SEPARATION OF STATE AND INTERSTATE COMMERCE. The attention of the student has doubtless been arrested by the classification of inland traffic as State and interstate traffic, the net earnings upon the former being assigned to the State for purpose of taxation, while the Federal Government en joys the exclusive right to impose taxes upon the latter. Can this classification be followed in practice? In the first place it may be remarked that this distinction is not an arbitrary one, but exists in the organization of the State itself. All interstate traffic is placed by fundamental law under the jurisdiction of Congress, while infra-state traffic is reserved to the jurisdiction of the States. Not only is this dis tinction clearly expressed in the Constitution, but it has been made the basis of a long line of consistent decisions by the courts for more than a hundred years. It is thus evident that the financier who seeks to make use of this classification in a fiscal scheme does not enter upon untrodden ground. On the contrary, he will find many of the terms and phrases which he must employ authoritatively defined in established law, while the general principles underlying his task, as well as the reasoning involved, have already been expressed.
Another fact may be noticed in this connection, which, while no more important in itself, has perhaps a more direct bearing upon the question in hand. Railway legislation in the United States (for the purpose of specific statement other forms of interstate commerce are dropped from view) has adjusted itself to this distinction between State and interstate commerce, the former being placed under the jurisdiction of State railway commissions, while the latter is consigned to ehe jurisdiction of a Federal commission. These two sets of agencies are complementary to each other, and neither can hope for the highest success without the cooperation of the other. To this end it is incumbent upon the commis sions that for the purpose of administration they work out the line of demarcation between State and interstate traffic, which the fiscal scheme here presented accepts as separating the local from the Federal taxation of inland commerce. Now it is a most significant fact, for the purpose we have in view, that the character of the traffic, and not the localization of the appliances by which passengers and freight are carried, is accepted as the basis of the distinction between State and interstate traffic, since it is the earnings of commerce, and not commercial appliances, which, according to the thesis here maintained, must be made the object of taxation.
The suggestion that interstate commerce should be as signed to the Federal Government and infra-state commerce to the States as a source of revenue through taxation not only conforms to the conception that underlies fundamental law, but it makes use of a distinction that must be worked out in a branch of public administration with which finances have nothing to do. In this the scheme conforms to what has been termed administrative economy. The expense in cident to the classification of commerce is one that must be incurred in order to render the control of railways through commissions effective; why should not the fiscal system be so adjusted as to make use of this expenditure in connection with the operations of the Treasury? The separation of traffic into State and interstate traffic is not in itself a difficult task, although great care must be exercised in selecting a proper basis upon which to proceed. A separation upon the basis of tonnage, or of ton-mileage, would be of relatively slight importance. It could answer none of those questions that arise respecting the probable effect of a change in rates, which is the significant thing for a Railway Commission to consider, nor could it serve as a basis of assessment in a financial system that accepts earnings rather than the volume of traffic as the proper object of taxation. In some way the rate received upon the traffic carried must enter into the computation. The classification must be more than a territorial assignment of tonnage or it will not be worth the making.
The commercial factor which represents both the volume of traffic and the rate at which it is carried is earnings, and the administrative problem that presents itself pertains to the separation of earnings according as it accrues upon State or interstate commerce. The distinction between " gross " and " net " earnings has already been explained, and it will be remembered that the net earnings of a corporation are, theoretically, the more appropriate basis of assessment. It is also true that net earnings are of relatively greater impor tance to Railway Commissions in the discharge of their pe culiar duties. Inasmuch, however, as gross earnings must be made the basis of net earnings, and since there are many who favour the adjustment of corporation taxes to the former rather than the latter, the analysis that follows will con sider the two items separately. The thought, also,
may be interjected at this point that the common objection of the courts to the acceptance of gross earnings as the basis of State taxes, namely, that by means of it the States tax interstate commerce, would be overcome by the plan here outlined; for it would result from this plan that each grade of government would be restricted to the traffic that pertains to it by the Constitution. It is possible, therefore, should the task of working out the programme here outlined be actually undertaken, that practical considerations would lead to the acceptance of gross earnings rather than of net earnings as the basis of assessment.
(a) On the Basis of Gross Earnings. Accepting gross earnings as the amount of income resulting from the amount of traffic multiplied into the rate charged for transportation, no allowance or deduction being made for expenditures in cident to operation, it is clear that its separation into State and interstate earnings must conform to the respective amounts of the two sorts of traffic and to the rates at which each is carried. Were these rates uniform, the earnings would be in proportion to ton-mileage; but the rates are not, and from the nature of the case cannot be, uniform. They vary for different lines and for different parts of the same line. They are influenced by the kind of goods carried, the con ditions under which they are carried, and for the distance carried. Special rates, also, for special commodities or se lected territories are a familiar and probably a permanent feature of railway transportation. A classification on the basis of tonnage, mileage, ton-mileage, or indeed any other physical attribute of commerce, must be inadequate.
Or were it true that interstate traffic is always inter-line traffic, white State traffic is confined to single lines of road, the problem would be easy of solution. This is true because it is ne cessary for the railways to separate these two kinds of traffic in order to settle accounts between themselves. But the assumption does not conform to the facts in the case, and an assessment of taxes on the basis of such a classification would be devoid of any very definite meaning. There is, however, in this second assumption a most fruitful suggestion. If inter-line accounting is adequate to settle fairly the accounts between railways that unite for through or long-distance transporta tion, it is only necessary to organize this accounting into a Federal system, and to so extend it as to include interstate traffic carried on single lines, in order to secure all that is ne cessary for the purpose of the financier. In the development of railway organization there must, sooner or later, be established a of Railway Accounts, and it would be highly advantageous from many points of view should the claims of a sound fiscal system and the demand for adequate public control over the business of transportation be permitted to give shape to that organization. Our conclusion is that, so far as gross earnings are concerned, no technical or theoretical difficulties stand in the way of an honest separation of State and interstate traffic.
(b) On the Basis of Net Earnings. The serious difficulty makes its appearance as soon as one passes from the ledger of receipts to the ledger of expenses. This is true because so large a proportion of railway expenditures are common to all classes of traffic. It is difficult to determine the cost of running a given train; how much more difficult to assign that cost to the different classes of goods carried in the train. It cannot be done, and rail way accountants and railway commissioners have alike re cognised that it cannot be done.
While acknowledging this to be true for the fine questions that arise in connection with public control of railways, it may yet be possible to arrive at a separation of State and interstate net railway earnings with sufficient accuracy to serve the legitimate demands of a fiscal system. It must be remembered that the interests affected are the fiscal systems of two grades of government, and that justice to individuals, either relative or absolute, is not involved. This being the case, the financier is justified in making use of rules for the classification of railway earnings, even though they are in some degree arbitrary, provided they are fairly reasonable and acceptable to the parties concerned, that is to say, to the Federal Government on the one hand and State govern ments on the other.