revenues.68 The important receipts additional to the taxes on gross incomes paid by companies relieved of local taxes in large measure relieved the situation.

cases where the assessed value is higher the tax rate is low. Illustrative of this, let us take the following examples:

"Example A. Suppose a corporation owns $100,000 worth of tangible property in County A. In that county the assessed value is only 25% of the real value, or $25,000. In this county, however, the tax rate is 3%. The corporation therefore pays a tax of $750.

"Example B. The same corporation owns $100,000 worth of property in County B. The assessed value is 75% of the real value, or $75,000. By reason of the high assessed value, the tax rate in this county is only 1%. The corporation therefore pays in this county the same amount of tax as in County A, or $750.00. "These two cases show the utter absurdity of the method adopted by the Board when it uses the assessed instead of the actual value for the purpose of determining the franchise value of the corporations. In the case of 'Example A,' the Board would subtract $25,000 from the value of the stock of the corporation and would levy a tax upon the remainder, or $75,000. In 'Example B' the assessed value, or $75,000, would be subtracted_and the franchise tax would be levied upon the result, $25,000. This, in spite of the fact that the corporation pays identically the same amount of tax in both counties."

At the 1913 session, two measures were introduced bearing upon the taxing of franchises for State purposes: Assembly Bill 1198 (Sutherland) and Senate Bill 1088 (Thompson).

In many particulars the two measures were practically the same. The Sutherland bill differed from the Thompson bill, however, in that it prescribed a special method of determining the value of franchises thus assessed, and bound the Board of Equalization in making the assessments to the rule laid down in the Bank of California case.

Of this feature of his bill, Assemblyman Sutherland in his explanation of the measure said:

"This law simply lays down the rule in the Bank of California case and would compel the State Board of Equalization to subtract the actual instead of the assessed value from the value of the paper of the corporation. This rule is in accord with common sense and reason, and if adopted by the Board would result in ascertaining the intangible value of the right to exist and to do business as a corporation. The element of tangible value would not enter into the calculation at all and there could be no opportunity for mistake. This method is the one which the Board claims to follow and there could be no valid objection on their part to making it compulsory. See Special Report on Taxation, Showing First Effects of Separation, dated December 1, 1911, at bottom page 6 thereof."

Both measures passed the Legislature. Governor Johnson signed the Thompson bill. He did not sign the Sutherland bill.

68 For the source of this theory see footnote 63, page 68. As a matter of fact the private franchise tax is not the only source of State revenues other than that paid by those public service corporations and other concerns which are entirely relieved of county, municipal and district taxes. For the fiscal year 1911-12

But another important fact went far toward preventing the deficit which Senator Cutten two years. before had predicted. The 1911 Legislature had been economical. Its appropriations had been held down to the minimum.

With the extraordinary development of the State during the last ten years expenses of State government, have naturally increased. The increase of the appropriations made at the session of 1903 over those of the session of 1901 was, for example, 18.42 per cent.; of 1905 over 1903, 32.53 per cent.; of 1907 over 1905, 13.90 per cent.; of 1909 over 1907, 18.12 per cent.

In the ordinary course, the increase of the 1911 appropriations over those of 1909 would have been approximately 20 per cent. As a matter of fact, the increase was kept down to 8.28 per cent.

To make this possible the 1911 Legislature was obliged to reduce every appropriation to the minimum. That closer economy could be practiced by the 1913 Legislature was out of the question. The 1913 Legis

69

the State received from poll taxes, $843,603.69; from inheritance taxes, $1,083,243.87; from corporation licenses, $802,012.50; from general property tax (delinquencies, etc.), $197,145.77; from insurance brokerage tax, $3,377.98. The greater the income that can be secured from such independent sources, the less the necessity of increasing the rates of those corporations which in lieu of paying State taxes are, under the new revenue system, relieved of all local taxes. At the 1911 session, a measure was introduced (Senate Bill 1020) placing a State license of $200 a year on wholesale liquor establishments; $150 a year on saloons employing more than four bartenders; $100 a year on saloons employing not more than four bartenders. The measure was again introduced at the 1913 session. Had this bill become a law the State would have derived enormous income from the saloons. This saloonfurnished revenue would have further removed the companies taxed exclusively for State purposes from danger of having their rates increased.

69 Governor Johnson in his biennial message to the 1913 Legislature (January 6, 1913), touched upon this point. "During the past two years," he said, "the percentage of increase in our public institutions has been infinitely greater than during any

lature found itself confronted with the problem, which could no longer be put off, of securing sufficient revenue under the new system of taxation for the requirements of the State government.

other biennial period. For instance, the increase in the number of insane in our hospitals was over 15 per cent.; the increase in the number of pupils in our normal schools was over 30 per cent.; and with these increases so great in percentage, the State has been maintained and its various departments operated with an increase of but 8.28 per cent. in appropriations. Economy has probably been stretched to the limit in the past two years in the management of our public institutions, as these figures demonstrate. To attempt economy beyond this will mean that sort of parsimoniousness that can only result disastrously."

CHAPTER VI.

1913 REVENUE AND TAXATION MEASURE.

Governor Johnson in his biennial message to the 1913 Legislature called attention to three facts which had become apparent to all in touch with the State revenue situation:

1. That the new tax system would not provide, for the years 1913 and 1914, the revenue essential for the maintenance of the State government.

2. That small corporations were paying a greater proportion of the taxes than they should and larger corporations were paying a smaller proportion of the taxes than they should.

3. That the small householder proportionately was paying a greater amount of taxes than the great public service corporations.70

The State Board of Equalization published a special

70 "I call your attention," said the Governor, "to the report of Controller Nye in which he estimates the excess of expenditures for the fiscal year ending June 30, 1913, at $630,000, and the deficit for the fiscal year ending June 30, 1914, to be $1,101,000. These estimates, in my opinion, are much less than the true amounts will be found to be for the periods mentioned. They are made with a confidence in the future revenue-producing possibilities of the new method of taxation possessed now by but few; and they are based upon estimates of the necessary expenses of the State which are far below what those necessary expenses should be. It is possible that, as in 1911, this Legislature may keep the appropriations of the State at an extremely low figure, even as low as the Controller estimates those expenditures in his report, but to maintain the expenditures at such an amount will probably be done at the expense of the progress and advancement of the State, and to the detriment of those the duty of caring for whom devolves upon the State.'

report a few days later on the Relative Burden of State and Local Taxes in 1912.71

This report bore out Governor Johnson's contentions. It set forth that under the new system, the average rates of taxes paid by the several groups on each $100 of actual value of their property 72 to be:

71 Copies of this special report can be had by addressing the State Board of Equalization or the State Controller at Sacramento.

72 The value of the property of the corporations was ascertained by the "stock and bond" method. This consists in ascertaining the prices at which the shares of stock and the outstanding bonds of a given company are selling for, and multiplying the number of shares and bonds outstanding by the price per share or per bond.

By this method the following results were obtained:

To get at the actual value of property of general taxpayers upon which local taxes are paid, the Board endeavored to ascertain the true market value of property in all parts of the State. This value was approximated:

(1) By making direct appraisements in thirty of the fifty-eight counties of the State.

(2) In addition, the Board availed itself of the following additional sources of information:

(a) Information concerning the sales and appraisements of property made by the courts in probate proceedings.

(b) The appraisements made under the direction of the courts and by appraisers selected by the State Controller for the purpose of fixing the State inheritance tax.

(c) The appraisements of property which had been made in many of the counties for the State Insurance Commissioner of the property upon which the insurance companies wished to make loans.

(d) The information upon relative values and the many points involved accumulated by the Board in its past work of equalizing and assessing taxes on property.

Twenty-six counties in which appraisements were made and in which the appraisals were deemed fair, aggregated $2,113,867,583 in assessed values, out of a total assessment in the State of $2,475,746,905, or 85 per cent. of the total. The appraisements in these particular counties showed an assessment of 45.2 per cent. of actual value. The ratio of all the counties considered was 45.1 per cent. The total of the county assessment rolls for 1912 was $2,475,746,905. The true value of the property assessed as estimated by this method was $5,490,934,141. The taxes collected from the general tax papers of California (county, municipal, district and Pan