents a problem of great magnitude and complexity. But have we not gone a good distance when we know how much the thing is worth ? Haven't we got a long distance in the way of determining what a railroad should be assessed at in any locality if we know what it ought to be assessed at in all localities ? And if we have found by any method the way in which we can ascertain precisely the actual value of the property, have we not laid a basis upon which we may hope to build the superstructure of distribution ?

Judge Gilson (Wisconsin) : Before Mr. Crandon leaves the subject I would like to make a statement in regard to the question of the valuation of the physical property in Wisconsin, that I did not understand at the time. I think it was ascer- tained by the State Board of Assessors that if new, the road was worth sixty millions of dollars, and that the cost of its present condition was fifty-two million. The result obtained by the engineers of the road was the cost of reproduction new at sixty million and the cost of reproduction in its present condition, fifty million. There was a difference of practically two millions of dollars between the appraisement by the State Board's expert and the valuation made by the railway company. The basis upon which the valuation of the physical property was made was very largely furnished by the company

2 K




through its engineers. They assisted the board in making that valuation by furnishing all the information that we called for. The difference was practically perhaps a million and a half or two million, both in the cost of reproducing the property new and its value in its present condition.

Mr. Crandon (Illinois) : I think the Judge is in error a little as to the amount. It doesn't make any real difference.

Dr. Chamberlain (Ohio) : Four per cent is pretty close. When you say per cent you know what you are talking about.

Mr. Purdy (New York) : I should like to say a word because Mr. Williams has honored me by crediting me with a theory of railway assessment. I appreciate fully the difficulty, referred to by Mr. Crandon, of dividing the interstate railroad, or any other public service corporation which operates in more than one State; also the difficulty of separating the property used in the operation of the road from property not so used. But, as Mr. Crandon has said, if you can determine some method which is fair for ascertaining the aggregate value, or as I would prefer, the aggregate tax, and then divide up or cut off part of it afterwards, your first problem is met if you have agreed that you have a fair way of finding the whole. Mr. Williams ex- plained it in part. I just want to say a few words more about that method which I thought of before I knew that it had in a crude form been adopted in the Internal Revenue Law in 1864 by the United States government. When I found that out afterwards, I don't know whether I thought my plan was better or worse, but it is a precedent.

As Mr. Crandon says, a public service corporation can really only be judged by its earning power. There is no other way. It takes property from other uses and devotes it to this peculiar use. When put to this peculiar use it has a value only as it can earn. You can compare it with nothing else because there is nothing else that is so like it that you can make proper comparison.

Economists have generally objected to a tax upon net earnings, so far as my reading has gone, only because we could not ascertain with accuracy what net earnings are. We can determine with some accuracy, as a rule, what gross earnings are; but how to find out what properly should be charged to operat-




ing account has always hitherto been regarded as a problem of great difficulty. We may be in a fair way to solve it now through a uniform system of accounting which would put all upon the same basis if it is accomplished. But we don't need to wait for that time if we wish to do the thing now.

Every public service corporation in the course of a long period must divide its earnings. How does it divide them? It divides them to persons called stockholders, and to persons who are its creditors; so its division is in the shape of interest on debt and dividends to stockholders. If it withholds dividends to stockholders for a period of years and accumulates a surplus, it is with two purposes: one, in order that it may perform a public service; two, in order that it may earn more dividends later on for its stockholders. If we have a basic tax, it will provide a minimum revenue even if there is no distribution of dividends or interest; for instance, if a public service corporation is in the hands of a receiver and pays no interest or dividends, there will still be a tax. Under normal conditions it is entirely immaterial whether the corporation distributes all that it can, or makes a surplus; because if it distributes all that it can, you get all that you should now in taxes. If it withholds part and builds up a surplus, the time will come in the future when that surplus will earn more dividends; those dividends will be distributed to stockholders and the State will get its share inevitably. We do need to devise a system which will reduce friction, which will work out mathematically and accurately year after year, about which we cannot quarrel, because there are other problems that to my mind are more important than the public service problem, and we want to get that out of the way and begin on the next one. (Applause.)

Mr. Whitney (New York) : I am very much gratified to see the evidence on the part of this Conference to treat so reasonably the consideration of the problems entering into the taxation of public service corporations. Unfortunately in many cases they are looked upon as enemies rather than as friends to the public, and I am prone to believe that Mr. Purdy's idea of some elimination of the discretionary power vested in State boards - which is apt to vary very much in administration - is a step very far in the right direction. This is the first of the Con-




ferences I have attended and I have learned a great deal, and I think every annual Conference will mean a great deal to all concerned.

Mr. Frank L. McVey (Minnesota) : I have listened with a good deal of interest at various times to the discussion of railroad problems, and I must say that I have been disappointed again and again in the onslaught that has been made by the representative of railway companies against the various efforts made by States to tax railroad properties inside of their border, and yet at the same time never offering on their part a system of taxing that would be adequate or satisfactory. Now we are told that the gross earnings tax is an unequal and unsatisfactory tax; we are told that the valuation of railway companies by the ad valorem system is iniquitous and again unsatisfactory. We are told that the method of taxing corporations and assessing them on a stock and bond basis is again unsatisfactory, unwise, etc., and further we are told that the taxing of them on the basis of net earnings is not altogether fair. Now, what is the system of taxation that is desirable ? What can be worked out as a sytem of taxation on railways ? Is it something that has not yet been tried in the States? Is it something that is unknown in the legislative history? Why not let us have it from the point of view of the railroad men themselves ? What kind of taxation do they want ? Or is it that they want a continuance of the old local assessment system? (Chorus: No, never !)

Mr. McVey: By the process of elimination one is practically forced to the conclusion that that is a more desirable system of taxation than any that we have at the present time. Now, from the point of view of the State, can the State say, " Gentle- men, we will tax the railroads on their net earnings?" But suppose a railroad has no net earnings, does that mean that it shall escape taxation entirely, and not pay part of the burden of the State? Perhaps if we wait, as has been suggested by Mr. Purdy, in time the company will earn dividends and therefore begin to pay taxes. But meantime the burdens of the State are increasing, and other property - real estate which may not be earning income or any returns whatsoever - is taxed on the real estate assessment plan.



DISCUSSION AND CRITIGISM 501

In all fairness, ought not we to get together? Ought not we to hear from the railway men what is their scheme of taxation ? And if they have none, why not get together and make some system in one of the States, say the system of an ad valorem tax, the very best that can be done; unite with the authorities in getting a proper assessment in all possible ways, and work it out carefully, so that we can come to some kind of a conclusion as to what is a real system of taxation? Now, we have laboratories in every State ; we can try out schemes of legislation in different States. Why is it not a fair proposition to get together with the various commissions - the Commission of Wisconsin, for example, or the Commission in other States - and try to unite on some practical scheme of legislation that will secure a fair, equitable taxation of railway properties? The State wants fair and equitable taxation of the railway companies, and that is what we want to get at. We ought to hear from the other side on what is a fair system of taxation. (Applause.)

Mr. Allen Ripley Foote : I simply wish to put in the record my solution so that it can come in competition with that of others. My solution is this - based necessarily upon a correct system of accounting for all public service corporations. Such a system we now have some opportunity of securing, through the federal law giving the State Commerce Commission author- ity to prescribe a system of accounting.

I suggest that a tax be levied upon the gross earnings of the corporations as returned to the Interstate Commerce Commis- sion under their system of accounting; that there shall be a low tax, say of 2 per cent, that all corporations shall pay under all circumstances whether they have any net earnings or not, and if you please that that 2 per cent shall be levied upon corporations whose operating expenses are 90 per cent of their gross earnings, that being an arbitrary basic tax. Then for every decrease in the percentage of operating expenses to gross earnings, a fraction of a per cent be added. To illustrate. If a road's operating expenses are 90 per cent of its gross earnings, it will pay 2 per cent. If it is 89, it will pay 2-^, or something like that. If it is 88, it will pay 2T', and so on down the scale. So that you have a rule that is absolutely adjustable on the




basis of the authoritative statements made to the Interstate Commerce Commission, and checked up by the Interstate Com- merce Commission under its system of accounting. (Applause.)

Mr. A. E. Holcomb (New York) : The speaker just before the last, in a criticism on the attitude on the part of some corporations, I think expressed a criticism that should be made. I simply rise to say that I don't take such a hopeless view of the case as would appear from the remarks of my friend Mr. Wil- liams or my friend Mr. Crandon. I think the suggestion might be made that in the limit of territory covered by Mr. Williams, in no State which he mentioned has there been ever an ad valorem system by a central board or a gross earning system. So that a part of the hopeless view that he has reached comes from his touching simply the States of New York and New Jersey, where, as everybody agrees, the situation is chaotic.

Now my personal experience reaches into thirty-two States and the District of Columbia. In connection with that work I have to do with all systems, and I cannot refrain from express- ing my appreciation and my admiration for the work that is being done in the Western States and in the Southern States towards the solution of the problems which seem to be so difficult in our Eastern States. In that way I say I take a little more hopeful view of the situation, and think that we can work out our problems if we will only get together and discuss the questions. No one here and no member of any board will dispute a great many of the questions.

From an experience of twenty years with various boards my suggestion is that the gross earning system is on the whole the best at this time. The obvious criticism made is that it would be unequal as applied to roads with varied operating expenses. It seems to me that the Wisconsin system would in a great measure obviate that, where the road is graded in

proportion to the gross earnings from time to time. At any rate, with the changes to the uniform accounting that is now being studied, the inequalities would seem to me to tend to disappear rapidly. The difficulties coming from that State are a great deal less than they have been in the past, and therefore I think the time is now ripe to at least start along the line of the gross earnings system properly graded.




In many States the gross earning system cannot be applied, the constitutions providing that there must be an ad valo - rem system of taxation. My suggestion with regard to those States would be that if possible the ad valorem method should be applied to physical or structural value of the plants, because it has been shown in the Wisconsin experience that the difference between experts is so small as to be negligible; and I would apply a supplementary small gross earning tax to take the place of the tax for intangible values which causes all our difficulties.

Practically all our difficulties are caused by the attempt to reach something that no one knows how to reach - this intangible or franchise value. I think it would be well at the present time, or temporarily, to reach that by a small supplementary tax on the gross earnings, and thus we get rid of the greatest difficulty in railroad and corporation taxation.

Another phase of taxation that has not been spoken of by any member here is what is known as the license fee, the annual license fee in some States, upon the entrance of an interstate or any corporation. In order that one of the cardinal principles of this Association - that is, interstate comity - should be respected, this tax, when levied, should not be applied to the entire capital stock in every State in which the company operates ; it should only be applied to such portion of the capital stock as represents property owned by the company in the State. This is a very important consideration with interstate corporations that have to cart their entire capital stock all around for assessment through all the States where that iniquitous tax is levied. I don't think that that was the intention of the tax, but that is the practical effect of it through inaccuracies in drafting the law.

One criticism in regard to Mr. Purdy's theory. The difficulty of determining how much you shall cut off on account of outside earnings would involve us probably in another long series of litigation extending to the Supreme Court and back again in the attempt to tell how you are to cut off the outside earnings such as coal, and it would involve us in serious litigation of constitutional and other questions.

Mr. Purdy : How do you get out of it as the gross ?




Mr. Holcomb: The gross is only applied to the railroad. Mr. Williams: How do they escape? Mr. Holcomb: They do not escape. The other income is

reached mostly through the capital stock taxation. I don't think anybody will claim that the earnings of a corporation and its stocks and bonds located in one State should be pro rata in other States that have nothing to do with these stocks and bonds. I don't think that is fair under any circumstances.

Mr. Theodore Sutro (New York) : My opinion is that the ad valorem tax is about the most unscientific tax as applied to anything that can be evolved. Even in the assessment of ordinary real estate, where there is an application for review and you resubmit a question to your assessors, you will find if you submit it to a dozen different assessors you will obtain a dozen different opinions on so simple a proposition as that. Now, in listening to the excellent papers that were read, includ- ing the papers that treated this taxation, for example, on mineral lands, oil lands, etc., and now this discussion with reference to the valuation of the property of public service corporations, it struck me how infinitely more difficult it is in those last-mentioned cases to make a really satisfactory ad valorem tax based upon an actual valuation. It is practically impossible in my opinion. Let us therefore strip this subject first of those methods which should not be adopted, which are unscientific. One of those is the ad valorem tax ; I think we ought to eliminate that from our discussion as unscientific and impossible to impose such a taxation on such a valuation. The other question is whether a tax of the public service corporation should be measured by the dividends and the interest on bonds. That is also an unsatisfactory method. In my opinion it can be juggled with. It is a method which is also not based upon the scientific principles of taxation. Then comes the question of net earnings. Now, if dividends and interest on bonds may be juggled with, how much more is that applicable to the question of operating expenses ? That is also unscientific from my point of view. What is left, then ? Only one method, and that is the gross earning method - tax on gross earnings. There can be no juggling about that; there need be no juggling about it if it is properly guarded, and it can be easily guarded by




legislation, by public officials who are charged with it the same as the bank superintendents or the insurance superintendents, who take that subject in hand and arrive by a system of statis- tical investigation at the actual gross earnings of a corporation. Now, I must say that the theory that was hinted at by Mr. Purdy, and somewhat more elaborated by Mr. Foote, is one that seems to me solves the problem more practically than any other probably would. It is not to be supposed, even if a public service corporation has no earnings now, that that corporation is not building up a plant which will lead to a future earning that shall surpass any earnings of corporations that are actually having a net profit; and it seems to me the problem should be solved in some such way as is suggested by those two gentlemen - to have a minimum tax placed upon the public service corporations, whether earning dividends or not, and then have an additional small tax based upon the earnings. It seems to me that is really the solution of the problem. I think other methods are unscientific and unsatisfactory, and I think that is the method that the Conference should take into serious consideration. I think some gentlemen ought sometime to read a paper on that special topic.

Mr. Oscar Leser (Maryland) : I was interested in Mr. Purdy's plan ever since I heard it announced, and I want to give him something to think about - how he would apply that plan of estimating the tax on the divided profits instead of dividends on stock to an actual case. In our city we have a telephone company which is in successful operation, in fact, has no opposition; it is capitalized at $10,000, it owns tangible property of perhaps a million and a half, it swears that it has no net earnings, and it swears that it has no bonded debt, and the joke of it is that that is probably true. {Laughter.) How would Mr. Purdy reach it?

Mr. Purdy: I talked to Mr. Holcomb about that nearly all the way up here from New York. {Laughter.) I have not found out yet. At present speaking I would put telephone companies off on a shelf by themselves and wait until we got around to them. {Laughter.)

Professor Charles J. Bullock (Massachusetts) : It seems to me it is going to be extremely difficult to persuade the people




of the several States to adopt the net earning basis of taxation for public service corporations while other property is taxed upon its actual value; and it seems to me the difficulties in the way of the net earnings scheme of taxation are insuperable so long as we maintain the principle of taxing other property upon its actual value - its commercial value or selling value. I don't believe that the people in any of the American States will consent to it, so that whatever its merits may be, if we were to have a system of taxation all round based upon the principle of net earnings or income, it seems to me that practically that alternative is excluded.

Quite possibly the solution of the question will not be the same for all classes of corporations and for all the States of the Union. You heard the stock and bond method of valuation pronounced this afternoon by Mr. Crandon to be one of the worst conceivable methods of valuing railroad property for purposes of taxation. Last year I heard President Mellen of the New Haven Railroad appear before the Commission on Taxation in Massachusetts and praise to the skies Connecticut methods of stock and bond valuation for railroad taxation, and urge us to adopt it in Massachusetts. Then besides that, in some of the States the stock and bond valuation is impracticable because it is impossible to get quotations of the stocks and bonds of many of the railroad companies, particularly subsidiary companies in railroad systems ; while in other States it is possible to get a stock and bond valuation of such a system as the New Haven Railroad or such railroad systems as we have in the State of Massachusetts.

The gross receipts methods of taxation is a practicable and possible alternative because it does not involve a departure from the principle of taxing property, the gross receipts being taken merely as a measure of the value of the property, and it being possible to adjust the gross receipts tax as illustrated by the recent commission in California. I believe that constitutional difficulties in the way of such legislation have been cleared away by the latest decision of the Supreme Court, which has about completed the circuit of the compass as to the constitutionality of tax legislation.

Mr. J. H. Easterday (Washington) : So far as taxing officials




are concerned in the assessment of railroads, it seems to me that the skies are rapidly clearing. Practically every State in the West and in the South have railroad commissions whose duty it is to ascertain the value of those railroads for rate-making purposes. The value of a railroad for taxing purposes should be and must be the same as it is for rate-making purposes. Any other proposition cannot appeal to any one as being just and fair. Taxation is the smallest feature of the railroad. If they are entitled to earn seven per cent say on ten million of dollars, then the value of that railroad for taxation purposes is also ten million dollars. The rate-making feature is to a railroad what the body of a hog is to the tail. We have to wag and go with it ; and so long as in my country they fix values for rate-making purposes, whether they be high or low, you will find me urging, insisting and demanding that the same valuations apply for the purpose of fixing their taxes.

I may say further that I cannot get away from that old- fashioned notion that things are worth what they sell for, whether it be a railroad, personal property or farm lands. If you purchase a farm for $10,000 and assume a mortgage on it for $10,000, then the reasonable value of that farm is $20,000. The bonds of a railroad company is the mortgage on the plant. The value of the stocks is the equity in them, and until you can show me a better method I shall continue to insist and insist, because I believe that that represents practically the true and fair market value. (Applause.)

Dr. Chamberlain (Ohio) : I wish to say simply that we outsiders insist that the taxes are a necessary part of the running expenses, and should be counted in as much as the payment of employees. I insist that the true economic principle is that the property is worth just exactly what it will sell for, and that the net earnings of a property will decide what it will sell for; not the actual net earnings under the present management, but possible net earnings. Here is a farm which we will say was worth $10,000, but under the management of a shrewd farmer it earns 23 per cent, as my own farm has done year after year. Here is another farm, just as good as the one that earns 23 per cent, but under poor management it is not earning a cent. Yet that farm which under poor manage-




ment is not earning a cent has got to pay just as much of the taxes as the farm that is earning 23 per cent under good management.

All economists will admit that the possible net earnings are very closely related to the salable value of any land - the possible net earnings. If a road is badly managed and does not earn anything at all, it ought not to be exempt from taxation any more than that farm which is poorly managed. The taxes are a part of the fixed expenses of the road or of the farm, and must be paid, and I insist that just as Mr. Purdy has gone through a very complicated method of finding the actual value of every piece of property in New York State, so with a good deal less difficulty we can find the actual value and possible net earning power of every railroad. It is a difficult problem, but we shall solve it a great deal quicker if we try to do it than we shall if we try not to do it ; and that is what we have been trying to do here all the afternoon - to bring up the difficulties.

Mr. W. S. Glass (Kansas) : One of the great troubles at the present time is our civilization. {Laughter.) We hear talk about inexperienced officials - that there has not been an official appointed in any of the Western States who comes as an expert to the office. That is true, absolutely true. Last winter, when the railroads interested in the State of Kansas knew that there had to be an assessment upon the entirely new basis of cash value, the experts of one road that I have in mind went out and by actual view, as was sworn in the report to the commission, they valued the property of that road. When the commission went over that road they found houses valued that the local inhabitants said had been removed for five years. We found other improvements on the road, new improvements, that were not included at all, that had been built for years. And yet upon an actual view, as sworn to by the tax assessor, they had given the actual value of those properties. The trouble is with our civilization. There should be honesty, there should be fairness, there should be equity and justice between the corporations that are asking favors at the hands of the public and the public itself. The government will be fair. Com- plaints with reference to over-assessments will not exist if the persons who represent the corporations come up and make




due returns in a proper manner. I want to assent to the statement made by the gentleman from Washington. We have a railroad commission in our State, we have a tax commission, we have before the commission certain men who are repre- senting the railroads or insisting upon certain high valuations for those roads as the basis for rate making. Then we have another set of officers coming before the tax commission insisting upon low valuations for the purpose of taxation. Let us all get to the basis of honesty, and then we will do the thing up in a good deal better shape. That is my idea of this business, that it is a simple transaction to get it at actual values, and when you get it at actual values you take all the elements of value into consideration. Whether there be an element this year that did not exist last year has to be decidedly the persons who judge on the property. There may be elements this year that did not exist last year, and they have to be taken into consideration. Take everything into consideration in determining value, because that is the only way you can get at value.

Mr. Crandon: My friend over there (Mr. Easterday) says he is going to find out the value of the railroad by taking the bonds and adding to that the value of the stock. Now, in the year 1903, the year when there was no panic, the stock of the Great Northern Railroad sold at one time for twenty-five millions and at another for $13,187,000. Which will he add? The Stock of the Pullman Company in that year was valued at $36,000,000 and there was a variation of $18,000,000. Will you add the 36 or the 18 ? The C. R. I. & P., one of the best roads in the country, was valued at 50 millions and the variation was 11 millions. Will you add 11 or will you add 50? Louisville & Nashville, 52 millions and a variation of 13 millions. Will you add 52 or will you add 13? You will have a very different assessment if you do one or the other.

Mr. Easterday (Washington) : I am not going to do either, but I will tell you what I will do. In my country there are 365 days in a year. I am going to take the value 365 times for the year, and then I am going to divide it by 365 and I will get the average for the year.

Mr. Sutro (New York) : Supposing the value of that railway




is represented by shares of stock in that New York Stock Ex- change, and a panic occurs, and the value fluctuates in one of those 365 days to the extent of 5 to 25 millions; how are you going to get your average there ? It is not merely a day, it is every hour.

Mr. S. C. Crummer (Kansas) : The way to get averages is a period. For instance, take a period of five years and you will have the earnings of that road through good times and through ill times; through times of prosperity and through times of adversity. Now, take your average for five years and you have a very fair average of that road.

Mr. W. A. Douglas (Toronto) : I would like to ask one little question. I have seen some railroad accidents. I have seen some scrap heaps. I have seen a new locomotive worth $10,000 or $25,000 and in a few years it is not worth five cents. I have seen the trains split up and used for firewood because they were worn out. The road itself has a certain value that you cannot burn out, you cannot destroy by accident. There is a peculiar value; it strikes me that the value of that franchise is represented in the value of that road. I have not heard one word about that. It seems to me when we come to assessments we must recognize that difference. I suggest this subject for discussion before this or the next Conference.



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DISCUSSION ON TAXATION OF PUBLIC SERVICE CORPORATIONS

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