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The Progressive Legislature which convened in January, 1911, found that under the provisions of the Revenue and Taxation Amendment, which had been ratified at the November elections, 1910, the Legislature must pass an administrative act to put the new scheme of collecting the State's revenues into effect.

Very frankly, the members knew nothing about the new scheme, nor had they the training, nor the time, nor the opportunity to study it.

On the other hand, the public service corporations affected had their experts on the ground, men who knew every detail of the new system, who were insistent in urging upon the legislators the course which should be pursued.

One fact, however, soon forced itself upon the harassed legislators, namely, that the amendment contained features, which had they been clearly understood when the measure was before The People, its ratification would have been improbable. But the measure had been ratified. The obligation was upon the Legislature to pass the necessary administrative act.


64 The San Francisco Chronicle was one of the strongest advocates of the ratification of the amendment. Less than four months after its ratification, February 27, 1911, the Chronicle said of it:

That the tax amendment was not understood is shown by the fact that its adoption has been followed by important and unpleasant results which nobody discovered during the discussion, and which if suspected would have defeated the amendment."


Such an act was introduced in the Senate by Curtin, member of the Commission which had worked out the new taxation scheme. The measure was made the basis of the bill that was eventually enacted. After five weeks' consideration by the Senate Committee 65 on Revenue and Taxation, the bill passed the Senate, with Senators very frankly stating they could make little out of it, and did not understand it, but assumed that Senator Curtin did.

The Assembly Committee on Revenue and Taxation amended the measure on 111 counts. The Senate, however, refused to concur in the Assembly amendments. The measure went to a conference committee which failed to agree, and then to a committee on free conference, which arrived at a compromise agreement. Both Houses finally accepted the Free Conference Committee's report blindly.66 Not one in ten of the mem

64a Senate Bill 13, 1911 series.

65 Under the change in the method of levying taxes, the public service corporations affected are relieved of local taxes on their operative property. They are required, however, to pay local taxes on their non-operative holdings. A crowd of lobbyists attended every committee meeting to urge upon the committee the various properties which in the enabling act they would have described as operating. One power company's representative held that in as much as his company was dependent upon a given stream for power, the watershed of that stream was operative property, and therefore not subject to local taxation. A tax expert of the Southern Pacific Company wanted operative property described as "property used in the business of the railroad company. The claim was advanced that any property "used or useful” to the corporations affected was to be classed as operative property. The greatest confusion prevailed. At one meeting, for example, a representative of the Southern Pacific Company proposed $20,000,000 worth of property which he insisted should be classed as operative, thus relieving it of local taxation. The newspapers enthusiastically announced that the railroad man was of tering for taxation $20,000,000 worth of property which had never been taxed before. This was taken as evidence of the satisfactory working of the new scheme of taxation.

86 "The experts or alleged experts," said the San Francisco Ohronicle in its issue of March 20, 1911, "who framed the (Revenue and Taxation) amendment, went immediately at work to prepare an administrative act, and it soon became apparent that


bers could have given a clear statement of what the measure provided, nor what the effects of its passage would be. But the Legislature had at least done what the Constitution required of it; it had passed an administrative act to bring the new provisions for raising State revenue into effect.

But another problem confronted the Legislature. Would, under the new taxation scheme, sufficient revenue be secured for State purposes ? State Controller Nye insisted there would be. Chairman Cutten of the Senate Finance Committee was as insistent that a deficit threatened. The issue between the contending factions finally narrowed down to the question of the amount of revenue that could be raised from the one per cent. ad valorem tax on corporation franchises. The Commission on Revenue and Taxation had first estimated that the State revenue from this source would not, greatly exceed $500,000. In a later report, the commission boosted the amount to nearly $1,000,000. Subsequently, when the 1911 Legislature was wrestling with the problem of revenues, a final estimate of approximately $1,500,000 was made. The State Board of Equalization later assessed such franchises $1,677,745. Of this tax there was, in 1911, actually collected

they did not really themselves know what the amendment which they had framed meant.

“With much labor the bill was finally prepared and introduced, whereupon Senators promptly confessed that they could not make head or tail of the law but would vote as the one Senator who confessed to understanding it told them to vote. And so the bill passed the Senate.

“The Assembly, however, has not the same faith. Its committee undertook to wrestle personally with the problem and, through a sub-committee, has proposed 110 (111) amendments, some of them said to be radical.

"We shall get through it somehow, some time. In a year or two we shall know what we have done, and if in any respect we have erred we can make the necessary amendments."

$1,619,588. This large sum did not come from corporations relieved of local taxation, but from general business firms and other taxpayers who had incorporated and who paid county, municipal and district ad valorem taxes on all their holdings.67 The incident

67 The smaller corporations in addition to paying increased local taxes, because of the withdrawal of the operative properties of the public service corporations from local taxation, forced to pay this large amount for State purposes, protested that the assessment was excessive, arbitrary, and not in accord with the intent of the originators of the new taxation scheme. They also objected to the State Board of Equalization's interpretation of the amendment. This interpretation found expression in the little understood enabling act of 1911, which provided that the term franchise “shall include the actual exercise of the right to be a corporation and to do business as a corporation under the laws of the State.

The smaller corporations insisted further that the wording of the 1910 report of the Commission on Revenue and Taxation, which was used as a campaign document in support of the ratification of the constitutional amendment changing the taxation system, led small business corporations to the general understanding that their franchises were not to be taxed for State purposes.

The method of assessing the franchises was also made subject of strong objection. This objection was set forth by Assemblyman Sutherland in explanation of his Assembly Bill 1198 (1913 series) relating to the Franchise Tax. Mr. Sutherland said:

"The theory under which it is presumed that the franchise to exist as a corporation and to do business as a corporation possesses any value in any case rests upon the assumption that the paper of the corporation possesses more value than the tangible or visible property belonging to the corporation. This is the assumption upon which the Court proceeded in the case of the Bank of California vs. San Francisco. The Court there said:

'It appears from the records in the case that the Supervisors held the difference between the value of the tangible property of the corporation and the aggregate market value of the shares of stock of the corporation, to be the value of the franchise' (142 Cal., at page 286.

“The decision that the Assessor had acted properly was based upon the determination that the paper of the corporation was worth more than the tangible property of the corporation. The State Board of Equalization in ascertaining and determining the value of the franchise 'to be and to do' has departed from the rule laid down in the Bank of California case. The Board instead of taking ne difference between the actual value of the tangible property belonging to the corporation, subtracts the assessed value as determined by the local Assessors in the counties wherein the property of the corporation lies. It is obvious that in those cases (which is nearly always the rule) where the Assessors have assessed the value of the tangible property of the corporation lower than its actual value, there enters into the result a large element of tangible value, that is to say, in attempting to determine the value of that “intangible thing," called the franchise, the Board has taken into consideration the value of a large part of the tangible property belonging to the corporation. The result of the method employed by the State Board of Equalization is

shattered the theory generally current throughout California that under the new taxation system the corporations relieved of county, municipal and district taxes on their operative properties were to provide all the State

that private business corporations of the State have paid more than is their just share of the burden of taxation, more than any other class of taxpayers, and, moreover, the taxes among the corporations themselves have been levied unequally and unfairly.

"Private business corporations of the State pay the following taxes: (1) incorporation fees for the privilege of receiving a charter from the State; (2) a license fee for the privilege of existing as a corporation; (3) a local tax upon all of their tangible property as assessed by the County Assessor of the county in which the property is situated. This tax is the same as that paid by all other classes of tax payers in the county; (4) after the private business corporation gets through paying these three taxes it is again levied upon by the State Board of Equalization for a franchise tax. Unequal taxes has been the result. The person, or group of persons, carrying on business through the agency of a corporation, in addition to the taxes paid for the right to exist and to do business as a corporation, is compelled to pay a greater tax upon the physical property of the corporation than is paid upon property of the same nature and value owned by private individuals. The following is an illustration:

“Suppose two pieces of real estate, each having an actual value of $100,000, are located side by side in the same county. The first is owned by an individual. Under the constitutional tax provisions and the laws of the State, the individual pays only a local tax and is relieved from all State taxation. His property is usually assessed by the County Assessor, according to the last report of the State Board of Equalization, at 45% of its actual value, or $45,000. Upon this $45,000 he pays a local tax, and here his burden of taxation stops. The second piece of property is owned by a corporation which has already paid the State an incorporation tax and an annual license tax. This property is likewise assessed by the County Assessor at 45% of its actual value, or $45,000. Upon this valuation of $ 45,000 the corporation pays the same local tax the individual. The

corporation, however, is not through paying taxes. The State Board of Equalization then demands a payment of a tax upon its franchise. In those cases where the stock has no market value the Board of Equalization assesses a franchise tax to this corporation by deducting from the actual value of all the property owned by the corporation, the assessed value as determined by the County Assessor, and upon the remainder, or $55,000 levies a franchise tax. This is done usually by dividing the $55,000 by four, and assessing a tax of 1% upon the result, $13,750. In such a case the individual pays a tax upon an assessed valuation of $45,000 and the corporation pays a tax upon an assessed valuation of $58,750.

"It is_obvious that the use of the assessed value is entirely wrong. Every mistake made by a local Assessor is perpetrated by the State Board and carried forward into the administration of the State tax system. The use of the assessed value is a mistake for another reason. Some Assessors fix the value at 25% of the real value of the property, but in such cases the tax rate is invariably higher than in those counties where the assessed value is nearer to the real value of the property. And in those


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