CHAPTER XLIII STATE FINANCE THE financial systems in force in the several States furnish one of the widest and most instructive fields of study that the whole range of American institutions presents to a practical statesman, as well as to a student of comparative politics. It is much to be wished that some person equipped with the necessary special knowledge could survey them with a philosophic eye, and present the results of his survey in a concise form. From such an attempt I am interdicted not only by the want of that special knowledge, but by the compass of the subject, and the difficulty of obtaining in Europe adequate materials. These materials must be sought not only in the Constitutions of the States, but even more in their statutes, and in the reports presented by the various financial officials, and by the special commissions occasionally appointed to investigate the subject or some branch of it. All I can here attempt is to touch on a few of the more salient features of the topic, and to cull from the Constitutions some illustrations of the dangers feared and the remedies desired by the people of the States. What I have to say falls under the heads of Purposes for which State revenue is required. Exemptions from taxation. Methods of collecting taxes. Limitations imposed on the power of taxing. Restrictions imposed on the borrowing power. I. The budget of a State is seldom large, in proportion to the wealth of its inhabitants, because the chief burden of administration is borne not by the State, but by its subdivisions, the counties, and still more the cities and townships. The chief expenses which a State undertakes in its corporate capacity are― (1) The salaries of its officials, executive and judicial, and the incidental expenses of judicial proceedings, such as payments to jurors and witnesses; (2) the State volunteer militia; (3) charitable and other public institutions, such as State lunatic asylums, State universities, agricultural colleges, etc.;1 (4) grants to schools; 2 (5) State prisons, comparatively few, since the prison is usually supported by the county; (6) State buildings and public works, including, in a few cases, canals; (7) payment of interest on State debts. Of the whole revenue collected in each State under State taxing laws, a comparatively small part is taken by the State itself and applied to State purposes.3 In 1882 only seven States raised for State purposes a revenue exceeding $2,000,000. In that year the revenue of New York was $7,690,416 (pop. in 1882 about 5,200,000). In 1886-87 the revenue of Pennsylvania was: $7,646,147 (pop. about 4,700,000). These are small sums when compared either with the population and wealth of these States, or with the revenue raised in them by local authorities for local purposes. They are also small in comparison with what is raised by indirect taxation for Federal purposes. 4 II. The Federal government raises its revenue by indirect taxation, and by duties of customs and excise, though it has the power of imposing direct taxes, and used that power freely during the War of Secession. State revenue, on the other hand, arises almost wholly from direct taxation, since the Federal Constitution forbids the levying of import or export duties by a 1 The Constitutions of Louisiana and Georgia allow State revenue to be applied to the supplying of wooden legs and arms to ex-Confederate soldiers. 2 All or nearly all States have set apart for the support of schools and of other educational or benevolent institutions, sometimes including universities, a considerable fund derived from the sale of Western lands granted for the purpose by the Federal government about twenty-five years ago, and derived in some cases also from lands appropriated originally by the State itself to these objects. 3 In the State of Connecticut (population in 1883 about 650,000) the total revenue raised by taxation in 1883-84 was $8,524,776 (£1,800,000), which was collected by and for the following authorities and purposes : 4 Stamp duties were also resorted to during the Civil War, but at present none are levied by the National government. State, except with the consent of Congress, and directs the produce of any such duties as Congress may permit to be paid into the Federal treasury. The chief tax is in every State a property tax, based on a valuation of property, and generally of all property, real and personal, within the taxing jurisdiction. The valuation is made by officials called appraisers or assessors, appointed by the local communities, though under general State laws. It is their duty to put a value on all taxable property; that is, speaking generally, on all property, real and personal, which they can discover or trace within the area of their authority. As the contribution, to the revenues of the State or county, leviable within that area is proportioned to the amount and value of taxable property situate within it, the local assessors have, equally with the property owners, an obvious motive for valuing on a low scale, for by doing so they relieve their community of part of its burden. The State is accordingly obliged to check and correct them by creating what is called a Board of Equalization, which compares and revises the valuations made by the various local officers, so as to secure that taxable property in each locality is equally and fairly valued, and made thereby to bear its due share of public burdens. Similarly a county has often an equalization board to supervise and adjust the valuations of the towns and cities within its limits.2 However, the existence of such boards by no means overcomes the difficulty of securing a really equal valuation, and the honest town which puts its property at a fair value suffers by paying more than its share. Valuations are generally made at a figure much below the true worth of property. In Connecticut, for instance, the law directs the market price to be the basis, but real estate is valued only at from one-third to two-thirds thereof. Indeed one hears 1 The account in the text does not, of course, claim to be true in all particulars for every State, but only to represent the general usage. 2 See, for a specimen of the provisions for equalization boards, the Constitution of California, Art. xiii. § 9, in the Appendix to this volume. 3 The special commission on taxation in Connecticut in their recent singularly clear and interesting report (1887) observe :-"One great defect in the practical execution of our tax laws consists in inequalities of assessment and valuation. This shows itself especially as between the different towns. . . It is notorious that in few, if any, towns do the assessors value real estate at what they think it is fairly worth. On the contrary, they generally first make this appraisal of its actual value, and then put it in the list at a certain proportion of such appraisal, varying from 333 to 75 per cent. Similar reductions are made in valuing personal property, though with less uniformity, and so perhaps with more injustice' everywhere in America complaints of inequalities arising from the varying scales on which valuers proceed. A still more serious evil is the fact that so large a part of taxable property escapes taxation. Lands and houses cannot be concealed; cattle and furniture can be discovered by a zealous tax officer. But a great part, often far the largest part of a rich man's wealth, consists in what the Americans call "intangible property," notes, bonds, book debts, and Western mortgages.1 At this it is practically impossible to get, except through the declaration of the owner; and though the owner is required to present his declaration of taxable property upon oath, he is apt to omit this kind of property. The Connecticut commissioners report that "the proportion of these intangible securities to other taxable property has steadily declined from year to year. In 1855 it was nearly 10 per cent of the whole, in 1865 about 7 per cent, in 1875 a little over 5 per cent, and in 1885 about 33 per cent. Yet during the generation covered by these statistics the amount of State railroad and municipal bonds, and of Western mortgage loans has very greatly increased, and our citizens have, in every town in the State, invested large sums in them. Why then do so few get into the tax list? The terms of the law are plain, and the penalties for its infringement are probably as stringent as the people will bear. . . . The truth is that no system of tax laws can ever reach directly the great mass of intangible property. It is not to be seen, and its possession, if not voluntarily disclosed, can in most cases be only the subject of conjecture. The people also in a free government are accustomed to reason for themselves as to the justice and validity of the laws, and too apt to give themselves the benefit of the doubt when they have in any way the power to construe it for themselves. Such a power is practically given in the form of oath used in connection with our tax lists, since it refers only to such property of the parties giving them in as is taxable according to (p. 8). "Household furniture above $500 in value constitutes an item of only $9500 in one of our cities, while a neighbouring town of not more than half the population returns $12,900" (p. 16). 1 The difficulty does not arise with stock or shares even when held in a company outside a State, because all States now tax corporations or companies within their jurisdiction, and the principle is generally (though not universally) adopted, that where stocks in a corporation outside the State have been so taxed, they shall not be again taxed in the hand of the holder of the stock, who may reside within the State. State laws and tax assessors can in each State succeed in reaching the property of the corporation itself. their best knowledge, remembrance, or belief. The man who does not believe that a western farm loan or foreign railroad bond (i.e. bond of a company outside the State) ought to be taxed, is too often ready to swear that to the best of his belief it is not liable to taxation. . . As the law stands, it may be a burden on the conscience of many, but it is a burden on the property of few, not because there are few who ought to pay, but because there are few who can be made to pay. Bonds and notes held by an individual are for the most part concealed from the assessors, nor do they in most towns make much effort to ascertain their existence.1 The result is that a few towns, a few estates, and a few persons of a high sense of honesty, bear the entire weight of the tax. Such has been the universal result of similar laws elsewhere." A comparison of the tax lists with the probate records convinced the commissioners that, whereas in 1884 more than a third of the whole personal property assessed in the State of Connecticut escaped taxes, the proportion not reached by taxation was in 1886 much greater; and induced them to recommend that "all the items of intangible property ought to be struck out of the tax list." The probate inventories of the estates of deceased persons, and the last returns made to the tax assessors by those persons, "show, to speak of it mildly, few points of contact." Connecticut is a commonwealth in most respects above the average. In every part of the country one hears exactly the same. The tax returns sent in are rarely truthful; and not only does a very large percentage of property escape its lawful 1 "A person, formerly assessor in one of our leading cities, reported that he had made efforts when in office to get this kind of property into the 'grand list,' and succeeded during his last two years in finding out and adding over $200,000 of it; but he adds, "That may have had something to do with my defeat when election came around.' 2 The West Virginian tax commission, in 1884, says, "At present all taxes from invisible property come from a few conspicuously conscientious citizens, from widows, executors, and from guardians of the insane and infants; in fact, it is a comparatively rare thing to find a shrewd trader who gives in any considerable amount of notes, stocks, or money. The truth is, things have come to such a condition in West Virginia that, as regards paying taxes on this kind of property, it is almost as voluntary and is considered pretty much in the same light as donations to the neighbourhood church or Sunday school."-Quoted by the Connecticut commissioners, who add that the New Hampshire commission of 1878 report that in that State three-fourths of all personal property is not reached by the assessors. Reference may also be made to the Report of the Tax Commission of Baltimore, 1886; and to the supplementary Report of one member of the Maryland Tax |