ties should be allocated to each of the two states. It does not seem wholly equitable that, when goods are manufactured in one state and sold in another, the state of origin should receive all the benefit and the state of destination none. Once it is recognized that net income from interstate commerce is a proper subject of state taxation, lawmakers should strive to devise some method of apportionment whereby income that is earned partly in one state and partly in another shall be fairly divided between the two.108 Those who enjoy a market place other than the state of their domicil or of their manufacturing may reasonably be required to contribute to the governmental expenses of that market place, for some of those expenses are likely to redound to their benefit.

These considerations are doubtless more pertinent for legislators than for courts. Neither the Fourteenth Amendment nor the commerce clause prescribes a perfect system of taxation. No such system has thus far been evolved by the ingenuity of man. The courts can at best forbid only the most obvious inequities. Whatever rules of the apportionment of bi-state income may ultimately be sanctioned by the Supreme Court will operate in some particulars to the advantage of the state which suffers from their other effects. Each state is a state of origin of goods sold to its neighbors and a state of consumption of goods made by its neighbors. If Illinois is not allowed to get any of the proceeds of goods sold to her citizens from a factory in Wisconsin, she will be recompensed by not having to make deductions from the proceeds of goods sent from her factories to dwellers in Wisconsin. We can hardly look forward to an era when double taxation shall cease to be. The same hydra-headed conceptions which have permitted the economic value represented by intangibles to be reached by one state on one theory and by another state on another theory 109 will be likely to produce the same results in the taxation of income. The most we can aim for is the most satisfactory compromise and adjustment possible in a mundane world peopled and managed by finite individuals.

108 The various types of unit rule will tend to make such an apportionment when the business in the several states is manufacture and sales and each state in which business is done is a market place for goods from other states and a place of origin for goods sent to other states.

109 Compare Kirtland v. Hotchkiss, note 77, supra, with Savings & Loan Society ". Multnomah County, 169 U. S. 421, 18 Sup. Ct. Rep. 392 (1898).

An important step in this adjustment has been taken by a committee of the National Tax Association, of which Professor Bullock of Harvard University is chairman. This committee has drafted a plan of a model system of state and local taxation 110 which, if adopted by all the states, would go far towards remedying many of the evils now incident to the haphazard and contradictory tax systems of the sister states. The recommendations concern us here only in so far as they apply to income taxation. In brief the proposal is to divide income taxation sharply into a personal income tax and a business tax. In the taxation of personal incomes, the source of the income is to be neglected except when the federal Constitution forbids, as it probably still does in the case of income from the national government." In addition to the personal income tax, there shall be a business tax on the net income derived from business carried on within the jurisdiction. Extra-state income will thus be taxed only to the ultimate human recipient at his domicil. Business income, as such, will be taxed only where the income is earned. The business tax is to be in lieu of the various other demands now made on corporations by way of excises, franchise taxes and the like. For special reasons some other method of fixing the amount of the business tax may be substituted for the reference to the net income.

These proposals, it is evident, will not do away with double taxation; but they will greatly minimize its inequities and other evils. There must continue to be two conceptions underlying an income tax: the earning of the income, and the enjoyment of the fruits thereof; the business, and the person. These two conceptions must be driven together in harness and under harmonious, if not unified, control. Only by securing the adoption of substantially similar plans by all the states to which the business of the nation penetrates can we avoid the complexities and diversities which now beset us. The Supreme Court can only fix the outside limits of decency. Within those limits there is need for all the intelligence that the states can muster to substitute a reasonable degree of 110 Pamphlet issued by National Tax Association, 195 Broadway, New York City. The pamphlet will be contained in the PROCEEDINGS of the Association for 1918.

11 In the next and concluding instalment of this series, consideration will be given to the inferences to be drawn from the opinion of Mr. Justice Pitney in the Oak Creek case, note 2, supra, as to the possibility of an abandonment of the doctrine that a state income tax cannot include the income from the federal government.

harmony for the chaos that is now characteristic of the aggregate of the fiscal systems of the several states.

III. Taxes Not Measured by Income

In his dissenting opinion in Western Union Telegraph Co. v. Kansas,112 Mr. Justice Holmes remarked:

"If after this decision, the State of Kansas, without giving any reason, sees fit simply to prohibit the Western Union Telegraph Company from doing any more local business there or from doing local business until it has paid $20,100, I shall be curious to see upon what ground that legislation will be assailed." 113

This curiosity cannot be said to have been completely satisfied by any of the decisions rendered thus far. In no case has a specific tax on local business been held to be a regulation of interstate commerce or a denial of due process of law. Yet, on the whole, the cases appear to negative the existence of an unlimited power to impose specific taxes on the local business of a concern that is also engaged in interstate commerce.

There are, indeed, intimations to the contrary in the decisions prior to the Western Union case. In Postal Telegraph Cable Co. v. Charleston,114 which sustained a municipal tax of $500 on the local business of a telegraph company, Mr. Justice Shiras declared: "If business done wholly within a State is within the taxing power of the State, the courts of the United States cannot review or correct the action of the State in the exercise of that power.'

"115

In Osborne v. Florida,116 which sanctioned a state statute imposing occupation taxes graded according to the number of inhabitants in the cities and towns in which the occupation was carried on, which statute the state court had construed as applicable only to local business, Mr. Justice Peckham observed: "So long as the regulation as to the license or taxation does not refer to and is not imposed upon the business of the company which is interstate, there is no interference with that commerce by the state statute." 117

112 216 U. S. 1, 30 Sup. Ct. Rep. 190 (1910).

Pullman Co. v. Adams 118 and Allen v. Pullman's Palace Car Co.119 have already been reviewed in the section dealing with taxes on privileges.120 The judges here appeared to be of the opinion that no tax on the local business could be a burden on the interstate business so long as the company was free to abandon the local business. These two cases were strongly relied on by the dissent in the Western Union case. Mr. Justice Harlan distinguished them on the ground that they involved no device to reach interstate commerce or property beyond the state in the guise of a tax on local business,121 thereby implying that such a device would henceforth receive the disapprobation of the court.

Two other cases prior to the Western Union case call for consideration. Kehrer v. Stewart 122 approved of a state statute "which provided that there should be assessed and collected 'upon all agents of packing houses doing business in this State, two hundred dollars in each county where said business is carried on."" 123 The State court had construed the statute to be applicable only to local business. It was conceded that most of the business was interstate in character, though the exact proportion of each was not shown. In Osborne v. Florida,124 ninety-five percent of the business was interstate. This fact is referred to by Mr. Justice Brown in the Kehrer case and declared to be immaterial. The attitude of the court on the general question is expressed as follows:

"If the amount of the domestic business were purely nominal, as, for instance, if the consignee of a shipment made in Chicago upon an order filled there, refused the goods shipped, and the only way of disposing of them was by sales at Atlanta, this might be held to be strictly incidental to an interstate business, and in reality a part of it, as we held in Crutcher v. Kentucky, 141 U. S. 47; but if the agent carried on a definite, though a minor, part of his business in the State by sales of meat there, he would not escape the payment of the tax, since the greater or less magnitude of the business cuts no figure in the imposition of the tax. There could be no doubt whatever that, if the agent carried on his interstate and domestic business in two distinct establishments, one would be subject

118 189 U. S. 420, 23 Sup. Ct. Rep. 494 (1903).

119

191 U. S. 171, 24 Sup. Ct. Rep. 39 (1903).

120

31 HARV. L. REV. 582-83. See also 32 HARV. L. REV. 405-06.

and the other would not be subject to the tax, and in our view it makes no difference that the two branches of the business are carried on in the same establishment. The burden of proof was clearly upon the plaintiff to show that the domestic business was a mere incident to the interstate business." 125

Later, in dismissing objections urged under the equal-protection clause, Mr. Justice Brown declared:

"What the necessity is for such a tax, and upon what occupations it shall be imposed, as well as the amount of the imposition, are exclusively within the control of the State legislature. So long as there is no discrimination against citizens of other States, the amount and necessity of the tax are not open to criticism here." 126

The Kehrer case was followed in Armour Packing Co. v. Lacy,127 in which the tax was $100 in each county and the fact appeared that the company did a large local business.

These cases undoubtedly justify the curiosity betrayed by Mr. Justice Holmes in his Western Union dissent. The opportunity to satisfy that curiosity was presented to the Supreme Court in Williams v. Talladega,128 but it was not grasped. A city ordinance imposing a tax of $100 was held void because it fell indiscriminately on all intra-state business including that done for the federal government. With respect to the contention material to our present purpose, Mr. Justice Day declared:

"It is further contended that the tax is unreasonable and unjust because of its effect upon interstate business. The reasonableness of the ordinance, unless some Federal right set up and claimed is violated, is a matter for the State to determine. It is contended that the result of the tax upon the intra-state business conducted at a loss is to impose a burden upon the other business of the company, and is therefore void. The Supreme Court of Alabama, however, reached the conclusion that the attempted test for eleven months, showing a loss of eighty-six cents, is not a sufficiently accurate representation of the business of the company conducted at Talladega to render the tax void. With this view we agree, and we are not satisfied that the tax is such as to impose a burden upon interstate commerce, and therefore make it subject to attack as a denial of Federal right.” 129