cerned with the extension of the tax to various exempted classes of income, increases in the rates, and a change in the differentiation plan.

A scale of taxation on personal incomes starting at one per cent on the first $1,000 of taxable income was recommended. This tax was to reach six per cent at amounts in excess of $10,000. The suggested scale was modeled on the Wisconsin income tax rates for individuals, but it advanced slightly more rapidly, and reached its maximum at a point $2,000 below that at which the Wisconsin rate becomes six per cent. The recommended rates should be put in force, in the opinion of the tax commissioner, only if his recommendation for the repeal of the personal property tax was also followed. In that case, the income tax should be apportioned to the counties and local districts. If the repeal of the personal property tax laws of the state should not be carried through, at least farm machinery, tools, wearing apparel, and household furniture should be exempted.

1

The reasons given for the recommended substitution of the income tax for the personal property tax are these: 1 1. Net income is a more accurate measure of ability to pay than the amount of personal property owned. 2. Persons with incomes can be equitably assessed through the income tax, while all persons who own personal property can not be equitably assessed under the personal property tax.

With regard to the revision of the income tax law of North Dakota, the tax commissioner further recommended to the legislature of 1921 that differentiation (that is, the application of different rates to earned and unearned income) should be abolished. Instead, a graduated surtax should be imposed on unearned incomes, in addition to the normal

1 North Dakota Tax Commissioner, Report, 1919 and 1920, p. 41.

tax. In this way one of the fiscal anomalies of the 1919 law (the situation in which the state receives a smaller revenue from certain combinations on earned and unearned income than from incomes wholly earned) would be done away with.

Other recommendations for the improvement of the personal income tax system were as follows:

The repeal of the personal property tax credit.

The inclusion of income from mortgages secured on business transacted in North Dakota.

The inclusion of income from mortgages secured on North Dakota real property and income from North Dakota bank deposits. In this connection the principle repeatedly enunciated by the National Tax Association's committee on a model system of taxation is presented: " Every person domiciled in the state should make a direct personal contribution toward the support of the state if such person has any taxable ability."

The maintenance of the existing exemptions, largely because of the trouble and expense of levying income taxes on small incomes.

The extension of the three per cent tax imposed on the incomes of corporations to all business carried on within the state under whatever form conducted. Otherwise, dividends received from a corporation already taxed on its net income should be exempted from taxation. The double taxation involved in the taxation of dividends becomes objectionable only when all taxpayers are not given the same treatment.

The inclusion in the permitted deductions of all losses actually sustained during the year in transactions entered into for profit.

Since the above recommendations were made the entire

financial program of North Dakota has met serious opposition and the future of the Non-Partisan League's proposals has become very problematical. It is possible that the income tax, since it is not a form of taxation peculiar to North Dakota, may escape in any general upheaval which occurs. At the time of writing, however,1 such questions as those of its particular form have been almost lost sight of. The legislature of 1921 failed to pass any constructive tax legislation. In spite of the fact that the personal income tax in North Dakota is a part of a program the whole course of which is doubtful, and has been handicapped by the unusually serious difficulties which its form brought upon it in the first year of its operation, the tax can still be so changed and adapted that it will form a valuable part of the state revenue system. Through the failures of the first year the tax-yielding capacity of the various classes of income has been shown up very clearly. If more extensive use were made of the federal statistics of income, in the way in which those figures have been used by the special revenue commission of New Mexico, for example, the taxpaying power of the state at various hypothetical income tax rates and the yield of any proposed measure might be foretold with a fair degree of accuracy. A number of wellinformed agencies and individuals are already urging careful and constructive changes in the law. The chief danger seems to be that North Dakota will fail to recognize the very obvious fact that the state is an agricultural state, with few large fortunes and few unearned incomes, even though the tax commissioner's report presents statistical proof that such is the case. If the state's needs are carefully studied the future income tax can be far more effective than the tax of the first year.

1 Early in 1921.

CHAPTER IX

THE INCOME TAX MOVEMENT IN NEW MEXICO

AND ALABAMA

1. The New Mexico income tax

THE state of New Mexico, admitted to the union in 1910, made its first experiment with the taxation of incomes in 1919. In that year the legislature passed an income tax law imposing a graduated tax on the net income of resident individuals and domestic partnerships and corporations and on the income from mines, oil wells and gas wells arising from sources within the state.1 Deductions were permitted for interest on indebtedness, repairs and insurance, taxes, business expenses, losses, bad debts, and income from partnerships and corporations already taxed under the act. The personal exemptions were $1,000 for each single head of a family, $2,000 for each married head of a family, and $200 for each dependent. The rates of taxation were as follows:

Personal property tax receipts were to be accepted as off

1 Laws of New Mexico, 1919, ch. 123.

149]

149

[150 sets against income taxes. The state treasurer was to administer the act, but no special authorization was given for the appointment of income tax deputies or the defining of income tax districts. The taxes paid were assigned to the state treasury for use in connection with the educational and other state institutions.

The bill was apparently drawn hastily, and questions as to its constitutionality were soon brought up. As a result the governor's call to a special legislative session in February, 1920, including among the subjects for consideration an amendment of the income tax law "in such manner as to make the law non-discriminative, and otherwise to make it conformable to the constitutional limitations on that subject, or else to take such other legislative action in regard thereto as to the legislature may appear to be right and proper."

A new income tax bill, substituting a more elaborate income tax, was introduced when the special session met. In general structure the bill followed the lines of the Wisconsin act. It provided for a higher progressive rate (one to five per cent) on all income of residents, both individuals and corporations, and on the income of non-residents "derived from property located or business transacted within the state." The legislature repealed the law already on the statute books, but declined to pass the new bill. Instead it established a special revenue commission and required it

to inquire into and make recommendations as to the policy or necessity of the adoption of appropriate legislation of a system of taxation of incomes and the relation of such a system of taxation to the present system of taxation of property." The latter bill was approved by the governor, but the repeal of the existing tax law was vetoed. As a result

1 New Mexico Special Revenue Commission, Report, 1920, p. 37.