These classes of securities were difficult to procure except by paying a high price, more particularly since the law, as it then stood, practically rendered it necessary to buy bonds through brokers. The new law, by authorizing the State Board of Examiners to bid direct, without depositing a certified check, has enabled the making of first-hand purchases, while at the same time the field of investment has been enlarged.

The effect is noticeable in a closer investment of school funds and also in a somewhat higher average rate of interest on the bonds purchased. On June 30, 1903, there was $1,262,574.64 in the State School Land Fund awaiting investment, and a year later this had been reduced to $792,128.98. By further purchases this had been cut down to approximately $495,000 on December 1, 1904, and when certain investments now in view are made, practically all available funds will be invested and drawing interest.

On the bonds bought between the years 1899 and 1902 the average rate of interest was 4.45 per cent, but the premiums paid reduced the net income to the State to 3.58. For 1903-01 the average rate of interest on the bonds purchased has been 4.107 per cent, and the net income has been 4.07 per cent, showing how closely the new law enables the State to buy. The income from these bonds is used for the support of the public schools, and the fund now amounts in round numbers to $5,000,000.

An Analysis of State Expenditures.—I am indebted to the State Controller for a valuable statistical compilation which shows at a glance how the disbursements on account of the State government are divided between the main branches of expenditure. Classified under eleven heads, the expenditures are given both by aggregates and by percentages: Expenditures-Fifty-fourth Fiscal Year.

Per Capita Cost of Inmates of Institutions.-In the following table there is shown the per capita cost of maintenance of inmates of a number of State institutions for last year, as nearly as can be ascertained:

With regard to this table it ought to be said that any inference drawn from a comparison of different classes of institutions with respect to relative cost of maintenance is likely to be erroneous, because the objects aimed at and the conditions under which

the institutions are conducted are so different. The only comparisons which properly can be made are between institutions of the same class in this State or between those of this State and those of other States, and even then other factors besides economy of management enter into the result. Usually the per capita rate of expense of maintenance diminishes as the number of inmates increases, because the cost of administration is relatively less in a large hospital or prison.

In general it may be said that our public institutions are as economically conducted as those of other leading States. The per capita cost for the four State prisons of New York is 41.2 cents per day, as compared with an average of 37.6 cents for the two California prisons. The State of New York, which has 25,000 insane persons in its hospitals, maintains these institutions at an average per capita cost of 44.3 cents per day, as compared with an average cost for California hospitals of 42.7. The State Home for Feeble-Minded Children in Syracuse, New York, reports a per capita cost of 49 cents daily, which is almost exactly the same as that of the institution at Eldridge.

The per capita expense of maintenance at Folsom Prison is ordinarily about 35 cents per day; during the earlier part of the fiscal year 1903-04 the number of prisoners had run down to less than 700, which raised the per capita cost above the ordinary; since then there has been a large increase in the prison population. Moreover, some of the extraordinary expenditures caused by the break of July 27, 1903, have been included in figuring out the per capita expense for last year.

CUSTODY OF STATE FUNDS.

The State of California pursues a policy different from that of a majority of the States by keeping public funds in its own vaults, thereby locking up a large amount of money, instead of making deposits in the banks. By following the deposit plan the money is permitted to circulate in the channels of trade until needed to meet claims against the treasury. The drain of money at certain periods of the year, when State, County, and City governments are all collecting taxes, is a heavy one; and it has long been a cause of complaint in California that, at these times, business is embarrassed by the large reduction in the circulating medium.

It was a step in the right direction when the law was passed, some years ago, making State and County taxes payable in two installments instead of one, because this reduced the amount of money locked up at any one time; but it would be an additional benefit to the business community if the greater part of the funds belonging to the State could at all times be kept in the channels of trade. The payment of taxes may be a hardship upon property-owners under the most favorable circumstances, but it becomes a needlessly grievous burden when it is made the means of locking up so much of the money which is the life of trade.

But this is not the only way in which the hoarding of funds is expensive to the State, since the money represents so much earning power lost; it could be, and should be, made to turn into the treasury annually quite a large sum collected as interest. The balance in the State Treasury, in ordinary years, ranges from $2,500,000 to $7,000,000, and for the last five years has averaged $4,000,000. The ordinary interest rate on daily balances paid by the banks is two per cent, and on $4,000,000 this would amount to $80,000 a year-enough to sustain one of the State institutions, or to reduce the annual tax rate nearly two thirds of a cent. If the money can be loaned safely, and this interest earned, it shows poor business judgment to go on sacrificing so large a sum.

As has been said before, California is one of a small number of States which keep their money in their own vaults. Of the forty-eight States and Territories, according to recent statistics, thirty-nine pursue the policy of depositing their funds in bank, with such precautions for safety as they think will insure them against loss. The history of the State deposit system shows that it has always been safe when proper security has been required by law. Banks receiving State funds should be compelled to deposit in the treasury securities-preferably United States, State, County, or Municipal bondssufficient in amount to guarantee the State against the possibility of loss.

Opinions of State Treasurers.-Several Treasurers of this State have pointed out the unwisdom of the hoarding policy. Hon. W. S. Greene, in his report for 1898, said: “I feel that I would not be doing my whole duty if I did not call attention to the fact that California is still following the method of collecting money semi-annually from the people and storing it up like old junk, when the object, and only object, of money is circulation. ** Upon thorough consideration and investigation, I am of the opinion that a system of State and County depositories ought to be established."

Hon. J. R. McDonald, who was Treasurer from 1891 to 1895, said in one of his reports: "I have never been able to see the necessity or propriety of the State having two or three million dollars piled up in her vaults year after year, without any benefit to the State and positive detriment to the people."

The present Treasurer, Hon. Truman Reeves, entertains the same views, and, referring to the deposit plan, he writes: "I am in favor of the idea, provided a law is framed whereby the funds can be safeguarded so as to eliminate the absolute possibility of loss to the State, and, if possible, to keep the office of State Treasurer out of politics."

In view of these opinions, and bearing in mind that such great States as New York, Pennsylvania, and Massachusetts have pursued the deposit plan for many years, receiving large sums for interest, and losing nothing even when banks have failed, it appears that we ought, as soon as it can be done, to substitute for our present practice

one more consonant with business thrift and judgment. If this can be done by statute merely, it is a simple matter; if a constitutional amendment shall be held to be necessary, the object to be attained is worth the trouble it will cost.

OUR SYSTEM OF TAXATION.

In my inaugural address, two years ago, I expressed the belief that the time was near at hand when the people of California should consider the question whether they ought not to introduce radical changes in their revenue and taxation laws, especially in relation to the raising of revenue for State purposes. The main reasons for this belief were the escape from taxation of large amounts of personal property and the difficulties which will always exist in securing under the present arrangement a fair assessment and a just equalization between the counties. The further opinion was expressed that the object aimed at ought to be the eventual separation of State and County taxation, giving to each of these political divisions its own subjects of taxation and its own assessment machinery.

During the past two years nothing has occurred to change the belief then expressed; but much has occurred to confirm it. There has been considerable popular discussion of the proposal that a new State revenue system is needed, and the tone of this discussion has been uniformly favorable. At the same time the movement in other States, to which also I referred in my former message, has continued to be away from the employment of the ad valorem, or general property, tax as the basis of all State revenue collections, and toward the development of different systems in different States, according to their several opportunities and needs.

California Tax History.-This revenue question is no new one in California, nor is this the first time that the demand for an improved system has been heard. A short review of the history of State taxation will be interesting, and may help us to a better knowledge of our needs.

In the very earliest days of our State its revenues were derived largely from merchandise and other licenses, but the general property tax was soon put in operation, and for a good many years gave general satisfaction. Personal property, for a time, constituted nearly one half of all the property assessed, and therefore it was not complained that this form of wealth was escaping its due share of taxation. The Legislature assumed the right to exempt from taxation certain kinds of property, such as churches, hospitals, the property of widows and orphans, growing crops, and mining claims; but when danger arose from the extent of the exemptions, the Supreme Court came forward and declared them all to be unconstitutional.

But in time a serious evil arose from the inequalities of taxation as between the various counties, which there was then no means of controlling. In the poorer counties the assessments were kept high, because only so could enough taxes be raised to pay the expenses of county government, and as the same assessments were the basis for State taxation, those counties contributed more than their just share to the State Treasury, while the wealthier counties were able to keep their assessments low and to escape their due proportion of general taxation. It was asserted that in some counties the assessed values were 80 per cent of the true values and in other counties no more than 20 to 30 per cent. As Governor Pacheco told the Legislature, "While the fundamental law demanded a revenue system of rigorous exactitude and uniform justice, there had developed one of false values and gross inequalities."

To remedy this evil the Legislature, by statute, in 1870, created a State Board of Equalization, for the purpose of equalizing assessments as between the counties. But it was not until the Political Code, in 1872, established the State Board on a supposedly firm foundation that it was able to show what it could do, and then the results were almost startling, for in one year the total assessment of property rose from $269,000,000 to $636,000,000, or more than 135 per cent. But the Supreme Court took the view that the Board of Equalization could not constitutionally exercise the powers it claimed, and at once the assessment roll began to fall off.

The Constitutional Convention.-But before this there had begun to issue from the Supreme Court a series of decisions, based upon the uniformity and equality clause of the old Constitution, which held that the taxation of bonds, notes, credits, and other evidences of debt, when the property on which they rested, or by which they were secured, was also taxed, was double taxation; and this created dissatisfaction, because it was claimed the wealthy were escaping taxation. Finally, in 1873, the Court, in a sweeping decision, held the mortgage tax to be unconstitutional.

That decision was, in effect, the cause of the calling of a convention to frame a new constitution; since, although the convention was not held until 1878-79, the dissatisfaction had been growing steadily from the date of the mortgage-tax decision. The advocates of a new plan of taxation were able to point to the fact that, although the State was growing wealthier, the assessment of personal property had ceased to increase and was diminishing, both relatively and absolutely. From $220,000,000 in 1872 it had declined to $118,000,000 in 1878, and from constituting 40 per cent of the total assessment, as it did in 1869, it had, in 1878, become only 20 per cent. This was one of the evidences that a great deal of property was escaping taxation.

As the revenue question was the one which was principally responsible for the calling of the Constitutional Convention, so it was the one which in that body was discussed longest and with greatest energy. The utmost determination was shown to

adopt a plan of taxation which should reach all species of property and make every class of people bear its proper share of the burden of taxation. The State Board of Equalization was made constitutional, and the mortgage tax problem was solved by treating the mortgage as an interest in the property and allowing a proportionate deduction from the assessment on the latter.

In the old Constitution the subject of revenue and taxation had been disposed of in one section of five lines; but in the new Constitution a whole article, embracing thirteen sections, was devoted to it.

The Subjects of Taxation. The gist of the old Constitution with reference to taxation was contained in these two sentences, said to have been taken from the first Constitution of Texas: "Taxation shall be equal and uniform throughout the State. All property in this State shall be taxed in proportion to its value, to be ascertained as directed by law."

Some of the warmest debates of the Convention of 1879 took place over the question whether the "equal and uniform" provision should go into the new Constitution, upon which some of the ablest members insisted. But it was upon that provision that the unpopular decisions of the Supreme Court had rested, and a majority of the delegates voted to exclude the words from the new instrument.

The provision that all property shall be taxed in proportion to its value was retained, but with it was included a definition of "property " which was meant to be so thoroughgoing that nothing should thereafter escape from the tax-gatherer. It was declared that, for purposes of taxation, property should "include moneys, credits, bonds, stocks, dues, franchises, and all other matters and things, real, personal, and mixed, capable of private ownership," the only exceptions being growing crops and public property.

It was further provided that all property should be assessed in the political subdivision where situated, save and except railroads operated in more than one county, which were to be assessed for both State and County purposes by the State Board of Equalization. It had already been recognized by the lawmakers of Illinois and Missouri that a great railroad could not be properly assessed piecemeal, and their plan of assessment of such property by a State board was followed by our Constitution-makers.

Test of the New Law.-It was the expectation of the framers of the new Constitution as we have seen, that a great deal of property would be taxed which theretofore had escaped. One of the leaders remarked: "We have said that all property should be taxed in proportion to its value. In addition to that we say that property which has heretofore been held not to be property shall, for purposes of taxation, be deemed property and subject to taxation. That covers the ground."

This boast was not justified by results, and the effect of the new Constitution in the direction of increasing assessments was, after the first year, very disappointing. In 1879, the last year of the old Constitution, the assessment roll amounted to $549,000,000, and in 1880, the first year of the new, it rose to $666,000,000, and the proportion of personal property increased from 20 per cent of the whole to 26 per cent. But the next two years the aggregate of the roll declined, and the proportion which the personal property-the kind of property which it was the special aim of the makers of the new Constitution to reach-bears to the whole commenced to diminish from that time forth. From 26.18 per cent it went down as low as 13.56 per cent, and is now practically stationary at 15 per cent. So that, despite the Draconian rigor of the definition given to property in the first section of the article on taxation in our present Constitution, the tax-gatherers find not more of personal property than before, but even relatively less, and absolutely less most of the time. For the aggregate of personal property assessed never afterwards went as high as it was in 1874-when it was $210,000,000-until 1903, when it was $269,000,000. In 1904 it was $239,000,000.

In the equalization of assessments as between counties, also, the new Constitution did not prove to be a perfect success. The Supreme Court stripped the Board of Equalization of some of the power which it had been supposed it possessed and which it attempted to exercise. It can raise or lower the county rolls only as a whole and can not distinguish between different classes of property, although one may have been assessed too high and another too low. Yet the total assessed value of property in the State has continued to increase slowly with the growth in population and wealth, but real estate and improvements bear 85 per cent of the burden. The total assessed value of money and solvent credits is only $42,000,000, which represents, of course, but a small portion of the true amount of this kind of property in the State.

Amendments to the Constitution.-Since 1880 the Constitution has been often amended, but most of the amendments of the article upon taxation have been in the direction of exemption. Fruit trees and grapevines of a certain age, household goods of the value of a hundred dollars, church buildings, the property of several educational and scientific institutions, and State and Municipal bonds have been relieved of tax burdens. But while all of these amendments taking property off the assessment roll have been adopted, there have been no amendments to put any on, nor has any change been introduced in the Constitution which would make the system more elastic or give the Legislature greater power over the subject-matter. This is the most serious fault of the Constitution in so far as it relates to taxation; the system was finished when the Constitution was adopted; it has not been capable of growth. In other States the Legistures improve the plan of taxation from time to time as experience suggests changes; their revenue laws, as they stand, have been a gradual evolution. But in California no changes of importance can be made because of conflict with the constitutional scheme.

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In the convention which framed this Constitution there were a minority of men who foresaw that a scheme of taxation so rigid as this would not be permanently satisfactory, and they argued in favor of vesting considerable discretion in the Legislature. One of those who took this view was the eminent lawyer, Samuel M. Wilson, one of the master minds of the convention, although in this instance his counsel was not followed. Mr. Wilson on one occasion, said:

"Government is a complex piece of machinery, and runs only at great expense. The true question, then, is this: What is the best system of taxation for the support of the government? In every State in the Union, with the exception of the instances mentioned by the gentlemen here, the matter of taxation is left to legislative discretion, with only certain broad principles on the subject laid down in the Constitution. In some few States the Constitution fixes the objects and subjects of taxation, and makes it mandatory upon the Legislature. In most cases it is left to the Legislature to select the objects and subjects on which taxes should be levied consistent with the general principles of equality and uniformity-the tax being upon property and not upon persons. The Legislature should have this discretionary power. My individual opinion is that the Constitution should only prescribe that all real estate and all tangible property shall be taxed, and that such taxation shall be according to value, and that the Legislature should have, beyond that, the power and discretion of imposing any other tax that it might see fit, except a capitation tax. Then the Legislature, in its discretion, could enact a stamp tax, a tax upon incomes, or a tax upon anything else, according to the necessities of the State at the time. That would be justice to all, and would leave it more elastic-in a better condition and more in accordance with the general principles prevailing in all of the States of the Union."

And Mr. Wilson added another valuable suggestion when he said: “It is not necessary to equal and uniform taxation that it should be universal."

It is worthy of note that the States in which the revenue laws are to-day in the most satisfactory shape are those in which there have been the fewest constitutional restrictions upon the power of the Legislature, nor does there appear to be any serious complaint that this power has been used to discriminate unfairly against any class of taxpayers. Experience and reason alike justify the belief that legislative control over the method of levying taxes would no more be taken advantage of to oppress or to destroy than are the large powers in other directions which the Legislature possesses. No Legislature could afford, as a matter of mere political expediency, to do injustice to such a large class of persons, or important business interests, as it would do by adopting an unjust tax law. It is a striking fact that it is in the States such as New York, Pennsylvania, New Jersey, and Ohio, in which the business interests are strongest, that the most advanced methods of taxing corporations have been adopted, and after business has had a little time to adjust itself to these new forms of taxation, they excite no great opposition.

Other State Revenue Systems.-The States which have effected a complete, or almost complete, separation of their State and local revenue systems are New York, Pennsylvania, New Jersey, Connecticut, and Delaware. These five States are able to dispense with a general property tax for State purposes because they have obtained in other ways sufficient revenue to meet their needs. This they have not accomplished at a single stroke, but usually by successive additions to their laws. It is about twenty years ago that the first step was taken in New York, although the greater number of the new features have been added recently. Pennsylvania, which has not taxed real estate and improvements for State purposes for many years, has been still longer in developing her plan of taxation. New York's constitution contains nothing requiring that taxation shall be uniform, or equal, or in proportion to the value of the property assessed, while the Pennsylvania constitution contents itself with saying that taxation shall be uniform upon the same classes of subjects and shall be levied by general laws.

These States, however, are only a few of those which have made notable progress in the same direction. Ohio has recently adopted a corporation tax law which has made it possible to reduce the rate of the general property tax one half. Minnesota has reduced the same tax to 10 cents on $100. Wisconsin has come so near to eliminating the ad valorem tax that only a small part of her revenue is raised by it, and the rate is 15 cents on the $100. Massachusetts raises half, or more than half, of her revenue by indirect taxes. Maine is working along similar lines. Maryland raises only a third of her revenue by ad valorem taxes, and West Virginia but one fourth. The old State of Virginia has recently adopted a new revenue law which embodies a number of modern ideas. Tennessee secures from other sources than the general property tax considerably more than half of her revenue, and Missouri has made such progress that her last State tax rate was only 15 cents on $100. Michigan is making progress in the same general direction. One of the latest States to remodel its revenue laws with gratifying results is Colorado.

Amendments to the Constitution.-Since comparatively little can be done under the present Constitution to change the revenue laws, or to provide new sources of revenue, it follows that it is not necessary to decide at this time precisely what laws ought to be enacted. In a few ways-one of which I will mention a little later-some additional revenue may be provided. But any new system must wait upon constitutional changes. The essential thing, then, will be to propose the necessary constitutional amendments, the object of which shall be to give the Legislature some discretion to deal with the subject of State taxation. It should have authority to continue the general property