National Tax Association

THE MINNESOTA CLASSIFICATION LAWSource: The Bulletin of the National Tax Association, Vol. 4, No. 6 (March, 1919), pp. 142-144Published by: National Tax AssociationStable URL: http://www.jstor.org/stable/41785290 .

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14:2 BULLETIN OF THE NATIONAL TAX ASSOCIATION [Vol. IV

sors having no authority were able to un- cover but a small amount, while the present law uncovers to the state all savings de- posits. As for taxing the proportional amount per share in local corporations, the process was simple after the owner was found out.

But the four mills rate does not alarm the shy and supersensitive taxpayer; he is impressed with its fairness ; he notices that his neighbor who formerly loaned money on real estate collateral now records his mortgage or transfer. He even bows to the tax assessor. He now eagerly and suc- cessfully searches the tax list for his neigh- bors name; gladly does he tender his cheque to the tax collector.

He recalls the former twinges of his

conscience at the thought of being obliged to lie or pay $1.65 to $1.85 out of a $4.00 dividend, but now he exults in the knowl- edge that, although he owns shares in local corporations, they are tax free to him. He freely displays savings bank books, ac- knowledges ownership of bank stocks and all sorts of local securities, because he knows the state has taxed them all and for that reason he is called upon to pay less.

Truly wisdom has entered into unknown places and justice has overthrown discrim- ination.

This state after many years' observance of polite and unprofitable comity with her sister states now enjoys home rule, and finds her venture into the four mills tax profit- able and satisfactory.

THE MINNESOTA CLASSIFICATION LAW From advance copy of Chapter XIV of the Sixth Biennial Report (1918) of the Minnesota Tax Commission

The classified assessment law (Chapter 483, General Laws 1913) resulted in a most remarkable change in true and full value statistics. Prior to 1914 when this act became effective, the law required all property subject to ad valorem taxation to be assessed at actual value. As is well known, no serious attempt ever was made to comply with this provision, and the usual custom was to assess at from 25 to 50 per cent of what property actually was worth, the percentage depending largely upon the whim of the assessor and varying greatly even as to property of the same class in the same district. In 1912, the last real estate assessment year under the old law, the full value returns, and the assessed value as well, of all property in Minnesota were only $1,512,745,944. In 1914, the first year under the classification act, full value returns jumped to $4,231,407,200, a gain of approximately 280 per cent, and in 1918 the five billion mark was exceeded.

Reasons for Increase The reasons for this increase are easily

ascertained. Under the system prevailing prior to 1914 all taxing officials disregarded the full value provisions of the law and, as we said in Chapter 4 of our fifth biennial report (1916), there had been developed " a general system of undervaluation, a direct law evasion, that was winked at by

local officials, and, finally, was openly sanctioned and approved by the legislature and state department heads."

The present law has to a great extent remedied this situation by both legalizing and standardizing the irregular practice of undervaluation which prevailed before 1914, and the old legal fiction and pre- sumption that true and full value and as- sessed value correspond and are in fact identical has been done away with. Now the assessor determines in the first instance the full value of each article of personal property or tract of real property which he is called upon to appraise and extends his assessment thereof at percentages fixed by law, varying from 25 to 50 per cent in accordance with the statutory classification.

The requirement that full value be in truth ascertained as a preliminary step in the assessment is directly responsible for the rather startling full value increase already noted, and the resultant statistics have become valuable as an index of the wealth of the state instead of being, as under the old system, valueless for any purpose and in fact " without form and void."

Classification Act is a Success If the classification act had accomplished

no other reform than the establishment of a reasonably accurate full value appraise-

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No. 6] MARCH, 1919 1*3

ment as an assessment base, its enactment would have been entirely justifiable. What has been accomplished in other ways through the enforcement of this law and a complete and detailed discussion of the reasons for its existence, as well as a his- tory and commentary of the results attained during the first three years of its operation will be found in Chapters 3 and 4 of the fourth biennial report of this commission (1914) and Chapter 4 of the fifth biennial report (1916). The general observations in those chapters apply to the 1917 and 1918 assessments as well as to those of 1914, 1915, and 1916, and need not here be repeated. It seems sufficient to say at this time that the classification system has met with such popular approval, has been so generally successful in operation, and has become, after five years' trial, such an intimate part of our scheme of taxation, that it never will be abandoned while ad valorem taxation prevails in its present form.

The tax commission by this observation does not mean to convey the impression that the classification schedules in the pres- ent law are perfect, but only to go on record as favoring the taxation of property at certain percentages of full value, thus giving to the legislature an opportunity to classify types and varieties of property, assigning to each such part of the tax bur- den as may seem just and proper. When taxes are levied on full value, household goods bear the same proportionate burden as bank stock. Classification allows dis- crimination and differentiation, and the courts have given legislative authority a wide latitude in this direction.

Comparison Shows Critics in Error

Percentage assessments, even when such a system is prescribed by law, have been widely criticized by tax experts on the ground, among others, that full value will not be ascertained with any more exactness than is assessed value when it corresponds with full value, and therefore that by as- sessing at a fixed percentage of an ad- mittedly erroneous full value the chance for unjust discriminations and unfair practices will be greatly magnified. The experience of Minnesota is a direct contradiction of this contention. In fact, we are firmly of the opinion that the equalized full value in this state, upon which the assessment is

predicated, more nearly represents the actual value of the property to be taxed than does the full value in comparable states where strenuous efforts have been maintained during the last few years to strictly enforce full value assessments.

No Radical Action Taken The Minnesota tax commission is well

content to stand in support of its conten- tion that the classification act of 1913 has brought about an improvement in assess- ment methods which has not been surpassed in any other state of approximately the same wealth. In several states where a de- termined effort is being made to assess all property at full value it has been necessary to resort to a program of drastic reassess- ments and considerable expense has been incurred in arriving at actual value and in keeping the assessment up to that mark from year to year. The results in Minnesota have been attained with little or no special effort of this character. The gain of 280 per cent in full value the first year of the new law over the full value returns for the last year when that value corresponded with assessed value came naturally and in the ordinary course of events. Outside of persistent and unremitting efforts by the tax commission to educate assessors and other tax officials in the proper discharge of their duties, no radical steps were taken to obtain these results and no particular attempt was made by the tax commission or other taxing officials to screw the re- turns up to the last notch. Since 1914 the increase has been steady and also has come without the necessity of employing any but educational measures.

Human Element Vital Factor Now that we in Minnesota have estab-

lished a full value basis which we believe to be substantially correct, it may be con- tended by some that we might well adopt this as the assessment. Such an argument overlooks the psychological or human ele- ment in the situation, which after all prob- ably is more responsible for the beneficial consequences outlined than any other one factor or group of factors. When prop- erty is supposed to be assessed at its actual value in money the natural tendency is for both assessors and taxpayers to modify the strict terms of the law even when rigid en- forcement is sought by some central author-

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14é BULLETIN OF THE NATIONAL TAX ASSOCIATION [Vol. IV

ity. Reassessments, prosecutions and other drastic remedies never have and probably never will eradicate the undervaluation habit as long as the law requires full value and assessed value to correspond. In our fifth biennial report, page 61, we said :

" The tendency on the part of the tax- payers to underestimate and undervalue is coincident with the history of taxation. It is not a modern political phenomenon, but rather a deviation from the straight and narrow path of common honesty so sanc- tioned by the custom of centuries and so ingrained into the very being and con- science of the worthy and unworthy alike as in a measure to remove it from the cate- gory of a moral lapse and establish it as a proper and justifiable evasion of the writ- ten law, an evasion which brings no re- proach from society and which is so uni- versal in character that the odium of false- hood does not attach to those who prac- tice it."

Law Recognizes this Frailty This is true today, always has been true

and probably always will be true. Not only is the taxpayer actuated by this desire to undervalue, but the assessor is generally a victim of the same tendency. The classi- fied assessment law of Minnesota recog- nizes this human frailty and the motive be- hind it ; it recognizes the well-known fact that the average taxpayer believes that the lower the assessed value the lower his tax ; it recognizes that a man with an automobile worth $1,500 is much more apt to admit its full value when he knows it is to be assessed at but one- third thereof, $500, than when he knows the assessed value and full value correspond ; and finally it recog- nizes that the same feeling controls most assessors and that they would much rather value property at a fraction of what it is worth than at true value. The taxpayer is, under our system, permitted to delude him- self if he so desires, by harboring the belief that undervaluation means less taxes. People are better satisfied in being allowed to follow hereditary customs. Assessors and other local taxing officials do not find it necessary to perjure themselves when they

certify the rolls to be correct. Instead of harm being done, much good has been accomplished, and we think the full value statistics already cited are conclusive on this point.

The 280 per cent gain in full value came " over night " as it were, and we are cer- tain that it would disappear with equal rapidity should it be decided to use it as the assessment.

Full Value is Itemized One other objection to undervaluation as

a system has been advanced. It is asserted that the resultant statistics do not give a correct idea of the wealth of a community. But in Minnesota full value data is avail- able in every district for each item of per- sonal property and each tract of real prop- erty listed. In addition, we are not of the opinion that those seeking investments or interested for other reasons in ascertaining the wealth of a city, village or township will pay much attention to assessed valua- tions, unless for legal reasons.

How Property is Classified The classification law has remained in-

tact since it was enacted in 1913. By its terms property subject to ad valorem taxa- tion is divided into four classes. Iron ore, mined or unmined, constitutes class 1 and is assessed at 50 per cent of full value. Such property as household goods, wearing apparel and other similar articles used for domestic purposes forms class 2, assessable at 25 per cent of full value. In class 3 we find the great mass of personal property, such as live stock, tools, machinery, mer- chandise, logs and lumber, all vehicles and other property of a like nature and, in ad- dition, rural (unplatted) real estate. Prop- erty in this class is assessed on a 33H per cent basis. All other property, including urban (platted) real estate, bank stock, the poles, wires, conduits, tracks and other similar equipment of light, power and street railway companies, privately owned structures on government land, and eleva- tors and warehouses on the right of way of railroads, will be found in class 4, as- sessable at 40 per cent of full value.

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