mier vind monicas vert taxed at difæon, 22.8 di 200°N stened manghies. These Desola Isles 200 8000 in odavand part the premios J-18e; taxes on mangide pears, amaa # the exemption did not any te bank stare Thee onako 40 d taxed at jocal Toy MX Bates inn. 1928 whon na,zons. Asnix marr given ibe opad of the star is of a nei moore (stataisaWWY In Delaware bank states were taxed at a fal rate of 3 of 7 ponvar raine. In New York, where personal proven gyorsly had Now હા એ exempted. back shares were taxed at 1 percent. The

differentiation caused in taxing national banks have been descriİNNİ In North Dakota, bank shares were assessed at 30 percent after de ducting the assessed value of bank real estate. Other intangiblow wor taxable at 3 mills on their assessed values In Massachus Missouri, North Carolina, Oklahoma, and Wisconsin banks were subjected to the same taxation as real estate," These diferences taxation of incomes in one way and banks in another caused hinga tion in which the taxes of several States were declared unconstitutional by the Supreme Court.22

In 1922 State income taxes produced revenues totaling $69,447,000 The yield in the several States is shown in table 11 Distributions to governmental units within States also are indicated.

16 See Leland, op. cit., pp. 225ff.

17 E.R.A. Seligman, The Income Tax, New York, Macmillan, Ad ed, rex, pp 408 14

18 Kimmel, op. cit., p. 47.

19 See supra, p. 202 in this appendix. Bank faxes were invalidated by People patel Hank

National

Bank v. Goldfogle, 234 N. Y. 345, 137 N.E. 611 (1922), the U. Aupreme Court retient to the the rap, 261 U.S. 620 (1923).

20 Bank tax declared invalid. Eddy v. First National Bank of Fargo, 278 UA AND dos Or Webch up cit., p. 37.

21 Report of the Committee on the Taxation of the Shares of National Banka, Pranalluge of the Flatha ! Tax Association, 1922, pp. 344 46.

22 The bank share taxes in Wisconsin from 1921 20 were held vold in that National Bank of 11. Wisconsin v. City of Hartford, 273 U.S. 548 (1927) Cf Welch, op elf, pp an ga

Source: U.S. Bureau of the Census, "Wealth, Debt, and Taxation, 1922, Taxes Collected," pp. 146-47.

5. Impact on Section 5219.-The foregoing account is only a sketchy portrayal of the public revenue system of the period. Numerous taxes and related sources of revenue have not even been mentioned, but enough has been said to provide a basis for judging whether the State revenue pattern of the early 1920s had any impact on the 1923 amendment to section 5219.

Since real estate taxation was common to every State the provision in 1923, and again in 1926, repeated word for word the provision originating in 1864. Bank real estate was, and is, taxed "as other real estate is taxed."

The share tax option in the 1923 amendment was changed in the hope that low rates of taxation on individually-owned intangibles would not invalidate taxes on national banks.23 In the Richmond case "other moneyed capital in the hands of individual citizens" taxed at substantially lower rates than national bank stock had made void the taxes on national banks in Virginia.24 Fears that other low-rate taxes might be similarly affected brought pressure from States for amendment of section 5219. In the writer's opinion, the effective force that induced Congress to act was a concern that States might suffer serious revenue losses and be compelled to refund taxes, rather than direct congressional interest in encouraging States to adopt and retain classified property taxes. Perhaps this is a distinction without a real difference. In any event, pressures from State officials were countered by bank organizations and attorneys who sought to yield as little as possible in descriptive words and phrases that would permit differential taxation of individual investments without invalidating taxes on national banks. The amendment of 1923, according to a subsequent 23 Congress intended to preserve classification: cf. Woosley, op. cit., pp. 55ff; Welch, op. cit., p. 43. 24 Discussed above at pp. 195-202 in this appendix.

decision, effected no substantive change the decision in the Richmond case was simply written into the statute.25

The success of States that used classified property taxes, both in according greater justice to taxpayers and in providing substantially greater revenues from intangibles (although not enough to help solve emerging fiscal problems), was noted in the congressional discussions, but this had little to do with the 1923 amendment.

The income tax option incorporated into the 1923 amendment was in recognition of the fact that several States, following the lead of Wisconsin, had become interested in adopting, so far as they could constitutionally, personal and corporate income taxes. The property tax was falling further into disrepute and was unable to reach directly the taxable capacity of many citizens. Individual income taxes were favored on the ability-to-pay principle; corporate income taxes alienated few voters. Both types of taxes had won substantial support. They combined much justice with high revenue potentials.

Little was said about the income tax option on the floors of Congress during consideration of the amendments. The share tax held the center of the stage. Nor was much said about income taxes in the 1923 hearings. They came to attention in debates on the 1926 amendment. However, the committee bill provided for the income tax option and it took hold even without much express support from the States. The amendment did recognize what was going on in a growing number of important States.

The limiting provision in the case of a net income tax applied to national banking associations-that they shall not be taxed "higher than the rate assessed upon other financial corporations nor higher than the highest of the rates assessed by the taxing State upon the net income of mercantile, manufacturing, and business corporations doing business within its limits"-corresponded with what States were attempting to do. They were trying to develop net income taxes applicable to corporations generally. Extension of net income taxes to banks would mean also as later results demonstrated-that taxes based on net income were less than share taxes for national banks. There was no reason for banks to oppose this option or to slow the development of either personal taxes (which included bank dividends in the taxable income of shareholders) or corporate net income taxation.

Unfortunately, the permission to include dividends in individual taxable income was vague, unsatisfactory, and unworkable. The amendment of 1923 provided that "In case dividends derived from the said shares are taxed, the tax shall not be at a greater rate than is assessed upon net income from other moneyed capital." This is about as unclear as the share tax proviso from which it was drawn. The consent that Congress may have tried to extend in granting the dividend option was cut back by this proviso. It remained for the 1926 amendment to clear this up.

25 First National Bank of Guthrie Center v. Anderson, 269 U.S. 341 (1926), reviewed above at pp. 216-17 in this appendix. The 1923 proviso which State officials hoped would overcome the Richmond decision read: "Provided, that bonds, notes, or other evidences of indebtedness in the hands of individual citizens not employed or engaged in the banking or investment business and representing merely personal investments not made in competitition with such business shall not be deemed moneyed capital within the meaning of shis section." For complete text of 1923 amendment, see appendix I-C, above, p. 4.

Nevertheless, it is believed that the income tax option in the 1923 amendment of section 5219 was a response to the growing use of such taxes by the States.

6. Impact of State practices on 1926 amendment.-What impact, if any, did State tax practices have on the form or substance of the 1926 amendment? That amendment, as has been indicated,26 added a fourth option-a tax according to or measured by net income-under which States could tax national banks. In the three years between the 1923 and 1926 amendments, New Hampshire shifted from the general property tax method to a special-rate tax (1923), South Dakota adopted a low-rate tax (1923), and Kansas did likewise (1925). Kentucky adopted a special rate in 1924, and Vermont in 1925.

Massachusetts pioneered in 1925 by adopting a privilege tax measured by net income, including income from Federal securities.27 This was the first time the privilege tax idea had been applied to national banks since the indirect method of reaching income from tax-exempt securities had been upheld in a case that involved the use of a tax base "measured by" net income from all sources under the Federal corporate income tax act of 1909.28

In 1926, New York adopted an income tax. The limited productivity of the direct net income tax, which could not reach income from tax-exempt securities, caused it to have little appeal to New York State officials. They much preferred to stick to the higher-yield share taxes which they thought could be continued under the 1923 amendment. However, New York wanted to expand the income approach applying the Massachusetts tactic, so under pressure from these two States and with leadership from them, an agreed amendment to section 5219 was adopted in 1926.29 Other States sought to clarify the share tax provision in the 1923 amendment but were unable to overcome opposition from the national banks and their representatives.30 The excise tax option which was adopted constituted a farreaching and attractive alternative for the States; also, it was a cheaper one than the share tax for the banks.

Even though the 1926 amendment was an agreed proposal sponsored by committees from the National Tax Association and the American Bankers Association, it is believed that its form was influenced by the law in Massachusetts and the income tax plans of New York. Again State tax programs had influenced the authorizations in section

5219.

D. State taxes in 1968-1969

In the fifty years following 1920, tremendous changes took place not only in the finances of governments and their functions but in the national economy and in the lives of citizens. Five major changes in the revenue systems of State and local governments are clear: (1) the introduction and expansion of sales and consumption taxation;

(2) the extension and development of income taxes; (3) the increased reliance on intergovernmental revenue transfers; (4) the assumption of new functions or their financing (mainly public assistance and other relief measures) by State and Federal Governments; and (5) relegation of the property tax by States to local governments, followed by deterioration of this tax as the primary source of revenue in urban areas. The first two changes directly affected State taxation of banks; at least two of the others affected the size of bank tax burdens. All these changes are part and parcel of the increased burdens of taxation on everyone, a development characteristic of the last 50 years.

The background out of which these changes came is worth noting. The short post-war depression of 1920 was followed by a feverish period of speculation and prosperity. The productive capacity so important in World War I was again turned on for production of civilian goods and services. The nation was no longer primarily agricultural in its endeavors; it had become one of the industrial giants of the world. High production and profits helped feed the speculation of the late 1920s. In 1926, the Florida real-estate-speculation bubble burst, followed soon by the stock market collapse of 1929 and the depression of the 1930s. Bankruptcy, unemployment, and misery necessitated relief, welfare, public works (P.W.A.), works projects (W.P.A.), Reconstruction Finance Corporation, and other Federal programs, and finally brought about the Federal-State public assistance and Federal social security programs. Aid to the poor and the indigent, which had been almost exclusively a county or township function, had to be taken over by States with support and guidance from the Federal Government. Vast highway programs also were undertaken to stimulate business and provide employment, as well as to meet current needs of automotive travel. A new and higher level of intergovernmental transfer payments was the result.

Hardly had these steps been taken or economic recovery begun, when World War II engulfed the nation. Armed conflict followed armed conflict into the Korean War and the Viet Nam engagement. Once it was "guns or butter," then followed an attempt to have both. Rising costs, inflation, and social discontent ensued. Governmental deficits to provide increased purchasing power during the 1930 depression were followed by deficits during war and postwar readjustments. The immense productivity of Federal income taxes led all levels of government to look to Washington for financial assistance in an ever-widening array of projects.