PROPERTY TAXES

TAXING U.S. PROPERTY, PRIVATELY HELD

The Federation of Tax Administrators recently inquired of tax departments in a number of States whether legislation would be proposed to permit the taxation of federally owned property in the hands of private persons along the lines of the tax sustained by the U.S. Supreme Court in the Borg-Warner, Continental Motors, and Murray Corp. cases. On the basis of replies which have been received at this time, it appears that bills of this type will be up for consideration in many of the legislative sessions this year.

The situation as of this date is as follows: In Michigan, Wisconsin, and Texas such a tax has been sustained; in the first two States, by the U.S. Supreme Court decisions and in Texas by a State supreme court ruling in Phillips Chemical Company v. Dumas Independent School District (TAN, November 1958). In at least 11 States bills have been introduced or are in the process of being studied or drafted. These States and the forms of the bills are:

California

The proposed bill is in the form of a specific-privilege tax applicable only to personal property.

Colorado

The bill introduced in Colorado applies to both real and personal property. It follows the Michigan statute fairly closely except that the phrase "with the privilege to use or possess" has been inserted in the text.

Connecticut

A bill which is practically identical with the Michigan law and relating only to real property has been recommended for introduction by the Connecticut Tax Study Commission in a special report on the subject.

Florida

The Florida Legislature does not convene until April 1. It is contemplated that a bill to deal with this subject will be introduced at this session but details as to the form of the bill are not available.

Massachusetts

The bill in Massachusetts takes the form of a specific-privilege tax and it applies to real property only. Real estate owned by the Port of Boston Authority and airports generally open to the public are excluded from the Massachusetts bill.

Missouri

A bill which resembles the Michigan statute closely and covers both real and personal property has been introduced.

New Jersey

The possibility of extending the New Jersey tax laws to the type of property under discussion is now under study by the division of taxation in that State. There is no indication yet about the form which possible legislation may take. New York

A bill generally identical with the Michigan statute and extending only to real property has been introduced in New York. A somewhat similar bill was passed by the legislature at its 1958 session and was vetoed by the Governor on the ground that it would probably upset a number of arrangements already in effect with respect to property in New York City. The new bill in New York does not apply to publicly owned property used for airports, parks, markets, fairgrounds, or similar property available for the use of the general public. Ohio

A privilege tax bill applicable to personal property has been drafted and it is expected that a similar bill applicable to real property will also be drafted for introduction at the current session of the legislature.

Washington

The subject under discussion is now being studied preparatory to the drafting of legislation to be introduced at the present session of the legislature. There is no indication yet of the form which the proposed bill will take.

In addition to the States mentioned, the subject is also under study in Idaho and in Illinois.

RULING ON STORED PROPERTY

In General Electric Co. v. City of Passaic, decided December 22, the New Jersey Supreme Court remanded to the State division of tax appeals a judgment which canceled the tax assessment of personal property owned by the taxpayer and held in a warehouse. The division's decision had been based on a provision in New Jersey law which exempts from taxation all personal property stored in a public warehouse. The city had appealed this decision on the ground that the premises in question-99 percent of which were occupied by the taxpayer— did not constitute a public warehouse.

In remanding the case for further consideration, the court held that the provision exempting personal property stored in a warehouse should be construed narrowly. It stated that the purpose of exemption was to place New Jersey public warehouses on an equal competitive footing with those of neighboring States where no personal property taxes were imposed. The history of the provision, the court said, required that the statute be construed narrowly so as to exclude private warehouses created or operated for the taxpayer's convenience. Only if the taxpayer stores its property in a well-established or newly created public warehouse, which is genuinely operated as such, is it entitled to the exemption provided in the statute, the court concluded.

THE JUDGES DECIDE

U.S. SUPREME COURT DOCKET

Certiorari granted

Commissioner v. Acker.—The U.S. Court of Appeals held that a taxpayer who failed to file a declaration of estimated tax under the Federal law was subject to a penalty for failure to file but not to a penalty for substantial underestimation.

Appeal dismissed

Second Federal Savings and Loan Association of Cleveland v. Bowers.-The Ohio Supreme Court upheld the inclusion of Federal securities in the measure of a property tax on shares and capital securities since the tax was levied on the ownership of depositors.

TAX ON NATIONAL BANK SHARES UPHELD

Michigan's tax on the income from intangibles may be imposed validly on national banks, the Michigan Court of Claims ruled in Michigan National Bank et al. v. Department of Revenue of the State of Michigan, decided in January. The taxpayer, a national bank, contended that in subjecting it to the tax the State violated section 5219 of the Federal code which specifies the alternative methods a State may employ in taxing national banks. The section, in permitting the taxation of bank shares, provides that the tax shall not be at a greater rate "than is assessed upon other moneyed capital in the hands of individual citizens of such State coming into competition with the business of national banks." The violation occurred, according to the taxpayer, because the effect of Michigan law was to impose a rate of tax against the shares of national banks which was several times greater than that levied against the shares of savings and loan and building and loan associations. The bank asserted that the associations were, by their nature, its competitors.

The court, after a comprehensive examination of the development of statutory law and judicial interpretation relating to the taxation of banks and savings institutions, ruled in favor of the State. Among its conclusions were the following: (1) The courts since 1887 have consistently held that on the ground of public policy the State may exempt mutual savings banks and other like institutions provided such exemption does not involve an unfriendly discrimination against national banks; (2) building and loan associations throughout their history have been similar in character to mutual savings banks; (3) Congress in the Home Owners Loan Act of 1933 recognized and approved a separate classification of savings/building and loan associations and the propriety of different tax treatments of banks and such associations. In effect, Congress said that money invested in such associations is not moneyed capital in competition with the business of national banks, the court held.

TRADING STAMP DECISION

Under Alabama law, companies engaged in the business of issuing trading stamps to merchants are subject to a State license tax of $1,000 per annum and to both a State and county license for each place of business in the State, at the rate of one-half the State tax, to be paid to the county in which the license is issued. The taxpayer was a foreign corporation which issued trading stamps to merchants in each of the 44 counties in the State. It maintained five redemption centers in the State where merchandise was exchanged for trading stamps. These constituted the taxpayer's only offices in the State.

The State contended that the taxpayer was liable for a State and county license fee of $1,500 in each of the 44 counties. The taxpayer's position was that it was subject only a single $1,000 State license tax.

In Metclaf v. Sperry & Hutchinson Company, decided January 15, the Alabama Supreme Court held that the taxpayer was liable for the $1,000 State license tax and for $500 in each county in which it operated a redemption center. It dismissed the taxpayer's contention that the State license tax operated to exclude any additional license tax. It also dismissed the State's contention that the taxpayer was subject to license in each county in which it issued trading stamps even though it might have no place of business in the counties. This latter ruling was based on the fact that the legislature had specified "place of business" rather than "doing business" in imposing the license requirements.

INTERSTATE BUSINESS HELD TAXABLE AGAIN

A corporation whose sole activity in Louisiana consisted of the regular and systematic solicitation of orders for its product by 15 salesmen was held subject to the State income tax in International Shoe Co. v. Fontenot, decided December 15. The corporation conducted its manufacturing and all other aspects of its business outside the State. It contended the imposition of Louisiana income taxes on its activities constituted an unconstitutional burden on interstate commerce.

In dismissing the taxpayer's contentions the court stated that it had considered identical issues in the Hay and Brown-Forman cases (Tan, February 1956, April 1958). It upheld the State's right to tax in those cases and reaffirmed these rulings in its decision in the current case (see also p. 15).

RESEARCH AND REPORTING

CENSUS BUREAU ISSUES COMPREHENSIVE REPORT ON STATE AND LOCAL FINANCES

"State and local government finances in 1957," No. 8 of the 1957 Census of Governments advance releases, offers the first comprehensive measures of State and local government finances to become available, on a State-by-State basis, since the 1942 Census of Governments. For governmental fiscal years ending in calendar 1957, the report contains nationwide and statewide totals of the financial transactions by State governments and the more than 100,000 local governments within the States.

The report which has been long awaited by students of government finance permits the first examination of the total State and local finance picture since 1942. The Bureau of the Census compiles data annually on the finances of State governments and for the city governments with populations over 25,000. However, since the distribution of functions and of revenue sources differs considerably from State to State, the segment of local finances not included in the annual coverage prevented any accurate evaluation of the relative tax and debt burdens among the States and of the relative emphasis given to the various State and local government functions. This new report by the Bureau of the Census, in its comprehensive coverage of all local governments, permits making such measurements on an almost current basis.

State and local governments collected $42.1 billion in revenue from State and local sources in fiscal 1957 and received an additional $3.8 billion from the Federal Government through grants-in-aid, shared revenue distributions, and payments for services. As the table on this page, reproduced from the report, shows, the 1957 total, $45.9 billion compared with $13.1 billion in total revenue in 1942. Combined State and local expenditure totaled $47.6 billion in fiscal 1957 compared with $10.9 billion in fiscal 1942. In the 15 years since the 1942 Census of Governments, State and local indebtedness rose from $19.7 billion to $53.2 billion.

A feature of the report is that it contains analytical tables on a State-byState basis reporting revenue and expenditure in per capita amounts and in terms of their relationship to State personal income. In fiscal 1957, on a nationwide basis, State and local tax collections averaged $169 per capita, ranging from $100 per person in Arkansas up to $238 per person in California. States with the highest per capita collections after California were Nevada and New York, $229, Massachusetts, $210, Connecticut, $205, and Oregon $201. In the relationship of State and local tax collections to personal income, the nationwide average was $83 per $1,000 of personal income. On this basis, amounts ranged from $49 in Delaware to $116 in North Dakota. States in which State and local taxes had the highest relationship to personal income, after North Dakota were Mississippi, where taxes accounted for $112 of each $1,000 of personal income, South Dakota, $106, Vermont, $105, and Louisiana, $104.

For property taxes alone, the report shows that collections averaged $75 per capita on a nationwide basis. The five States with the highest per capita property tax collections were Massachusetts, $122, California, $112, New Jersey, $111, Montana, $110, and New York, $109. The States with the lowest per capita collections were, Alabama, $20, South Carolina, $24, Arkansas, $27, West Virginia, $28, and North Carolina, $30.

Total spending by State and local governments for all regular public services showed a range, on a per capita basis, from $148 in Arkansas up to $368 in Nevada. For education, which alone required more than one-third of all expenditure of State and local governments in fiscal 1957, statewide amounts per capita ranged from $47 up to $120. Spending for highways and streets ran from $19 up to $107 per person. For public welfare purposes, spending by State and local governments varied from less than $7 per person in Virginia up to $46 per person in Oklahoma. For health and hospitals the per capita range was from $8 in South Dakota up to approximately $36 in the District of Columbia.

Marked interstate differences are also reported for indebtedness of State and local governments. At the end of fiscal 1957, they owed a total of $53.2 billion, of which $51 billion consisted of long-term debt of State and local governments ranged from $46 in the District of Columbia up to $569 in New York.

In addition to State-by-State totals, the report contains tabulations for each State showing revenue, expenditure and debt detail for the State government and each class of local government. (Bureau of the Census, Washington 25,

D.C., Price $1.)

Senator MURRAY. Dr. Stout.

STATEMENT OF DR. RUTH STOUT, PRESIDENT, NATIONAL EDUCATION ASSOCIATION, TOPEKA, KANS.

Dr. STOUT. Thank you.

Senator HILL. I want to apologize for the good doctor. We have a quorum call preceding a roll call vote on an amendment. I am going to have to go to the Senate floor. I have read with interest your testimony. I deeply regret that attendance at another meeting made it impossible for me to be here yesterday.

Dr. STOUT. Thank you. I seem to bring quorum calls.

Mr. Chairman, as an English teacher I will not use statistics, but I would take another crack at answering Senator Hill's question. I was hoping he would rephrase it so I would be sure to answer it as he worded it.

It does seem to me that with the incentive factor built into the bill as it is written, there is a real indication of opportunity for equalization within the State. I think that is the most we can hope for at this time. It does free the States from the strictures of poverty, as I mentioned yesterday, and makes it possible for them to carry on a much more flexible program. If we can have the school reorganization, as Dr. Conant advocates, we can make more efficient use of the funds that are available within our States. We have districts in my own State with a great deal of money spent per child, but it does not provide an effective or efficient education. There are other districts where the education is on a poverty basis. There are still other small districts that are paying 60-hour teachers more than we are paying master's degree teachers in another part of the State. The incentive formula which you have there, and the distribution of the funds on the basis of the child of school age, does, no matter what kind of arithmetic or statistics we use, place more money in the educational program, by far, and reduces the inequality between the States greatly, even if it does not wipe it out. It does leave responsibility within the States to use their own moneys more effectively for equalization. I would like to make that point.

I

Senator MURRAY. I am sorry I will have to answer the quorum. want to thank you both for the statements you have made before this subcommittee. I think it will be a great help to us. We will study your statements very carefully. If you have any further comments or statements to make you may submit them in writing, and we will be glad to incorporate them in the record.

Dr. STOUT. Thank you very much.

Dr. HELLER. Thank you, Senator.

Senator MURRAY. The subcommittee will adjourn now until 10 o'clock tomorrow morning.

Dr. STOUT. Mr. McCaskill wants a correction on the record. He is not from Mississippi. He is from northeast Tennessee.

(Thereupon, at 12:15 p.m., a recess was taken until Friday, February 6, 1959, at 10 a.m.)