PART VII

ADDITIONAL SPECIFIC MATTERS

CHAPTER 1. TAXATION OF WAY

A. STATE TAXATION OF INTERSTATE COMMERCE

The commerce clause in the Constitution provides that Congress shall regulate commerce between the States. Especially with respect to State taxation of interstate commerce, the Congress has not done this, leaving the role of maker of policy to the Supreme Court. The Court, unaided by objectives and standards from the Congress, has followed alternative and, at times, inconsistent doctrines in determining the proper relationship in our Federal system between the national interest in unfettered commerce and the States' need for revenue. The case-by-case decisional process is an inadequate means to establish policy on interstate commerce objectives and Congress must assert leadership in this by appropriate national legislation.

Historians and jurists generally agree that of all the provisions of the Constitution the commerce clause and the interpretation of it, perhaps more than any other contributing element, have united to bind the several States into a Nation.

The ability to interpret the commerce clause as it applies-or does not apply to State tax laws affecting interstate commerce depends, in direct measure, on the objectives and standards established to regulate commerce between the States that are made available to the deliberative body.

The commerce clause in article 1, section 8 of the Constitution is the basic guide for the Supreme Court in its deliberations on respective rights in State taxation of interstate commerce. It provides merely that the Congress shall regulate commerce between the States. The argument still rages on the meaning to be given this clause, ranging from exclusive power in the National Government to regulate interstate commerce, through concurrent power with the States, to the power of the States to regulate commerce, as of right, in the absence of the Congress "occupying the field."

The 14th amendment, added to the Constitution in later years, gave additional basic guidance to the Court in meeting its obligation to judge permissible burdens on interstate commerce imposed by State tax laws. This was the restraint, under the due process limitation, upon the power of the State to tax extraterritorial values. Due process is concerned, therefore, with whether the tax in practical operation has

relation to opportunities, benefits, or protection conferred or afforded by the taxing State.

Only these two provisions of the Constitution have given basic guidance to the Court on the extent to which the States may tax interstate commerce. The Congress not only has not "occupied the field," it has virtually not acted at all in filling in the standards and objectives contemplated when the power to regulate State taxation of interstate commerce was given to it.

The first clearly definable judgment on the meaning of the commerce clause was given by Chief Justice Marshall in the celebrated case of McCulloch v. Maryland, in 1819, where he held that the Congress had exclusive power to regulate interstate commerce. His dicta that the "power to tax is the power to destroy," known to most every schoolboy, still lives on even though the decision as to the nature of the power of the commerce clause has long since died.

That principle, which has been put through the political and judicial wringer, for well over a hundred years, concerning burdens on interstate commerce, stands as an unassailable truism even today. However, the difficulty is not with acceptance of the principle but with determining which of the two sovereigns in our Federal system— the State or Federal Government-shall have the power to tax commerce, or whether they both shall have that power, and if so, in what proportion, or, once having decided the base of the power the degree to which it may be permitted to burden commerce.

It is no exaggeration to say that the problems raised by these questions, which plagued our courts and legislatures in our formative years as a nation, are no nearer final solution today. The same questions are asked and the same exploration is made as to appropriate relations between the several governments which compete for revenue and the national interest in unfettered commerce among the States. Regularly, the tax revenue laws of the States are subjected to the same test for validity that other such laws have in the past, namely, whether those laws can withstand the constitutional limitations of the commerce and due process clauses.

The answer on where the balance is struck between the conflicting demands of States for revenue and of the Nation for an economy not unreasonably hampered by State action is given, of course, by the Supreme Court of the United States.

The "final answer" however, is only for that tax, by that Court, and under existing conditions. Different decisions are issued on closely parallel taxes, or with change in composition of the Court or with cyclical changes in the economy.

Aside from certain principles developed and accepted by which to judge gross departures from constitutional requirements, there seems to be no reasonable certainty as to the vitality of a State tax affecting interstate commerce. However, in the absence of legislative standards, the Court has developed and modified various doctrines concerning State taxation of interstate commerce to provide what cement it could in this troublesome area.

The decision of the Supreme Court in 1819 that Congress had "exclusive power" to regulate interstate commerce was only the first of a long line of decisions on the nature of the power of the Congress and the States to regulate taxation of interstate commerce. Labels given to other tests employed by the Court to determine permissible limits of State taxation of interstate commerce include the taxable event test, the concurrent power test, the will of Congress test, the multiple burden test, the substantial effects test, the direct-indirect burden test, the pragmatic test, and modifications and combinations of these tests. Whether the Court has been the appropriate agency of Government to provide the guidance required, in view of the constitutional requirement that Congress shall regulate commerce between the States, is a subject long debated by authorities on the Constitution. Appropriateness notwithstanding, however, the fact is that the Court rather than the Congress has been the principal maker of policy in this field. Southern Pacific Co. v. Arizona ex rel. Sullivan (325 U.S. 761, 769 (1945)), in the majority opinion on this point, Chief Justice Stone said:

In

For a hundred years it has been accepted constitutional doctrine that the commerce clause, without the aid of congressional legislation, thus affords some protection from State legislations inimical to the national commerce, and that in such cases, where Congress has not acted, this Court, and not the State legislature, is under the commerce clause the final arbiter of the competing demands of State and National interests ***. Congress has undoubted power to redefine the distribution of power over interstate commerce. It may either permit the States to regulate the commerce in a manner which would otherwise not be permissible or exclude State regulation even of matters of peculiarly local concern which nevertheless affect interstate commerce

More important than the question whether the Court is the appropriate agency to make policy, however, is whether the policy guidance provided by the decisional process alone is adequate to the needs. An examination of the doctrines developed by the Court in its case decisions, over the years (see App. A hereto), makes it plain that something more than guidance by case decision is necessary to cope with the increasingly complex relations between State and Federal Governments. The deficiency should be filled by the Congress by adoption of legislative standards.

The case, it is hoped, having been made for Congress to exert leadership by setting policy on the regulation and taxation of interstate commerce, the momentous question is how to do this. It is obvious that this is no small chore. The urgency of the need for action, however, outweighs the difficulty in its execution.

This committee, which has responsibility only for matters concerning national transportation policies, does not presume to have the full answer. Other industries are equally affected by State tax policies on interstate commerce and accordingly other committees of Congress must judge what kind of legislative action is necessary before a comprehensive law or compatible series of laws is enacted to attain the balance desired between State need for tax revenue and unfettered national commerce.

There are some general ideas that come to mind, however, to attain this balance which may be worthy of consideration or which may set into motion other ideas on how this objective can be realized. In addition, there is one specific proposal in the field of transportation that would, if adopted, mark a significant first step in assumption of leadership by Congress so earnestly recommended.

As to general ideas, more than by any other tax, the tax that more closely measures ability to pay is the income tax. If by legislation the Congress were to set standards to identify business deemed to be interstate in character, a graduated income tax, based on gross revenues, could be exacted from such businesses, to be collected by and for the use of the States in lieu of all other taxes now imposed by the States on those businesses. Apportionment of tax revenues among the States would be made in accordance with a formula prescribed by national legislation, much like the procedures used for interstate carriers to allocate system value to the States. Or, the formula devised by the National Conference of Commissioners on Uniform Division of Income for Tax Purposes Act could be used, which provides for allocating and apportioning business income of a taxpayer taxable both within and without the State.

Protest and appeal could be to an administrative agency established for the purpose, or to the courts, depending on the specificity of the standards prescribed.

The reasons to commend this general plan are its relative simplicity, the practical ability to realize revenue by adjustment of rate of tax, and most important of all its essentially nondiscriminatory elements. Another general idea, short of the one just proposed, has been suggested by Professor Hartman ("State Taxation of Interstate Commerce" (1953)) wherein, by legislation, Congress could declare permissive limits to State taxation by means of authorization and prohibition of various State taxes. He suggests two alternative forms of action to implement this plan: (a) broad legislation (Sherman Act type) with detailed enforcement of the act left to the courts; and (b) a detailed act (Interstate Commerce Act or a code type).

The specific proposal in the field of transportation which could set a pattern for congressional leadership in the regulation of State taxation of interstate commerce is one which would relieve a burdensome inequality between interstate carriers, which cannot, practically, be relieved by State action. It is relief from the ad valorem property tax on the right-of-way of railroads and pipelines, which has no counterpart for competing carriers, which use way provided and maintained at Government expense.

The substance of the ensuing report is an identification of the ad valorem property tax on the right-of-way of railroads and pipelines as a direct and unique tax burden on these carriers; a description of the procedures used by States in ad valorem property taxation of carriers; an analysis of these procedures to demonstrate that discrimination results between these carriers and their competition not only by virtue of the uniqueness of the tax on right-of-way but between these carriers and other property holders in the same jurisdiction by virtue of outmoded assessing procedures; and a recommendation for remedial legislation by Congress.

B. RIGHT-OF-WAY PROPERTY TAX UNIQUE TAX BURDEN

The major taxes levied by government on transportation include the corporate income, capital stock, sales and excise and payroll taxes at the Federal level and, in addition to these, earnings, franchise and ad valorem property taxes at the State and local level. Studies show that railroads and oil pipelines are more heavily taxed than motor, air or water carriers in major part because State and local property taxes on rights-of-way are not exacted from the other carriers. Accordingly, the ad valorem right-of-way property tax has been selected for special study because of the direct and unique tax burden on rail and pipelines resulting therefrom. Of the major taxes imposed on regulated interstate common carriers by Federal, State and local governments the ad valorem property tax on the right-of-way of railroads and pipelines is unique with these carriers. Although there are differences in the rate of taxation or subject matter covered on a particular type of tax, as, for instance, excise or payroll taxes, these differences more or less balance off and do not qualify the conclusion that right-of-way taxes are unique tax burdens on railroads and pipelines.

At the Federal level all regulated interstate carriers are subject to corporate income, capital stock, sales and payroll taxes. At the State and local level, with differences adapted to individual needs, such carriers are subject to capital stock (including franchise taxes) gross earnings, net income, highway user, sales and use and payroll taxes. In addition, all State or local governments impose ad valorem property taxes on these carriers, unlike the Federal Government which is virtually prohibited by the Constitution from levying a tax on property.

In 1944 the Board of Investigation and Research in transmitting a "Report on Carrier Taxation" concluded after an exhaustive study of relative tax burdens on truck, air, bus, pipeline, water and railroad carriers, that oil pipelines and railroads were more heavily taxed in 1940 than the intercity truck lines, air lines and water carriers. This relative overtaxation was largely traceable, the Board said, to "the failure of the States and their political subdivisions to exact property taxes from other carrier groups commensurate with those exacted from the railroads".

Notwithstanding the time removed from the B.I.R. report on this relative tax discrimination as between modes, there is no reason to believe that the conclusions reached in 1944 do not obtain now. No comparable study of relative tax burdens on the various modes of transportation has been uncovered, but examination of the kinds and degree of taxes currently imposed reveals that the property tax on right-of-way of railroads and pipelines still stands as a unique and burdensome tax on these carriers which keeps them in a relatively tax discriminated status.

Total consideration of the relative tax burden of each carrier requires a summary review of user charges since it is apparent that usercharges on Government provided way can be raised to the point where the burden thereby resulting can equal the burden of direct taxation