THE CONFLICT BETWEEN THE STATE AND LOCAL GOVERNMENTS IN TAXATION.
1. Conflict between the state and municipalities concerning sub jects of taxation.
2. Should property be taxed at the same rate by the state and municipalities ? 3. One way to solve the question is for the counties to collect all the taxes and pay over a portion to support the state.
4. No state has attempted to do this.
5. To what extent ought corporations be taxed for state pur poses? 6. Exemption of manufacturers.
7. Objections to exempting them.
8. If they have been exempted the state should act justly in taxing them.
9. License taxes.
10. The state can collect some taxes more effectively than municipalities.
11. The practicability of taxing by state and municipality the same thing.
12. Objections answered.
13. Effect of different rates of taxation in different places on the same kind of property.
1. One of the gravest difficulties in taxation is to as certain the rightful boundary between State and local action.' If several railroads run through a county, it is a strong believer that railroads should be subject to local taxation; in a county not thus blessed, the belief is equally strong in the State taxation of railroads, and, as a proper corollary, that the State should pay for many expendi tures, the maintenance of justice, schools and the like.
2. There is another question, hardly less difficult. Admitting that railroads and other corporations for vari ous reasons should be taxed by the State, it is maintained by the owners of other property that corporations should be taxed in a similar manner and at a similar rate ; and if the income received by the State through such a system of taxation is more than sufficient to pay its expenditures, the excess should be divided among the counties. A farmer often contends against the gross unfairness of the tax on his farm, at a rate two or three times higher than that of an adjacent railway. These questions reveal at once grave difficulties in determining the correct boun daries between State and municipal taxation.
3. One way to solve them would be for counties to collect all the taxes of every kind, and pay enough into the treasury of their State to meet its expenditures. What would be the effect of such a policy? The first effect would be to reduce State expenditure. Many of its func tions would be suspended. As the counties would then be interested in keeping the largest amount for local ap plication, they would strongly favor the policy of re stricting the functions of the State to narrower limits. But now, as corporations pay a large part of the expense, the tendency is to extend the functions of the State. Counties do not much care what the State does with its revenue, so long as they cannot have any portion of it.
4. Thus far, no State has ever attempted to renounce all taxation to the counties and live by drawing from them ; and if this were done a difficulty of the gravest character would follow. Each county would strive to be smart and put an undue share of the burden on other counties by undervaluing its property. In other words, the same principle that operates among taxpayers to re lieve themselves from their lawful burden by making im proper returns would operate with tenfold force among the counties to shift their lawful burden of maintaining the State. This plan, then, may be dismissed without further consideration.
an income by taxation, assessed and collected by its own officers, how much shall it collect, from what sources, and what relation shall the rate of taxation bear to other property thus left to the taxation of municipalities? It is generally thought that railroads should be assessed and taxed by the State, although all are not agreed that it should retain the entire amount paid by them. But the moment railroads are passed the difficulty thickens. Ought a bank or manufacturing company to be taxed by the State or by the locality in which it exists and does busi ness? Are they not local property, like the land of farm ers? They are fixtures ; they are a part of the munic ipality. The only argument in favor of State taxation is that it is more uniform. But is this sufficient to warrant the withdrawal of manufacturing companies from local taxation ? Again, should the rate of the tax be the same as on the capital of a railroad corporation? At present, the capital in different kinds of corporations often pays different taxes, a manifest injustice.
6. Again, in some States the capital of a manufactur ing corporation is exempted from taxation, and only their real estate is liable to a tax in the county or township where it may be located. Is this just to other taxpayers to withdraw the capital of one class of corporations from taxation ? If a city or town is willing to exempt a cor poration from taxation for several years as an inducement to locate or to extend its business in that particular local ity, that may be a wise policy, as all living there expect to gain something from its creation or extension, but such action is very different from that of a State exemption of a large amount of capital from taxation.
7. For it should be remembered that other persons and capital must share the expenditures which otherwise would be borne by those exempted. By exempting one class a larger burden is imposed on others. Does the gain to the State or to the people in numbers or in the value of their land or in the cheaper goods furnished to con sumers justify the exemption of manufacturers from tax ation? In truth, do not advantages flow from the ex penditure of capital of every kind? If a railway is built, do not the lands through which it passes increase in value? Are not goods carried at cheaper rates than they were formerly? Do not consumers ultimately derive a bene fit? Are not more persons employed? Are not farmers benefited by the increased consumption of their products? In short, are not many advantages reaped? And if Kt, are not the reasons for exempting them from taxation just as strong as those for exempting manufacturers? 8. It is true that if a State has embarked on such a policy it may not be justified in imposing a tax on them ; but it certainly would be justified in carrying the exemp tion no further, and in restricting and withdrawing it so far as this could be done without inflicting any injustice on those who have acted on the assumption that the State would follow this policy permanently.
9. Another tax collected by the State is for licenses. It may be objected that such a tax ought to be collected locally by the towns and other places where the person or company licensed lives, and the same remark may be made concerning the taxation of personal property, notes, bonds, stocks, etc., as well as mortgages.
fo. One of the reasons given by the State for includ ing within its sweep so many objects is, it can collect taxes more effectively than the municipalities. Doubtless there is some truth in this assertion. If a tax was im posed by a small locality in which a bank, insurance com pany or manufacturing company was situated, it would not be so readily paid as a tax levied by a more powerful political organization like the State. The same remark may be applied to a mining company.
1. Suppose the State imposed a small tax, a fran chise tax, perhaps, based on the capital of all corpora tions. Suppose, further, that municipalities were permit ted to tax them on the value of their property, but re quiring them to deduct the franchise. Would not this be fairer than the present way of dealing with them? 12. It may be remarked, as an objection to dividing taxation between the State and municipalities, that there would be varying local conditions which would work un evenly on business. A bank in one city might be taxed higher than a bank in another; a railroad might be sub to a higher local tax in one county than in another. This is an objection ; but the answer is that just such in equalities now exist in taxing real estate and personal property. Each township and county collects as much as is needful for local purposes, regardless of the rates charged by surrounding townships or counties. This in equality is one of the hardships of doing business, and cannot be escaped. It is understood by business men ; they take the risk ; and it is as just to apply this principle to one kind of property as to another.
13. This principle has a wider application. In differ ent municipalities rates of taxation differ greatly on com peting property, and the municipalities that are the most economically managed and in which the taxes are the lowest have an obvious advantage over other municipal ities in which the rates are much higher. Why does not a State or municipality see that prosperity is insured by maintaining the lowest possible rate of taxation, for by so doing municipalities tempt the creation of new enter prises and the extension of old ones. One of the best possible reasons for extending manufactures in any place is the intelligent, economical and honest administration of the local government. This is an argument of the highest worth, one which some municipalities are wise enough to appreciate, and the time is not far distant when others will realize its significance.
'See articles by Max West on City and County Taxes in 14 Political Science Q.. Nos. 2 and 3, and Taxation in American States and Cities by R. T. Ely.