The assessed valuation of real property in 1899 was not materially increased over the above figures, the real estate as assessed being about $825,000,000, and that of personal property $144,000,000. Through the efforts of the State board of tax commissioners, the valuations for 1900 were materially increased, the increase being $349,260,941 in the total valuation-$180,594,302 on real estate, and $168,666,639 on personalty. What effect this increase, made somewhat indiscriminately, will have upon the equality of taxation throughout the State can not yet be determined. SPECIFIC TAXATION SYSTEM. The property of most quasi-public corporations within the State comes within this system, imposing fixed rates of taxation upon gross earnings. The constitution of the State provides that all specific State taxes, except those received from the mining companies of the Upper Peninsula, shall be applied to the payment of the primary-school interest fund of the State. This primary-school interest fund, so called, is apportioned among the several townships and cities of the entire State in proportion to the number of children in each between the ages of 5 and 20 years. The total specific taxes for 1899 were as follows: From railroad companies.... From river-improvement companies From insurance companies. From plank-road companies From express companies.. From telegraph and telephone companies. From freight, palace, and sleeping car companies. Total $1,091, 526.39 2,180.77 239, 500.45 1, 188.51 13,680.56 70, 058.81 39.93 6, 441.88 1,424, 617.30 From the reports of the auditor-general it appears that occasionally a county having a considerable population, but small amount of taxable property, receives a larger amount from this primary-school fund than the entire amount of State tax contributed by such county; but as a rule the amount of the primary-school fund apportioned to counties constitutes but a small portion of the amounts of State taxes paid by them. Prior to 1871 the railroads of Michigan were required to pay a specific tax on their respective amounts of capital stock paid in. In 1871 an entirely new system of taxation of railroads was adopted, based upon earnings instead of capital, earnings being regarded as a more equitable criterion of value for the purpose of taxation. It was thought that a road that earned nothing was of little value, whatever it might have cost, while a road with large earnings was valuable regardless of its cost. Difficulties of previous systems were disposed of and the State started out upon a system, which has ever since existed and still continues, of taxation upon gross earnings. At first no provision was made in regard to corporations whose roads crossed the State line; but as necessity arose, in 1873, the law was revised and provision made for the taxation of a corporation whose line of railroad "lies partly within and partly without the State," and a method was prescribed for arriving at the proportionate earnings of such a road. RAILROAD SPECIFIC-TAX LAW. Under the existing law passed by the legislature in 1897, increasing the graded specific-tax rates over those of the previous law, every railroad company and union railroad station and depot company owning or operating any railroad situated in whole or in part in Michigan is required, on or before July 1 of each year, to pay to the State treasurer, on a statement of the auditor-general, a specific tax upon its business computed in the following manner: Upon a gross income not exceeding $2,000 per mile of road actually operated within the State, 24 per cent of such income. Upon an income in excess of $2,000 and not exceeding $4,000 per mile, 3 per cent thereof. Upon all such income in excess of $4,000 per mile and not exceeding $6,000 per mile, 4 per cent thereof. Upon all such income in excess of $6,000 per mile and not exceeding $8,000 per mile, 4 per cent thereof. Upon all such income in excess of $8,000 per mile, 5 per cent thereof. In the case of union station and depot companies whose earnings are in excess of $20,000 per mile the rate on such excess is 10 per cent. When railroads lie partly within and partly without the State, the gross income for the purpose of taxation is upon the earnings of the road in Michigan, computed by adding to the income derived from business entirely within the State such proportion of the income arising from interstate business as the length of the road over which said interstate business is carried in Michigan bears to the whole length of the road over which it is carried. While the legality of the tax upon earnings from interstate commerce has been questioned in discussion in this State, it has not been tested in the courts, railroads having complied with the law. The taxes so paid are in lieu of all other taxes, except real estate owned and not necessary or in use in the proper operation of the road, such estate being subject to local assessment as other property under the general law. There is another exception, that of real estate for local assessment for specialimprovement taxes in cities and villages. Prior to 1897 the graded specific rate of taxation was as follows, there being, as above set forth, a considerable increase in the law of 1897: Upon gross earnings not exceeding $2,000 per mile Per cent. 2 21 3 31 4 The following table shows the amount charged to and paid by the railroads of the State during the years designated: It should be borne in mind that these amounts are in lieu of all other taxes, and represent substantially the total taxation of railways in the State during the years stated, except special assessments for public improvements in cities and villages. VALUE OF RAILROAD PROPERTY. The State railroad commissioner, in his annual reports for 1897 and 1898, states the total cost of railways in Michigan to be as follows: 1897: 1898: Wholly or in part within the State.. Wholly or in part within the State.. Cost of portions within the State Total gross income or receipts from operation in Michigan: 1898 1899.. $1,013,504, 035.31 291,074, 216.78 1,025, 741, 348.54 294, 290, 145. 02 32, 047, 469. 84 35, 892, 864.22 26, 162, 127.21 9,730, 737.00 The reported cost of railroads affords no reliable measure of the actual values of such property and no proper basis for taxation. It is obvious that the original cost of such property bears no necessary relation to its present actual value, much less to its present earning capacity. A railroad commissioner of this State recently said: "The cash valuation of a railroad is fixed by the amount of its earnings, continued for a number of years, regardless of the cost of construction; in short, the market value of a railroad depends upon its past, present, and prospective earnings." Capitalizing, according to the method adopted by the Ohio tax commission in 1893, namely, earning power at 6 per cent, the net earnings being $9,730,737 in 1899, an exceedingly prosperous year, the actual value of the property producing it would be 16 times that amount, or $162,178,950, and the rate of taxation thereon substantially 6 mills on the dollar. The net earnings of Michigan railroads for 1895 were $5,229,760.93, which amount, according to the above rule, would indicate a value that year of $97,162,682.16. While the mileage of Michigan_railroads is large, it is not uniformly profitable, nor would it come within as high a grade or value as that of Ohio railroads, and this method would afford no reliable criterion of value. The assessed valuation of Ohio railroads under the general-property tax is less than one-third of the valuation computed by the above method. The assessed valuation of the railroads of Indiana by the State board of tax commissioners under the unit rule in 1899 was, in round numbers, $153,000,000. The grade of railroads in Indiana is much higher than that of Michigan railroads, Indiana being traversed in every direction by the great trunk lines; and while Michigan has a few more miles of road than Indiana, it is hardly probable that its entire mileage could be fairly appraised at anything like the real value of the Indiana roads. The Illinois tax commission in 1886, after careful study of railroad statistics and much thought given to the average proportion between gross receipts, expenditures, and capitalized values of railroads, deduced the conclusion that five times the amount of the gross receipts of a railroad would, for purposes of taxation, fairly represent the value of its property, and would be high enough to compare with other property assessed on a basis of full cash value. Applying this novel rule to Michigan railroads would result in a taxable value in 1898 of $160.237,345 and in 1899 of $179,464,320. Inasmuch as considerable controversy has arisen in this State during the past few years as to the relative amount of taxes paid by the railroads of the State, compared with the amount paid by other property under the general-property tax, a few observations upon this subject may not be out of place in this report. The equalized valuation of real and personal property of the State under the general-property-tax law, as fixed by the State board of equalization in August, 1896, was $1,105,100,000. The taxes levied for all purposes in the State, including all specials of every kind, but excluding all specific taxes, as shown by a careful investigation of the auditor-general, amounted to $19,500,061.09. By a system of computation made in the auditor-general's office, in which are taken into consideration as factors the rate of taxation in the respective counties of the State, and also the various amounts of property to which these rates apply in the different counties, the average rate of taxation is shown to be $1.76 on each $100 of equalized valuation of the year 1896. We give this more accurate computation for the reason that the computations generally made, omitting some of the factors above named, give a common rate of taxation of approximately 3 per cent. Obviously, in ascertaining an accurate rate of taxation on this valuation in the State, still other factors should be considered. The equalized valuation of property upon which the computation referred to is based is very much less than the actual cash value of the property assessed under the general law, the cash value of property assessed being, as we have stated, approximately three times the assessed valuation. When in connection with the undervaluation is taken into consideration the vast amount of property, real and personal, exempt from taxation under the general law, and the enormous amount of personal property, both tangible and intangible, which remains undisclosed and escapes the assessment rolls entirely, it will be seen that the strictly correct rate of taxation of property under the general law, as compared with the cash value of property under the specific-tax system, based upon the total cost of such property or upon net earnings or business, would be very materially reduced below the rate of $1.76 referred to; in fact, would be but a small portion thereof. As we stated elsewhere (see Ohio), it is exceedingly difficult to make strictly equitable and reliable comparison between two entirely different methods of taxa tion, the one based upon real and tangible property, partially valued by estimate of elective officers, and the other based upon real and intangible property, fully valued by self-assessment, based upon actual business and earning power, without evasion or escape. Could such comparison be reliably made, the necessity for the adoption of a different method for intangible and corporate property would disappear and the general-property tax would be adequate. It should be remembered that the methods are based upon entirely different principles of taxation, the one upon property value, the other upon productivity, and it is about as difficult to apply a like measure to both as to measure water with a yardstick. It is easy to juggle with intangible and speculative values. Indeed, it is difficult to avoid juggling in the attempt, commendable though its purpose may be, at comparison of the real and tangible with the unreal and intangible for purposes of taxation. The statistician and theorist should be extremely conservative in the comparison of one great class of property upon a rule of valuation based upon productiveness, upon uncertain and intangible elements, with tangible property under the antiquated and slipshod general property-tax system, if he would avoid conclusions that are unreliable and misleading. It is obviously difficult, if at all possible from a scientific standpoint, to frame an adequate rule of comparison between a rate of taxation on gross earnings and one on property value under the general property-tax system. The most elaborate attempts usually end in conjecture and an uncertain jumble of figures. A more independent consideration of a new method for the taxation of intangible or corporate property is essential to the determination of its adequacy and actual merits. If the revenues of the State were to be raised from the incomes of persons and business, there would obviously be no comparison between the rates of taxation thereby imposed and the valuation of property under the general-property tax. This is, in a measure, true with respect to gross-earnings tax. The methods are based upon different principles. In the application of a scientific method of taxation to a great class of corporate property owners, the end to be attained is their subjection to a fair share of the burdens of government. To go beyond that is to place an embargo upon the prosperity of the commonwealth. Justice and equality require that corporate property be fully and fairly taxed, but not necessarily by like methods with other property. The comparisons frequently made, in the investigation of taxation, between methods or between results in different States under different systems, when carefully analyzed, often prove unsound, and in many instances would appear ludicrous were it not seriously proposed to frame a new system of taxation based upon such results. Whether or not, under the present specific-tax law, the railroads of the State are bearing their portion of the public burdens compared with property assessed under the general law we do not assume to say, but merely suggest some of the factors which should be taken into consideration, the dangers to be avoided, and the methods employed for the purpose of determining the question of equality of taxation under these different systems. GROSS RECEIPTS TAX. The gross income, as defined by the State railway commissioner and sustained by the courts, is held to include substantially all the receipts of railroads of every kind or nature. The amount of gross receipts is fixed by computation based upon reports of the railroad companies. The law requires railroad companies to make such reports annually, and imposes a penalty for neglect to make them or for false reports. The system of taxing gross earnings, as applied to railroads in Michigan, has been in force and operation since 1871. It is distinguished from the general property tax in that it is based directly upon income. With this basis the rate of taxation is fixed by law and does not depend upon the changing valuations of assessors or commissions selected under a political system. The specific tax so fixed can not be evaded. It is uniform. It reaches all property under it and subjects it to contribution. None can escape it. RAILROAD REPORTS AND ACCOUNTS. Soon after the adoption of the specific-tax system in Michigan, as applied to railroads, the necessity for a correct and uniform system of accounts and reports for the various railways doing business in the State, as a basis for just and equal taxation, for wise and judicious legislation, and for other obvious purposes was recognized. The importance of this subject in this connection was clearly discerned by the Hon. W. B. Williams, railway commissioner of Michigan for 1877 to 1883, one of the ablest and most industrious commissioners the State ever had, who proceeded to formulate such a system of accounts and reports, and to cooperate with commissioners in other States to secure its adoption by railways generally. As the tax upon gross earnings depended upon the reports of railroad companies to be taxed, the value of any system of reports that might be adopted depended upon the correctness of the accounts upon which they were to be made. To be of practical value for the purpose of a taxation basis or any other purpose, it was necessary that they be made up from a comprehensive and complete statement of accounts upon the books of such companies, and not from estimates. It was neces sary that such accounts be authentic and sufficiently complete in detail to furnish adequate means of checking and verifying them. Many of the railroads of the State being parts of continuous lines passing into and through other States, a system of accounts to be of practical value must be uniform throughout all the States traversed by such roads. For the purpose of establishing such a uniform system of reports and accounts, a convention of railroad commissioners was called, and at an adjourned meeting at Saratoga in 1879 the report of a committee on uniform reports, containing substantially the form of report and accounts previously used in Michigan, was adopted. The form there laid down was wrought out by commissioners with the aid of experts in railroad accounting, who had had many years of experience in keeping accounts of railroad companies and making reports to the States where they were located, with a view to making them as simple and comprehensive in their plan as possible, and at the same time supplying the information required. This system was adopted by the convention, as well as by the officials of several States, and with such changes as from time to time became desirable has been in use in Michigan and some adjoining States to the present time. Accounts are open to public inspection, appear in the public reports of State railroad commissioners, supply accurate and reliable information as a basis for taxation of gross earnings and for all other purposes, and through them is or may be derived the full benefit of publicity of the business and operation of railroads. As a remedy for abuse of corporate power or financial combination or manipulation, publicity of reports and accounts of these railroads exists to-day. REPORT OF THE COMMITTEE OF RAILROAD COMMISSIONERS. The convention of State railroad commissioners in 1878 appointed a special committee, consisting of Charles F. Adams, of Massachusetts, W. B. Williams, of Michigan, and J. H. Oberly, of Illinois, to examine into and report the methods of taxation as respects railroads and railroad securities then in vogue in the various States of the Union, as well as in foreign countries, and to report a plan for an equitable and uniform system for such taxation. The report of this committee, making special reference to Michigan, is justly celebrated in the literature of taxation; and it is so applicable in its description of the chaotic condition of railroad taxation to the various States at the present time that I desire to embody it herein: "Shortly after the last convention of commissioners your committee issued a circular and accompanying interrogatories in relation to the matter referred to them for investigation, which were sent to all the State executives and to a large number of the railroad corporations of the country. Through the courtesy of the State Department at Washington the representatives of the National Government at the principal capitals in Europe were also called upon for information on the railway-tax systems there in use. As a result some 60 answers were in all received, covering the various States of the Union, Canada, England, France, Belgium, Holland, Germany, Russia, Switzerland, and Austria-Hungary. The information contained in these answers is much of it of great value, especially in the case of the documents relating to the systems of taxation in use in foreign countries. These the committee have printed in full as a part of the present report, as the facts and statements contained in them are not elsewhere to be found in any easily accessible shape. A compendium of the systems in use in all the States of the Union has been prepared, and likewise forms a part of this report. "On examining this compendium of State systems in present use in this country it will at once be observed that they are much more varied than would naturally be supposed, or perhaps than would have been thought possible. Generally it may be said that there is no one principle running through the various systems described; and further, that there is no method of taxation possible to be devised which is not at this time applied to railroad property in some part of this country, So far as those now well-recognized principles which should be at the basis of all systems of taxation are concerned, they would as a rule seem to have been utterly ignored. In two adjoining States, for instance, with roads belonging to one company operating in both, will be found on one side of the line a system simple, direct, equitable, imposing a moderate and fixed burden from which there is no escape, while on the other side of the line will be met a system which can be said to be based on nothing more reliable than arbitrary guesswork. In certain States the railroads are apparently looked upon as a species of windfall, from which everything which can be exacted in the way of taxation is so much pure gain. In other States they escape with very slight and wholly disproportionate |