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Home -> Merlin Harold Hunter -> Outlines of public finance -> Chapter 12

Outlines of public finance - Chapter 12

1. Preface

2. Chapter 1

3. Chapter 1 continue

4. Chapter 2

5. Chapter 2 continue

6. Chapter 3

7. Chapter 3 continue

8. Chapter 3 continue

9. Chapter 4

10. Chapter 4 continue

11. Chapter 4 continue

12. Chapter 5

13. Chapter 5 continue

14. Chapter 5 continue

15. Chapter 6

16. Chapter 6 continue

17. Chapter 7

18. Chapter 7 continue

19. Chapter 7

20. Chapter 7 continue

21. Chapter 9

22. Chapter 9 continue

23. Chapter 10

24. Chapter 10 continue

25. Chapter 10 continue

26. Chapter 11

27. Chapter 11 continue

28. Chapter 11 continue

29. Chapter 12

30. Chapter 12 continue

31. Chapter 13

32. Chapter 13 continue

33. Chapter 13 continue

34. Chapter 14

35. Chapter 14 continue

36. Chapter 14 continue

37. Chapter 15

38. Chapter 15 continue

39. Chapter 15 continue

40. Chapter 16

41. Chapter 16 continue

42. Chapter 17

43. Chapter 17 continue

44. Chapter 17 continue

45. Chapter 18

46. Chapter 18 continue

47. Chapter 18 continue

48. Chapter 19

49. Chapter 19 continue

50. Chapter 19 continue

51. Chapter 19 continue

52. Chapter 20

53. Chapter 20 continue

54. Chapter 20 continue

55. Chapter 20 continue



138. Constitutional Provisions Present Difficulties.
Many changes and suggestions have been made to at-
tempt to remedy some of the evils that were pointed out
in the preceding chapter. One of the first things to be
remembered by those who are interested in making
changes in fiscal systems, is that they cannot use a free
hand in the matter. In every case the provisions of the
Federal Constitution as well as the provisions of the state
constitutions, with their court interpretations, must be
considered. The government of the United States is one
of delegated powers, while the powers of the state govern-
ments are residual. That is, the Federal Constitution
specifically enumerates and prescribes the activities hi
which the Federal government may engage, while the
states are free to enter any fields of endeavor from which
they are not prohibited.

The latitude of the states in tax matters is easily seen
to be much broader than that of the Federal government.
The fiscal provisions of the Constitution have already
been enumerated Congress shall have power to lay and
collect taxes, duties, imposts, and excises; no direct tax
shall be laid except in proportion to the population; no
tax shall be laid upon exports; bills for raising revenue
shall originate in the House. These, with the Sixteenth
Amendment, which gives the power to levy an income
tax, constitute the taxing powers of the Federal govern-

Court Decisions. The court interpretations, however,


must not be overlooked. Taxes upon corporation incomes
and inheritances, for example, have been held as not
direct, and consequently do not need to be apportioned
in accordance with population. An income tax at the
time of the Civil War was considered constitutional, while
the one of 1894 was held to exceed the powers of Congress.
It has been held, moreover, that the states have no power,
by taxation or otherwise, to retard, impede, burden, or
in any other manner control the operation of the constitu-
tional laws enacted by Congress. Consequently taxes
upon operations which will hinder the activities of the
Federal government have been held void. State laws
which imposed taxes upon United States bonds, for ex-
ample, have been declared unconstitutional, as interfering
with the prerogatives of the Federal government. Like-
wise it has been held that the Federal government has no
power to tax the instrumentalities or property of the

The Fourteenth Amendment. The Fourteenth Amend-
ment to the Constitution has also developed an important
bearing upon taxation. The clause, "nor shall any state
deprive any person of life, liberty, or property without
due process of law," is frequently invoked in tax matters.
The importance of this lies in the interpretation the courts
place upon the phrase, "due process of law." This has
frequently been invoked to prevent or annul the arbitrary
assessment and collection of taxes, and to require that all
taxes be levied through the general process of legislation.

Limitations by States. State legislatures, because of the
residual nature of their powers, are not limited in the field
of their activities except as restrictions are placed upon
them by the Federal or state constitutions. The limita-
tions found in the state constitutions, however, have not
only been rather widespread, but have frequently been
barriers to securing needed tax reforms. Most of the con-
stitutions were formed when the entire reliance for rev-
enue was placed upon property, while the property was


largely of tangible nature. The idea prevailed that this
property represented the best basis for taxpaying ability,
and that it should all be taxed equally.

Uniform Tax Clause. Because of the importance at-
tached to property, the " uniform tax clause/' as it is
generally known, found its way into many state constitu-
tions. It generally takes a form somewhat as follows: all
properly shall be assessed at its full value and at rates that
are just and uniform. With the development of various
classes of property, especially a large class of intangible
property, the uselessness of attempting to assess all forms
at a full value, and consequently tax them at a uniform
rate, becomes apparent. Some states have been able to
remove the restriction, but in many it still remains be-
cause of the fear of the citizens that if classification of
property were allowed some classes of property, whose
owners possess political influence, would escape taxes.
Mere indifference has also had an influence in many cases.

139. Attempts Have Been Made to Correct Inequalities
of Real Estate Assessments. One of Adam Smith's
canons of taxation is that taxes shall be certain and not
arbitrary. We have gone far, as has been previously
noted, in constitutional attempts to enforce this ideal. In
practice, however, much arbitrariness has been found
from the beginning because of the difficulty in the admin-
istration of the tax laws. The administration is usually
left in the hands of local officials, who are seldom adverse
to catering to the good will of their constituency. No way
is more sure of winning popular favor, moreover, than
through the curtailment of the burden of taxes that the
individual believes he would otherwise have to pay. The
result has been that many assessments have been arbi-
trarily made by the assessor in order to gain or maintain
popular favor. As industry has grown more complex,
the possibilities of these arbitrary assessments have also

At first thought one would think that little chance


exists for arbitrary assessments in the case of real estate,
since it is visible, and since comparisons can easily be made
between different parcels. Selling prices, also, are gen-
erally known and can be used as a basis for assessment.
Many arbitrary assessments still result, however, espe-
cially in the large cities. Here values are likely to fluc-
tuate rapidly and unexpectedly, so that to actually value
the property really becomes the business of an expert
a qualification that assessors seldom possess. All they
can hope to do, even in a conscientious performance of
their duties, is to use their best guess, which frequently
happens to be far from the actual value.

Equalization Boards. From the earliest times the in-
equalities and injustices which have arisen from real
estate assessments have not continued unnoticed and
with no attempts to make corrections. One of the earliest
plans to secure a just assessment was to have a review
and equalization of assessments by a board higher up
than the local assessors. That the need was recognized
early is indicated by the fact that before the end of the
Revolution an appeal was made to the Governor of New
York to provide some method for equalizing assessments.
From this early date to the present time the equalization
of assessments has been used extensively in an attempt to
secure greater equality and justice.

Modern equalization boards are of two kinds those
that equalize assessments within a county, or the county
equalization boards, and those that equalize assessments
among counties, or the state equalization boards. City
equalization boards sometimes exist and possess a varying
degree of power.

The state equalization board, which exists in some form
in more than three fourths of the states, usually has no
power to change individual assessments, but only to make
more equitable adjustments between counties. In a few
cases individual adjustments can be made. The state
board is usually comparatively free from political in-


fluence, but the magnitude of its task precludes any
entirely satisfactory distribution of tax burdens.

The county equalization board has a widespread exist-
ence, and varies in the degree of its efficiency. The
powers are so limited, frequently, that any possible effec-
tiveness in accomplishing the desired results is destroyed.
Local politics and conditions, combined with personal
favoritism, have had so much influence, in general, that
the accomplishments have not been what justice would

Other Attempts. Another remedial measure that has
been attempted is to make the assessor an appointee of
some central authority, thus removing the influence of
local politics. The extension of his tenure of office for a
period long enough so that he can attain some degree of
efficiency, has also been adopted in some localities. Some
states have inaugurated the policy of holding conferences
for assessors in order that they may have the advice of
others in the same work as well as the benefit of their
experience. As a whole, however, little has been accom-
plished in mitigating the evils of inequalities in assessing
real estate.

Progress in Cities. Assessments in cities are peculiarly
difficult because of the enormous and rapidly changing
values. Some city officials have sensed this situation to
such an extent that definite methods of assessment have
been adopted. Tax maps are constructed that show the
exact size and location of each parcel of land. Some unit
value is hit upon as a standard of measurement, as so
much for a front foot. With this unit of value in mind
definite variations are made for distance from the main
street, the depth of the lot, and other factors that defi-
nitely affect values. A number of cities have even called
in experts in valuation to aid in placing a proper assess-
ment on property. The merit of such plans has been in
their uniformity and in the divorcing of the assessments
from the guesswork of the assessors. The movement


toward the separate assessment of land and buildings in-
dicates that the general adoption of this method would
aid materially in obtaining a just assessment of these two
classes of real estate.

140. Many Devices Are Used in Personal Property As-
sessments. Because of the difficulties that have attended
the assessment of personal property, many methods of
securing better results have been suggested, and some
have been tried. Such suggestions as the classification of
property, the separation of state and local revenues, and
the centralization of authority will be treated under
separate topics. To mention all the devices that have
been used or suggested in the different taxing districts
would be next to impossible. Only a few will be noted as
suggestive of some of the attempts to make the assessment
of personal property successful.

Use of Oaths and Penalties. As was indicated in the
discussion of the local assessor, the law often places strong
reliance upon the use of the oath to accomplish the proper
assessment of property. The following requirements of
the state of Illinois are typical of the requirements of many
other states. The assessors are required to take the fol-
lowing oath:

I do solemnly swear (or affirm) that I will support the Constitution
of the United States and the Constitution of the state of Illinois, and
that I will faithfully discharge all the duties of the office of assessor,
deputy assessor, or supervisor of assessments (as the case may be) to
the best of my ability; that I will without fear or favor appraise all
the property in said county at its fair cash value, said value to be
ascertained at what the property would bring at a voluntary sale in
the due course of business and trade; and that I will assess said
property when so appraised at one half its said cash value; that I will
cause every person, company, or corporation assessed, to sign his, her,
or its assessment schedule, and I will administer to each and every
person so signing said assessment schedule, the oath thereon, and
return said schedule so signed and file the same with the county clerk.

The Illinois law provides for the following penalties:
If any assessor refus.es or knowingly neglects to perform


any duty required of him by law, or if he consents to any
evasions of the law whereby any property required by
law to be assessed shall be exempted or valued at less
than required by law, he shall, upon conviction, be fined
for each offense not less than $100 nor more than $5,000,
and shall be imprisoned in the county jail not exceeding
one year, or shall be both fined and imprisoned. Anyone
who evades the law in regard to the assessment of property
or who delivers a false list to the assessor, shall be pun-
ished by a fine not to exceed $5,000 or by imprisonment
in the county jail not to exceed one year, or both. Yet
the public treasuries are not being filled with fines from
assessors and property owners, neither are they crowding
the county jails. A glance at the figures for property
valuations, moreover, would immediately convince one
that it is not because the requirements of the law are being

Other Methods. Some attempts have been made to
divorce the assessors and equalization boards from local
politics and influences, and to give the assessors broader
powers in locating property. To have no political interest
between the assessor and the assessed is of course an ad-
vantage, since no office is then at stake. Some plan
should be followed, however, to insure that the assessors
and members of the equalization boards will be efficient
and capable men. This, of course, could not hope to solve
the difficulties in reaching intangible values.

The powers of assessors have often been extended in
order to enable them to better reach intangible property
values, and just as often have the results been unsatis-
factory. It is sometimes attempted to enlist the aid of
citizens in securing just assessments. One state requires
the publication of the entire assessment list, so that
everyone may know the assessed value of the property
of everyone else. The hope that discrepancies would be
reported, however, has not been realized.

Ohio Tax Inquisitor Law. One of the most commonly


cited examples of the attempt to enlist citizens in the
securing of accurate assessments is what has been called
the Ohio tax inquisitor law. Under this law anyone could
report property that he thought had not been listed with
the assessor. If this proved to be true, a 50 per cent
penalty was added, a part of which was to go to the
individual who made the report. The result, however,
was unsatisfactory, and little was accomplished in secur-
ing more accurate assessments of personal property. The
result of every attempt to reach intangible property
values, moreover, has been much the same.

141. Classification of Property for Taxation Has Been
Attempted. The restrictions imposed by constitutions
have been particularly troublesome where attempts have
been made to treat classes of property differently in order
to equalize more nearly the tax burden. The results of
property taxation have demonstrated that a general, uni-
form system of taxing property is no longer practical, and
that, under modern conditions, it cannot be enforced
equitably or effectively. The so-called uniform tax is
based on the theory that every form of property, regard-
less of character or condition, shall be taxed in proportion
to value and by a uniform method and rate. The theory
presupposes that all property is able to bear the same
burdens and that all forms of property are equally easy
for the assessor to find and to estimate their values. Uni-
formity of valuation is an imperative requirement. All
property must be assessed at the same percentage of ac-
tual values, so that each class, with a uniform tax rate,
will bear its just proportion of the burden. No possi-
bility exists, under modern conditions, even to approxi-
mate this result.

Court Interpretation. It has been found possible, where
permissible, to approach more nearly a uniformity in tax
burdens on property by varying the method of assessment
and taxation for the different classes. The Supreme Court
of the United States has consistently held that this prin-


ciple of classifying property for purposes of taxation does
not violate any principle of the Federal Constitution.
The line of reasoning has been somewhat as follows:
diversity of taxation, both with respect to the amount
imposed and the various species of property selected,
whether for bearing tax burdens or being exempt from
them, is not inconsistent with a perfect uniformity and
equality of taxation in the proper sense of these terms.
A system, moreover, which imposes the same tax upon
every species of property, irrespective of its nature, or
condition, or class, will be destructive of the principles
of uniformity and equality in taxation out of a first
adaptation of property to its burden. State courts, how-
ever, have generally been much narrower in their inter-
pretation of the constitution or statute providing for uni-
form assessment.

Status of Classification. Much interest has been shown
in recent years in the classification of property for tax
purposes. In not every state where the constitution per-
mits this feature, however, is classification used. Colorado
furnishes an example of this situation, which illustrates
an exception, however, rather than the rule. A provision
was placed in the constitution of 1876 which permitted
the legislature to classify property for tax purposes. As
yet there has appeared little disposition on the part of
the legislature to provide for a classification of property.
This is probably on account of the small amount of in-
tangible property which appears in this state. On the
other hand, in more than a dozen states, where classifica-
tion of property is allowed, experiments looking to a
greater equality of assessment are being carried on, while
a number of states which are not allowed the privilege of
classification are seeking to obtain it.

Principle of Classification. The outstanding idea in
the principle of classification is to place a distinctly lower
rate of tax on intangible property than upon other forms.
This is because it has been clearly demonstrated that an


imposition of the general tax rate upon this class of prop-
erty drives a large majority of it into hiding, and it is not
reached at all. Tangible property, moreover, is so fre-
quently assessed at only a fraction of its true value, that
a lower rate is needed on the intangible property to secure
equality, since much of this must be assessed at full value
when it is found.

Results of Classification. The general experience of the
states which have tried to reach intangibles through lower
rates has been satisfactory. The results are not that
perfection has been reached, but that a decided improve-
ment has resulted. The number of property owners as-
sessed has increased materially, as well as the amount of
property, and in some cases the actual revenue obtained
has been greater than before the tax rate was lowered.
The results would indicate that the conscience of tax-
payers varies inversely with the tax rate.

Taxation of Mortgages. One class of personal property
that has generally escaped taxation under the property
tax is mortgages on real estate. A number of plans have
been used to attempt to remedy this evil. Some states
have taxed the land at full value and levied only a low
rate on mortgages, with the hope that more mortgages
would be given in to the assessor. Others have allowed
the land owner to deduct the amount of the mortgage
from the assessed value of the land, but because of the
general underassessment of land, the amount of the mort-
gage has frequently exceeded the entire assessed value of
the land. Still others have given up the attempt to col-
lect any tax from mortgages except a nominal tax at the
time of recording. In spite of the apparent injustices,
however, most states attempt to tax both the mortgagor
and the mortgagee.

New York Mortgage Recording and Secured Debts Tax.
The state of New York, in 1906, through the enactment of
the mortgage recording tax, gave legal recognition to the
fact that mortgages generally escape taxation. This law


removes mortgages from the general property tax and sub-
stitutes a tax to be paid, once for all, at the time the
mortgage is recorded. The rate is five dollars on the
thousand dollars, irrespective of the term of the mortgage.
The next extraction from the application of the general
property tax was the secured debts, which came in 1911.
The holders of these instruments could secure immunity
from all future taxes, no matter what the length of life of
the security, by presenting it to the comptroller of the
state, paying a tax of five dollars on the thousand dollars,
and having stamps affixed to indicate that the tax had
been paid. This was unsatisfactory because of the un-
equal rate which resulted on securities of different dates
of maturity, and the low return which really came to the
state when the time element was considered. Several
amendments were tried, and the final result was the in-
vestment tax law of 1917. Under this secured debts are
taxed annually by the state at the rate of two dollars per
thousand dollars. The tax may be paid for one, two,
three, four, or five years, but for no longer period.

Other Examples of Classification. Pennsylvania and
Connecticut have both used the principles of classifica-
tion with interesting results. A few years ago Pennsyl-
vania reduced the rate of taxation on intangible property
to a small fraction of what it had been, and for the next
year received more revenue from this source than for the
preceding year with the higher rate. It appears that the
new rate was not high enough to sear the consciences of
the owners of intangible property.

Connecticut has a voluntary registration of bonds,
notes, and, in fact, practically every form of taxable in-
tangible property, with the state treasurer. A tax is paid
upon this registered property at the rate of four mills a
year. The attached treasurer's receipt exempts from all
other taxes. If the document is not registered it is sub-
ject to taxation, if found, at the local rates, which are
much higher than the state rate of four mills.


The use of the system of classification is but another
attempt to make a success of the property tax. At pres-
ent it is but in its experimental stage, but a strong agita-
tion and extensive program of education is being carried
on to secure a wider adoption. It is likely that the future
will bring a much more extensive use of the principle, but
whether it will satisfactorily solve the problem of taxa-
tion of property remains to be seen.

142. Limitations Have Been Placed upon Tax Rates
and Borrowing Power. The rapid increase in public ex-
penditures, especially on the part of cities, has been viewed
with alarm by the taxpaying citizenship.

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