In many of the less advanced states of the union the great majority of incomes within the state are earned by residents of the state; that is to say, there are comparatively few non-residents who sojourn for a protracted period within the state. And, on the other hand, most of the residents of the state secure all or a very large part of their revenue from property situated or business conducted within the state. In New York, however, the situation is very different. In the first place, New York City, as the great metropolitan center, attracts people from all over the country. Not only do they swarm to New York for weeks or months at a time, but a large number of wealthy individuals, who still retain their legal residence in other states, erect princely mansions in New York and live there most of the year. On the other hand, New York is the financial center of the country: we know that more than one-third of the individual income tax of the entire country is paid in New York. This means that the wealthy residents of New York own a large part of the property of the nation and that the incomes received in New York are to a considerable extent received from sources outside the state. Finally, New York as the industrial center of the country is crowded with hundreds of thousands of members of the professional classes and of wage-earners who get their living in the city but who commute to the suburbs. Northern New Jersey and, to a less extent, southwestern Connecticut, are nothing but suburbs of New York.

Thus from both points of view the question of double taxation, i. e., the taxation of non-residents on income received within the state and of residents on incomes received without the state, assumes in New York a significance which in practice far transcends that in any other part of the country.

In working out the plan which was finally adopted in New York, namely, that of the taxation of non-residents on income derived from sources within the state of New York and the taxation of residents on all income, these facts were carefully taken into consideration. It was plain that the taxation of incomes from within the state only, while practicable in a debtor state like Wisconsin, would mean the exclusion of the high proportion of income re

ceived by residents of New York from outside the state. The revenue that New York would receive from its taxpayers would be insignificant compared with the expenditures which it would be called upon to incur because of their presence in the state. The second possibility, that of allowing exemption from taxation to non-residents, would mean that New Yorkers, working side by side with New Jerseyites, would be subject to taxation and the New Jerseyities would go free. The third possible solution, that of taxing residents on total income and non-residents on income derived within the state seemed to the framers of the law the least of the three evils. Injustice to nonresidents who were or became subject to personal income taxes was guarded against by a provision suggested by Professor Seligman, by which credit was allowed for income taxes paid in other states provided the other jurisdiction granted similar credits.1 It was held that this solution of the problem marked an advance in the development of state income taxes, in line with that of the United States and of other important countries. The New York law went one step ahead by allowing credit for taxes paid to other jurisdictions. The sections of the law allowing to resident taxpayers personal exemptions of $1,000 and $2,000 was framed on the assumption that neighboring states would soon adopt income tax laws.

Shortly after the passage of the law the fight against it was begun by non-residents. The litigation was begun by the Yale and Towne Manufacturing Company, a Connecticut corporation doing business in New York, which contended that the provision requiring it to pay to the state of New York a portion of the salaries of its employees who were non-residents of the state of New York was uncon

1 E. R. A. Seligman, "The New York Income Tax," Political Science Quarterly, vol. xxxiv, no. 4 (Dec. 1919), pp. 536, 537.

stitutional and inconsistent with the "due process of law" clause of the Fourteenth Amendment. Eventually all allegations but one were disregarded, and the litigation revolved around the question as to whether the New York law was unconstitutional in depriving non-residents of the $1,000 and $2,000 exemptions allowed to unmarried and married residents of New York. The case was eventually carried to the Supreme Court of the United States. On March 1, 1920, that court upheld the right of the states to tax the incomes of non-residents, but held unconstitutional as discriminatory the provision of the New York law which denied the personal exemptions of $1,000 and $2,000 to non-residents while granting such exemptions to residents.1 Justice Pitney, in delivering the opinion, declared the law discriminatory in the following terms:

In the concrete the particular incident of the discrimination is upon citizens of Connecticut and New Jersey, neither of which has an income tax law. Whether they must pay a tax upon the first $1,000 to $2,000 of income, while their [New York] associates do not, makes a substantial difference. We are unable to find ground for the discrimination, and are constrained to hold that it is an unwarranted denial to the citizens of Connecticut and New Jersey of the privileges and immunities enjoyed by the citizens of New York.

The suggestion made by the counsel for New York that the states affected might make counter discriminations against residents of New York was dismissed with the declaration that "discrimination cannot be cured by retaliation."

The adverse decision was anticipated by the New York officials, and an amendment was at once introduced in the legislature granting non-residents the same exemptions as

1 Eugene M. Travis, Comptroller, v. The Yale & Towne Mfg. Co., U. S. Supreme Court, March 1, 1920.

those previously granted to residents.1 In the same legislative session the deductions allowed to non-residents were made to correspond with those allowed to residents. The New York law is now safeguarded from further attacks along this line, but the taxation of non-residents is still a source of active dissatisfaction in the "commuting" class.

3. The revenue from the tax

The proceeds of the tax on personal incomes were counted upon to make good the deficit in the state's revenues which would otherwise have resulted from the enforcement of prohibition, and at the same time to supplement the revenues of the state and the localities from other sources. The tax has fulfilled the expectations of its proponents in this respect. The rates as finally adopted, reaching a maximum of three per cent on amounts above $50,000, were expected to produce a tax yield of $45,000,000. The yield of the tax for the first year, approximately $37,000,000, was below the most optimisic of the estimates made at the time of the passage of the act, but it exceeded by many millions any sum ever produced by the personal income tax in any other state, and was regarded as a satisfactory yield by the state officials. More than $22,000,000 was received from New York City alone. In all, nearly 600,000 residents of the state paid taxes on their incomes, and more than 25,000 non-residents paid in

come taxes.

In accordance with the legal requirement, one-half of the proceeds of the income tax were distributed to the various counties of the state. More than $18.250,000 was

1 Laws of New York, 1920, ch. 191.

Laws of New York, 1920, ch. 693.

3 Bulletin of the National Tax Association, vol. v, no. 8 (May, 1919), p. 204.

distributed in this way, according to the valuation of real property. New York City's share was $12,469,255. In this instance New York City profited by its 100 per cent valuation of real property, and the taxpayers who were accustomed to protest against their heavy assessments were to some extent recompensed by the receipts from the new source of revenue.

An analysis of the federal income tax returns for New York shows that the receipts from the New York state income tax for the year 1919 were about 10 per cent of the personal income taxes collected by the federal government in New York in the preceding year.1 New York is by far the richest state in the union, and is counted upon by the federal government to furnish about one-third of the total yield of the country's personal income tax. The net incomes upon which the taxes are paid in New York formed only about one-sixth of the total net incomes for the whole country, however. A comparison of these two ratios indicates that a number of very large incomes must be received in New York state, and that the very high graduated rates of the federal scheme produce a disproportionately high tax yield when applied to these extremely large incomes. An income tax with low rates and a slight degree of progression, like the state income tax, is not expected to produce such amounts. The state tax, which is applied at the uniform rate of three per cent to all amounts of income above $50,000, hardly taps the funds reached by the high federal tax. New York ranks behind Wisconsin and Massachusetts in the ratio of state income tax receipts to federal income tax receipts, but an attempt to gain larger amounts from the New York state tax is regarded by tax experts as inadvisable on almost every count.

New

1 United States Internal Revenue, Statistics of Income for 1918, p. 24.