valuations subject to local general property taxes was $272.4 billion, distributed as follows:

No statistics were included to show the amount of railroad property assessed by local communities; however, it is safe to assume that the total is much below 50 percent since, as noted previously, 36 States centrally assess railroad operating property for general taxation purposes. Noteworthy is the fact that of $22.5 billion assessed by State agencies, $6.5 billion, or almost 30 percent, is for assessment of railroads alone. Also remarkable is the fact that of the property subject to general property taxation 91.8 percent is locally assessed. After consideration of tax revenues from all other sources, local jurisdictions in the United States obtain approximately 87 percent of their current tax revenues from the tax on general property.

To determine the amount of ad valorem property taxes paid in 1957 by class I line-haul railroads which was chargeable solely to roadway and track properties, a special questionnaire was prepared under the auspices of the study group and the Association of American Railroads and circulated to all such railroads for completion. One hundred percent of the class I railroads of the United States replied to the questionnaire.

To assure uniformity in reporting, instructions included: (1) Tax year (taxes levied for the year 1957 and chargeable to railway tax accrual (ICC account 532) regardless of when paid); (2) taxes covered (ad valorem taxes on operating property or taxes in lieu thereof (whether so stated by statute or so interpreted) or taxes determined by applying ad valorem rates); (3) procedures to determine taxes applicable to roadway were prescribed for States where assessments and taxes were separately determined for roadway property and for States where unit value assessment is employed or a separation is not made in the assessment.

The total amount of ad valorem taxes paid by the class I line-haul railroads in the Unitd States in 1957 on roadway and track properties was $182,698,670, broken down by States as follows:

Ad valorem, or equivalent taxes, levied for the year 1957 on class I line-haul railroads in the United States

Source: Reports of railroads to the Association of American Railroads.

The general objective of the study was to develop the facts regarding the extent to which railroad roadway or right-of-way properties were subjected to taxes that had no counterpart in taxes paid by other carriers other than pipelines. As we have seen the latest Interstate Commerce Commission valuation of all railroad operating land rightsof-way property was $1,959,387,000. Subtracting the value of operating land not used for right-of-way reduces this total value by such amount. Thus the actual tax bill for class I line-haul railroads in 1957 for roadway properties was something more than 9.3 percent of the assessed value of those properties. This compares with the normal maximum of 3 or 4 percent for the general property tax rate for other similarly taxed property.

No comparable study was made for pipeline right-of-way property taxes, however, the 1959 issue of "Transport Statistics in the United States, Part 6-Oil Pipe Lines," prepared by the Interstate Commerce Commission, indicates (table 7) that the pipeline investment in rightof-way property for gathering lines was $6,858,069 and $46,808,890 for trunklines, for a total of $53,666,959. The Board of Investigation and Research in its report on carrier taxation in 1944 found the average tax rate for pipelines to be 2.27 for ad valorem taxes on all tangible property. Taking a rough average of 3-percent tax rate, the ad valorem property taxes paid by pipelines on right-of-way property

in 1959 was in the neighborhood of one and a half million dollars. It is appreciated that, relatively speaking, ad valorem property taxes on pipeline right-of-way is not burdensome, however, it has been grouped with consideration of right-of-way taxes on railroads, which are unduly burdensome, because the chief objective in the final recommendation for national legislation to exempt this property from taxation is to equalize opportunity for all competing transportation carriers.

In recent years the property tax has been important as a source of revenue in the United States only at the local level of government. With a few exceptions it is insignificant today in the fiscal operations of States. In 1956, local revenues totaled $26.3 billion. Of this amount, $19.4 billion came from local sources; $6.9 billion from other governments, mainly from the States. Property tax receipts were $11.3 billion. This total was 87 percent of local tax revenue and 70 percent of the local general revenue.

The property tax as a source of revenue is still highly significant in our national tax structure chiefly because of the dependence of local governments on this tax, but its significance is declining steadily. Until recent years the property tax was the leading producer of revenue but today it runs a poor second to the income tax.

The property tax, which has deep historical roots, was rationalized in earlier times on the premise that the ownership of land and other property was a reasonably satisfactory measure of ability to pay taxes. The commercial and industrial revolutions changed this since land no longer was always the best measure of the taxpayer's ability to pay a tax. Another complaint on the taxation of property with respect to ability to pay is that taxes on income-producing property are levied at proportional rates, which are seldom determined by capitalizing property income, rather than on progressive rates on assessed values.

Criticism of the property tax has developed, as well, on the benefitsreceived principle. This acknowledges that property owners are beneficiaries of many direct public services financed by levies on property, such as police and fire protection, street maintenance and the like, and consequently are responsible to pay taxes in relation to those benefits received.

The limitations to this principle, however, are that benefits are largely subjective and difficult to measure accurately since benefits which arise from public spending of property tax receipts are not restricted to owners of property, but tend to be widely diffused; and, some property taxes are likely to be shifted, which may cause the direct monetary burdens of this payment to fall on non-property-owners. At best, the benefits-received principle can be employed to provide no more than a partial justification of taxes on property.

Probably, the most severe criticism of the property tax in present day commercial life is the fact that the tax is not related directly to income and therefore is regressive in effect.

The case against the property tax then, generally, is that it tends to function rigidly with little built-in flexibility. With 100,000 local units collecting over $11 billion from the property tax in accordance with varying assessment and collection practices, little opportunity exists for adaptions of revenue receipts to cyclical changes in economy.

Alterations in assessed values or property are likely to be made only infrequently even though market values are subject to rapid fluctuations. Effect on tax rates tend, therefore, to rise in depression and to fall in prosperity.

With all its faults the question is rightly asked why the property tax is still prominent in our tax structure. The answer is that, so far, there is no wholly adequate substitute by which to produce equivalent local revenues. Intergovernmental revenues from the States and from local nonproperty tax revenues serve today as substantial additions to revenue from local property taxes, as with school districts which were the recipients of almost one-half of the funds distributed to local jurisdictions by the States. These intergovernmental revenues could-with appropriate emphasis at State level to change applicable tax laws and policies be that substitute which will hasten the obsolescence of the general property tax. In any event, there is much to support the position that ad valorem property taxes on interstate carriers, particularly on their private rights-of-way should be relieved on two grounds: (1) that such taxes are discriminatory as between taxpayers in the same jurisdiction; and (2) that they result in unfair competitive advantage to those carriers not so taxed.

E. RECOMMENDATIONS

1. A Federal law to exempt railroad and pipeline right-of-way property from State taxation

The first major tax measure, capable of practical fulfillment, recommended for congressional action to equalize competitive opportunities for our Nation's transportation carriers, is legislation to exempt the right-of-way of railroads and pipelines from ad valorem property taxation by the States.

The exemption contemplated is the conventional exemption, sometimes granted in the early building era of the railroads, of land within a defined right-of-way of these carriers. Ownership or responsibility for maintenance of this property is not intended to be changed. Terminal areas, in the case of railroads to be defined by appropriate legislation, is not to be included within the exemtpion, principally because of the commercial value of the property apart from its use for the operation of the railroad.

The exemption is recommended to take effect gradually over a period of 10 years to permit State and local governments to adjust to the tax loss. Mechanics to do this might include use of the Interstate Commerce Commission's elements of value for a base year, as for example, 1960, to fix values of the right-of-way. Each succeeding year the value of that property would be construed to be reduced 10 percent, until at the end of the 10-year period the right-of-way land value would be construed to have no value for ad valorem or "in lieu" tax purposes. Acquisitions of new right-of-way property would be immediately exempt. The sale of right-of-way property would not affect the exemption schedule.

It is not considered that Government purchase and ownership of right-of-way of railroad and pipeline property is in the public interest despite the apparent equality of making all highways of commerce public way. Railroads and pipelines require exclusive use of way, as

contrasted with water, air, and road way, which have multipurpose traffic, therefore, no good case is apparent for public expenditure for purchase and maintenance of this private way due to the restricted use to which it would be put. Conversely, good reason exists why this private way should remain under the management control of the users of this way. Due to the nature of operations of railroads and pipelines, particularly with respect to movement of traffic along fixed way it would be seriously disruptive of operational efficiency if this way were to be made public in the full sense.

The impact of this proposed exemption on local tax revenues is not unappreciated. As has been indicated, taxes chargeable to roadway and track properties for class I railroads in 1957 totaled $182,698,670, and about $12 million for pipeline right-of-way property. This would be the sum of tax revenue "lost" by local governments, which in these days of scraping the bottom of the barrel for tax base would be troublesome. However, receipts from local property taxes in the same period totaled $11.3 billion so that the right-of-way property tax receipts represent about 12 percent of the local tax revenues from property sources only. In addition, since local revenues from all sources totaled $26.3 billion ($6.9 billion from intergovernmental revenue) the percentage of revenue relied on by local governments from taxation of right-of-way is about 0.7 of 1 percent.

It is not suggested that even this small fraction be completely absorbed by local communities. Reliance should be placed on intergovernmental revenues from the State to equalize burdens.

There is good precedent for this in the action of the State of New York in April 1959 where, among other tax relief measures for railroads in the State, it froze all railroad real property taxes at the then current levels and introduced a system of taxation involving exemptions to railroads with inadequate earning power. For those localities suffering consequent loss of revenue, State aid will be provided in the amount of 50 percent of the loss of tax revenue.

Earlier than this, under New York State's redevelopment corporation law in 1954, the Long Island Railroad was relieved of all State taxes and the city of New York and the counties of Nassau and Suffolk reduced their real estate tax collections by 50 percent.

Exemption of right-of-way property, albeit part of a larger exemption, has current authority as well as antecedents in the past. As has been indicated earlier, the States of Maine, Connecticut, Pennsylvania, and Minnesota presently exempt railroads from property taxation in favor of some form of gross earnings tax, which to these States, represents a more practicable and equitable system of taxation of railroad property. Significant to our concern for loss of local tax revenue should right-of-way property be tax exempt in all States, however, is that in these four States local units of government do not have railroad valuations as a portion of their ad valorem base therefore, no general demand exists for the sharing of the gross earnings revenues which go to the general revenue fund of the State. In certain cases where the proportion of railroad property to the total within a local unit is very large the legislatures have provided special aids to schools and municipalities.

It is this fiscal relation between State and local governments that is favored upon adoption of national legislation to exempt right-ofway property of railroads and pipeline carriers.