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The investigations of this “physical property' required the appraisers to cover 57,000 square miles of Michigan territory and traverse 10.000 miles of railway track, every mile of which was actually inspected, as were the engines, car shops, machinery, and other physical property.

The valuation gave, in the first place, the estimated value of each item as new work, material, or equipment, each item, bowever, being given a percentage mark for "condition representing the relation which the actual existing value bears to the estimated value for renewal or replacement." In estimating the cost of the individual items the market price or an average price for a term of years was used, according to circumstances, but no attempt was made to ascertain or use the actual cost price paid by the railways.

The values of real estate and rights of way were, we understand, determined largely by estimate based upon such information as the appraisers were able to obtain.

It will be seen that the criterion of values adopted was the present cost of the various constituent parts with estimated reductions for depreciation, and including various estimated expenses that might be incurred in procuring and putting them into combined operation as a railroad.

It is claimed by railroad managers and owners, who as a class have ceased to regard this inethod as affording a reliable criterion of the value of a railroad, that “the value of such separate items of property, the combination of which constitute a railroad do not necessarily or even prima-facie represent the actual value of the combination, the railroad as a single entity."

It is said that the great variation in the mileage, cost of construction, and the avails of operation discredit such methods of valuation for business purposes and render them unreliable for purposes of taxation. It is argued that the constituent elements of a railroad possess little stable value when disassociated from their earning capacity in combined operation as a unit.

While the State board of tax commissioners apparently regards this laborious appraisement as forming a reliable basis of valuation for taxation, or at least as a basis of comparison with the taxation of other forms of property, railroad men seein to reject such methods and regard the results as unreliable for any purpose.

Even though this elaborate appraisement of the physical values of constituent parts of a railroad property should be accepted as a reliable basis of valuation for purposes of taxation, another difficulty arises in the minds of taxpayers as to the practical attainment of equal taxation ” in the failure of local assessors to value all other forms of property with the same degree of skill and accuracy.

Thus, while the appraisement may justly be regarded as the most elaborate attempt ever made to ascertain the actual value of railroad property, of great importance for many purposes and perhaps of great benefit in the solution of the problem of equal taxation of such property with property in general, its practical value and reliability for purposes of taxation are still matters of conjecture and dispute in the State where the appraisal was made.


In connection with this value of physical property is taken what Professor Adams has designated as the “nonphysical" property. In his preliminary report he indicates some of the elements of this nonphysical property of a railroad, as follows:

“It is submitted that this nonphysical or immaterial element is not a simple commercial element, but includes, among other things, the following:

“1. It includes the franchisea. To be a corporation. b. To use public property and employ public authority for corporate ends. “2. It includes the possession of traffic not exposed to competition, as, for example, local traffic.

"3. It includes the possession of traffic held by established connections, although exposed to competition, as, for example, through traffic that is secured because the line in question is a link in a through route.

“4. It includes the benefit of economies made possible by increased density of traffic.

“5. It includes a value on account of the organization and vitality of the industries served by the corporation as well as of the organization and vitality of the industry which renders the service; this value consequently is, in part, of the nature of an unearned increment to the corporation.

Upon this theoretical and ingenious classification, Professor Adams proceeds to work out the “ immaterial” or “ intangible" values of the railroad property of the

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State, which, together with the “physical” values determined by Professor Cooley, are assumed by the State board of tax commissioners to represent the actual value of railroad property for purposes of taxation. The classification and methods pursued by Professor Adams in this regard are unique, and have created intense interest and discussion throughout the State. These processes receive the emphatic commendation of those who favor the application of one uniform rule of valuation and one uniform rate of taxation to all property, and advocate an increased tax upon quasi-public corporations through the ad valorem method. They contend that all these elements possess value to their owners and should be taxed upon an equality with other property.

On the other hand, while the classification referred to would naturally excite interest and criticism among representatives of railroads under any circumstances, when the proposition is made to include such elements as a basis of valuation upon which to levy taxes at the same rates applied to other property under the general property tax system, the effect upon such interests is somewhat startling, and provokes severe inspection and criticism. It is declared that such elements as * benefit of economies made possible by increased density of traffic,” “ organization and vitality of the industry which renders the service," or in other words, industry, ability, and thrift, are equally applicable to many other kinds of business and income, producing property of corporations and natural persons; but that the suggestion that they be included in their valuation for taxation has never been made and would not and could not be considered or tolerated at all. Such classification of “nonphysical" values in connection with the crude general property tax rates is regarded by men of experience in railway management as impractical and a basis for extortionate taxation. It is contended that the fallacy of including these various elements of nonphysical value, which, if based on anything, are based upon earning power as a basis of taxation, rather than the earnings themselves, is apparent: that as a basis of comparison with other property valuations under the prevailing system, it is misleading and unfair; and as a basis for “ equal taxation," delusive and inequitable.

There is clearly considerable force to these criticisms and arguments. Mr.Adams himself says that the task of appraising railway properties undertaken by this commission is akin to, if not identical with, the revaluation of railway securities, should this become necessary for reorganization or for transfer." While this statement may be received in justification of the classification of elements of nonphysical values, such classification may be regarded as a practical demonstration of the futility of comparing an earnings tax with the general property tax, and of the attempt to subject all modern forms of property to one uniform tax upon value.

Mr. Adams, although faithfully trying to perform the difficult task undertaken by the State commission under the direction of the law, recognizes earning power of a corporation of this character as “undoubtedly the basis of all valuation of corporate properties," and that “it is the income account from which this earning power can be determined.”

After constructing this unique classification of “nonphysical” values and sustaining their existence by reference to the practice of corporations with respect to revaluation, and rules of courts in certain instances; discarding statements of assets and liabilities, cost of property, and par or market value of stocks and bonds as unsatisfactory for the purpose of the commission, and recognizing earning power as shown by railroad accounting as an acceptable basis for appraisal of such values, Professor Adams formulates a rule “ for the appraisal of the inmaterial values of railway properties,” or what he terms “ the capitalization of corporate organization and business opportunity,” as follows:

1. Begin with gross earnings from operation, deduct therefrom the aggregate of operating expenses, and the remainder may be termed the income from operation.' To this should be added · income of corporate investments,' giving a sum which may be termed 'total income,'and which represents the amount at the disposal of the corporation for the support of its capital and for the determination of its annual surplus.

"2. Deduct from the above amount, that is to say, total income,' as an annuity properly chargeable to capital, a certain per cent of the appraised value of the physical properties.

*3. From this amount should be deducted rents paid for the lease of property operated and permanent improvements charged directly to income. The remainder would represent the surplus from the gross earnings from the year's operations, and for the purpose of this investigation may be accepted as an annuity which, capitalized at a certain rate of interest, gives the true value of immaterial properties.

“7. To obviate the criticism that both gross and net earnings vary from year to year, it is suggested that in place of a single year's income account, the average income account of a period of 10 years be accepted as the basis of computation. The reason for accepting a period of 10 years is that under existing commercial conditions it is likely that the corporation whose property is appraised would during that period pass through years of both prosperity and adversity.

“8. It will be observed that the above rule fails to appraise the speculative element in railway property. While this element doubtless affects the price of corporate stocks and corporate bonds, it is not entirely clear that it should influence appraisals for the purpose of taxation. Should, however, the commission desire to compute the present worth of property, as resting upon expectations in the future as well as upon earnings in the past, the pertinency of the above rule would not thereby be impaired. This is true because the speculative value of properties must, from the nature of the case, be a modification of their value computed upon the basis of their earning capacity."

We are advised that the “certain per cent” referred to as a basis of capitalization in the foregoing rule was 4 per cent, that being regarded as a proper criterion for the purpose for which it is employed.

While it is possible that this theoretical method applied to all income-producing property and business of corporations and natural persons throughout the State might evolve “ equal taxation," we apprehend that the suggestion of such a universal application would not commend itself to general public esteem. Certainly its rigid application as a basis of valuation to one class of property upon which is to be levied the "average rate” of taxation, while all other property is assessed under the general property tax, would result in taxation unequal in the extreme.

When this complicated and expensive process is followed out, the fact remains that a tax based upon such valuations is nothing more or less than a tax upon income, and its use would transform the general property tax, with respect to one class of property, from a mere inefficient and inadequate method to a system of extortionate taxation sanctioned by law.

Its modification with a view to the attainment of approximate equality would obviously require the vesting of discretion and power of adjustment as to rates or valuation in a board, and involve continued contention; in short, would continue the fundamental defects of the property tax which progressive thought and legislation is seeking to escape. If adopted, it would apparently be a distinct departure from correct principles.

RAILROAD VALUES. The result of the foregoing appraisment of physical and nonphysical values is shown as follows: Cost of reproduction, all elements new, by Professor Cooley $201,013, 081 Cost of reproduction, allowing for depreciation, by Professor Cooley. 164,812, 230 Value of nonphysical elements, by Professor Adams..

35,988, 632 Total value of physical and nonphysical elements.

200, 800, 862 The compilation of these novel reports in their detailed forms will occupy 7 volumes.

APPRAISAL BASED ON EARNING POWER. Besides the appraisals of Professor Cooley and Professor Adams, another appraisal of the values of railroad properties in Michigan was prepared by Robert C. Oakinan, one of the State tax commissioners in 1900. The values of the former were absolute, no attention being paid to the conditions of operation or prosperity of the roads. Mr. Oakman's values were based chiefly upon the principle of earning power, due regard being given to such elements as advantage and disadvantage of location, quality, quantity, market facilities, environment, and other conditions, which, while not susceptible of separate valuations, are considered as means of fixing the true value of a property as an entirety. Due regard was also given to gross earnings, expenses, stock values, bonded debts, etc.

Mr. Oakman says in his report that the board “has found that in the markets of the world these properties have a value which is measured mainly by the income which they will produce. The commercial world, when it desires to invest in stock and bonds issued by these corporations, informs itself about the earning capacity of the properties on which they are based. All its searchlights are directed upon their earning power. Why should not the State do likewise?"

He also points ont clearly that the State board in the valuation of these properties has followed the mandate of the law to ascertain their actual cash value.

The following comparison of taxes based upon Mr. Oakman's valuations is made:

Specific taxes paid on railroad earnings in 1899, $1,240,730.90, showing a rate of taxation based upon cash valuations of $6.652 per $1,000.

Taxes that would have been paid under the average rate of 1899, $21.13 per $1,000, $3,940,985.57.

Taxes that would have been paid under average rate of 1900, $15.47, $2,885,331.13.

What the average rate of taxation might be in case all the property in the State were as completely valued by the method applied to railroad property is significantly omitted.

Commenting upon the work of the commission in his report, Mr. Oakman says:

“ If railroad property is to be assessed and taxed at cash value at the average rate, and not specifically, it would, in my opinion, be unfair to allow exemptions or deductions of other property in the State. It must be remembered that restrictions of rates and fares of transportation companies operates as a tax. Hence all exemptions of other property creates an excess as against those incapable of shifting the burden. When exemptions are made or deductions allowed the total of such exemptions or deductions is thrown upon property which is not exempt.

“I wish to say that months before any law taxing railroads on an ad valorem basis could take effect there would be ample time in which to give these appraisals a thorough review, to the end that railroad properties would be assessed and taxed

in the same manner and to the same extent as other properties paying taxes under the general tax laws of the Commonwealth."

Earning power is the keynote of his valuation.

In the manner thus briefly set forth Mr. Oakman estimates the cash value of the railroad properties of the State to be $186,511,385.34.

The following comments on “ fixing valuations” are taken from his report:

" Having in mind the necessity for the specific examination of the roads, it may be stated that the valuation of the railroad property operated within the State found by capitalizing at 6 per cent the net earnings of the revenue-producing roads, figured upon the system herein referred to, and computing the earning power of the roads showing deficits in operation in their reports on the basis of the average ratio of expense to income for all the roads within the State, say 73.79 per cent, will reach the sum of $186,511,385, while the valuation of the same property computed throughout on a capitalization of 6 per cent upon net earnings, based upon the said average, 73.79 per cent of expense to income, will amount to $172,154,412. It is probable that an examination of the accounting method of the roads as suggested, and a further investigation as to location, traffic arrangements, terminals, connections, and other elements that go to make value, would result in a material increase, or perhaps somo decrease in special cases, of the valuations which appear in the appendix.”


[Prepared under the direction of the Industrial Commission by GEORGE CLAPPERTON, expert agent.]

The systems of taxation in vogue in the Provinces of Ontario and Quebec, which are fairly representative of the systems throughout the entire Dominion of Canada, present features and principles of especial interest and importance.

A distinctive feature of the systems of taxation in the provinces named is the complete separation of municipal from provincial or state taxation. Each municipality (county, city, or town) is entirely independent of the Provincial Government in the assessment and levying of taxes for local purposes.

In the Province of Ontario the “Revenues from ('ompanies,” so called, is becoming an important source of provincial taxes, and is a distinctively modern method of taxing corporations. The supplementary revenue act imposes an annual tax upon the income or capital stock of corporations or companies for provincial purposes. The yield from this source in the year 1900 was more than a quarter of a million dollars.

Another distinguishing and established feature of Ontario taxation, and one embodying a principle of especial interest in the United States, is that of the tax upon incomes.

The annual income of individuals and corporations, within welldefined limitations, is assessed as property, and taxed at the same rates as other property. While the income tax law is indifferently administered, it constitutes an important factor in the Ontario system of taxation.

In the Province of Quebec there is a provincial tax on commercial corporations, based upon capital and income, and in the case of railways, upon mileage. In the city of Quebec there is no property tax in the usual sense of the term. Municipal taxes are based upon the rental values of property, and are supplemented by certain fixed annual duties upon particular kinds of business. Personal property is not directly taxed.

In the city of Montreal there is a property tax upon real estate, but no distinct tax upon personal property either tangible or intangible. There is a “business tax”' based upon the rental values of premises occupied for business purposes, special taxes upon certain persons and kinds of business, and an elaborate system of licenses, from which sources a large portion of the municipal revenues are derived.

PROVINCE OF ONTARIO. The revenues of the Province of Ontario, amounting to about four and one-half millions of dollars in 1900, are provided througlı special subsidies from the Dominion of Canada, receipts from Crown lands, various license and other fees, stamp taxes, and, latterly, revenues from companies and graduated succession duties.

The amount received from law stamps in the year 1900 was $55,410.27; from succession duties or inheritance taxes, $229,676.51; and the amount of revenues from companies, so called, $229,774.44.


Until the year 1899, the taxation of companies was left as a source of revenue exclusively to the various municipalities of the Province, but in that year an act was passed and subsequently amended appropriating a large proportion of the income taxes upon companies for supplementary provincial taxes, thereby seriously encroaching upon what had theretofore been an important source of local revenue.

This act effected a great change in the local taxation of certain classes of companies, limiting the local income tax to so much of the income of such companies as was earned in the municipalities in which they are located, and imposing an annual government or provincial tax on all other income, and in some cases upon capital.

By this act the following classes of companies, transacting business in the Province of Ontario under their names or otherwise, are taxed for provincial purposes as set forth below:

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