Rate limitation and the general property tax in Ohio

Preface

The provisions made for the administration of the general property tax in Ohio have resulted in substantial injustice to some of the citizens of the state and in general dissatisfaction among all of them. If this paper brings to any man a better understanding of the difficulties involved in the proper administration of the tax laws and assists in pointing out a way toward the fairer distribution of the tax burdens of the state its preparation will not have been amiss.

The facts presented in the second chapter concerning the actual practice in the administration of the general property tax were gathered through personal interviews and correspondence with county auditors in all parts of the state. Other material which is presented was obtained ill conversations with tax authorities and state officials. Acknowledgement should be made for the assistance afforded the author by the following men : Auditor Bittinger of Ashland County, Auditor Young of Delaware County, Auditor Valentine of Franklin County, Attorney Crist of Delaware, Mr. Edge of the Legislative Reference Bureau, Mr. Forney and Mr. Horn of the State Tax Commission, Mr. Dyer of the Ohio Tax Association, Mr. Laylin of the Attorney General's office, who kindly loaned his manuscript on The Ohio Tax Situation, Mr. Swiggert of the Department of Public Instruction, Auditor Zangerly of Cuyahoga County and Hon. Vic Donahey, former auditor of the state. Special acknowledgement must be made to Prof. Henry F. Walradt of The Ohio State University, who read and criticized completed manuscript, and to Miss Florence Chapman of Ashland, Ohio, who assisted in its revision.

C. W.

Delaware, Ohio, May 3, 1922.

Table Of Contents

Chapter Page I. Introduction

Section 1 — The Place of the General Property Tax in the American Tax System 7

2 — The Scientific Estimate of the General Property

Tax 7

3 — The Importance of the General Property Tax in the

Ohio Tax System 8

4 — The Increasing Cost of Government in Ohio 11

II. Administration of the General Property Tax in Ohio

Section 1 — Constitutional Provisions 15

2 — Property Subject 15

3 — Determination of the Base 16

Part A — Law as to Assessment 16

Part B — Practice as to Assessment 18

4 — Fixation of the Rate 22

Part A — Law as to Levy 22

Part B— Practice in Levy 23

5 — Collection 25

III. Tax Limitation

Section 1— Origin of the Smith Law 26

2 — Existing Undervaluation in Ohio 30

Part A — Real Estate 30

Part B — Personal Property 31

(1) Tangibles 32

(2) Intangibles 35

3 — The Effects of Undervaluation 36

4 — History of the Smith Law 39

5— Effects of the Smith Law 47

Part A — Limitation on Local Activities 47

Part B — Pillaging of Sinking Funds 49

Part C — Increased Indebtedness 50

IV — Remedies

Section 1 — The Present Situation in Ohio 55

2 — Assessment Procedure 55

3 — The Taxation of Intangibles 56

4 — The Taxation of Incomes 59

5 — Rate Limitation 61

6 — Debt Limitation 62

7— Local Budgets 62

ILLUSTRATIVE TABLES

Table Page I, — Diminishing Importance of the Property Tax as a Source of

State Revenue 9

II. — Sources of State Revenue in 1921 10

III. — Increasing Cost of Government Activities in Ohio 11

IV. — Increasing Cost of City Activities in Ohio 12

V. — Increasing Cost of School Activities in Ohio 12

VI.— The State Property Tax Levy in 1921 23

VII.— Total Property Tax Levies in 1921 24

VIII. — Percentage Distribution of Tax Revenues Among Political

Units in 1921 25

IX. — Percentage of Taxes Paid by Personal Property in Large

and Small Counties, 1920 31

X.— Return of Live Stock for Taxation in Ohio, 1920 33

XI. — Money on Deposit in Ohio, 1920 36

XII. — Changes Made In the Text of the Original Smith Law 39

XIII. — Some Ohio Tax Levies and the Rate Limits to Which They

Are Subject 42

XIV. — Average Tax Rate in Ohio, 1910-1921 46

XV.— Tax Rates in Ohio in 1921 46

XVI. — Excess of the Amount Asked to be Levied Over the Amount

Allowed by the Budget Commissions in Seventy Counties 48

XVII. — The Increase in Public Debts 52

XVIII,— New Debts Created vs. Old Debts Paid, 1920 52

XIX. — The Percentage of the Ohio Tax Dollar Used for Sinking

Fund and Interest Purposes 52

RATE LIMITATION AND THE GENERAL PROPERTY TAX IN OHIO

CHAPTER I— INTRODUCTION Section I — The Place of the General Property Tax in the

American Tax System The use of the total amount of the possessions of an individual as the base for taxation originated in purely agricultural communities where it was not unsuited to prevailing economic conditions. It was the first attempt made to secure an equitable distribution of tax burdens, and at one time its use was well nigh universal. With the development of industry and commerce, this general property tax ceased to comply with the requirements of justice. It became, in effect, a tax upon real estate. Everywhere but in America it has been divided into a number of subordinate property taxes, made a subordinate member of another system, or entirely abandoned. In America, alone, it remains as the largest single source of local revenues, used in practically every district, town, city and state of the union. In 1919, 50.6% of the state revenues in the United States were derived from this source.i In the same year the American cities with populations of 30,000 and over, secured from it 66% of their funds.2 In 1913 it supplied American counties with 76.4% of their income and incorporated places of 2,500 population and over with 61.1%.3 In spite of its general abandonment abroad, in spite of the development of new revenue sources in this country, the general property tax still stands as the most important single source of income for the maintenance of state and local activities.

Section 2 — The Scientific Estimate of the General Property Tax The general property tax meets with the almost universal condemnation of political economists. It is condemned in theory because it presupposes the existence of an ascertainable general mass of property, while property in contemporary society is really a composite of inseparable, but widely differentiated elements. It conforms with neither of the accepted bases for taxation; that taxes should be levied according to the benefits receivsid by taxpayers from government activity or that the levy should be according to their taxpaying abilities. The man with little property who sends his six children to the public schools derives great benefit from the expenditure of government funds to which he makes no contribution. His bachelor, landowning friend who spends much of his time outside the state, makes a large contribution without receiving commensurate benefits in return. The tax is at fault, also, in its assumption that the possession of property is a true criterion of taxpaying ability. For with the growing diversification in the types of possessions included within the term, this has ceased to be the case. The landowner may derive a very small income from his thousand dollar tract, while the stockholder's thousand dollar shares may yield him a handsome return. Similar amounts of investment in metropolitan and in rural real estate

(1) U. S., Bureau of the Census, Financial Statistics of States, 1919, p. 33.

(2) Ibid, Financial Statistics of Cities, 1919, p. 55.

(3) Ibid, Report on Wealth, Debt and Taxation, 1913, p. 298, 658.

may yield vastly different revenues. Equal amounts of property may be very unequally productive, and it is the productivity, rather than the total amount, of this property which affords a fair index of the ability of its owners to contribute to the public revenues. The unfairness of the tax is increased by its total inability to reach incomes arising from personal exertion, which have no basis in property ownership.

The property tax offends as badly in practice as in theory. Inequalities in assessment procedure have resulted in a marked lack of uniformity in the burden which is placed on different taxpayers. The failure of the tax to reach personal property has provided a great incentive to increase the dishonesty of taxpayers generally and has placed the main burden of the tax on the holders of real estate and the conscientious or foolish holders of personalty, allowing the unrighteous to escape. This widespread evasion has resulted in a tax rate which is, in effect, regressive, since it places the heaviest burdens often on those types of property which are least able to bear them. And, finally, the inclusion of securities and credits in the total of taxable property has brought about a double taxation which causes the burden of one man to be twice as great as that of his neighbor. The indictment of the tax, as it exists in our country today is well summarized in the words of Professor Seligman :

"Practically the general property tax as actually administered is, beyond all doubt, one of the worst taxes known in the civilized world. Because of its attempt to tax intangible as well as tangible things it sins against the cardinal rules of uniformity, of equality and of universality of taxation. It puts a premium on dishonesty and debauches the public conscience; it reduces deception to a system and makes a science of knavery ; it presses hardest on those least able to pay; it imposes double taxation on one man and grants entire immunity to the next. In short, the general property tax is so flagrantly inequitable, that its retention can be explained only through ignorance or inertia. It is the cause of such crying injustice that its alteration or its abolition must become the battlecry of every statesman and reformer."!

Section 3 — The Importance of the General Property Tax

IN THE Ohio Tax System In the state of Ohio the General Property Tax is the source from which the funds are derived which carry on the major portion of the necessary activities of every county, school district, village, township and city. By the means of this tax there was raised in 1921 over two hundred and twenty million dollars, more than ninety-two millions of which went to carry on the work of the common school system. The cities and villages in the state derived from this source nearly sixty, millions; the counties over forty-three millions. Only eleven million dollars, but five percent of the total amount provided by the tax, went to finance the activities of the state government, this sum being spend for school purposes, buildings and the improvement of the state highways.

(1) Seligman, E, R. A., Essays in Taxation, Ninth Edition, p. 62.

During the second half of the nineteenth century the state, as well as its subdivisions, drew its main support from this source. The administrative system was decentralized and weak and serious inequalities came to exist in the distribution of the state tax over the various counties. A solution of the difficulty appeared in the plan of separating the state and local revenues. To this end, the property tax was left to the local units and the state tax was considerably reduced and finally abandoned as a source of revenue for general state purposes. In the place of the revenue so relinquished, the state built up other sources of supply, including excise taxes on corporations, the ""nheritance tax, and the like. Table I shows how the property tax diminished in importance as a source of revenue for the state government during a period when the expenditures of the state were rapidly increasing. Table II gives the receipts of the state government in the year 1921, showing the relative unimportance, in that year, of the property tax as a source of state revenue.

Table IU) — Diminishing Importance of the Property Tax AS A Source of State Revenue

Year State Tax Tax Collected State Revenues Percentage

Rate (mills) by Property Tax All other sources of State

Levy (thousands) (thousands) Revenue

from General Property Tax

1915 45 1,689 9,851 14

1916 45 3,238 15,937 15

1917 45 3,351 17,559 16

1918 45 3,633 20,061 15

1922 1.525(5)

This table shows an increasing dependence by the state up to the present year up on revenue sources other than the property tax. The sudden increase in the state tax rate in 1920 was due to an increase in the state common school levy from .055 mills to 1.8 mills. This state school levy (Educational Equalization Fund) was reduced to .15 mills in 1920.

(1) Based upon the Auditor of State Report, 1921, p. 165.

(2) , (3), (4) Figures from the State Auditor's Notice of State Tax Levy. These rates are introduced here for consistency. They differ from the ones given in the Auditor of State Report because of the allowance made there for the change in 1915 which made the fiscal year end June 30th instead of November 15th.

(5) Estimated rate, not final, furnished by State Auditor's Office.

(6) , (7) Based upon Statement II, Auditor of State Report.

Table II— Sources of State Revenue in 1921

Inheritance Tax

Insurance Fees

Automobile Licenses

Corporation Excise Taxes General Property Tax . .

(Including levies for Common Schools Roads

Other sources: (miscellaneous fees, income of state institutions, interest on deposits and misc. receipts) .... 17,279,448.05

(Based upon Auditor of State Report, 1921, Statement No. 2.)

In the year 1920, less than 17% of the total receipts of the state government were derived from the general property tax. In 1921, the following year, only $1.91 of the $38.20 average per capita tax of the state went for the activities of the central government. The suggestion is naturally made, and often, that the state government should entirely drop the use of the property levy as a source of funds and derive its entire income from those sources which already furnish over eighty per cent of it. This plan is unworkable for two reasons. First, the existing revenue sources are not sufficiently elastic solely to care for necessary state activities. Second, the revenue which they yield would be inadequate. The inelasticity of existing sources is easily seen. The yield of corporation taxes depends upon the volume of their business, their amount of capitalization and the rate of levy. The first two factors are beyond the power of state control. Repeated use of rate changes to alter the state income would meet viith. immediate and effective opposition on the part of business interests. The yield of the inheritance tax in any one year is extremely uncertain and cannot be controlled to meet state revenue needs. The income from fees, fines, licenses, interest and the like is similarly insusceptible of control. These revenues are not only inelastic, but also inadequate. As a matter of fact, it is rarely that the receipts of the central government exceed its disbursements. d) If the spending authorities were in any year to make use of all the funds appropriated to them by the legislature, the state government would straightway go bankrupt. In 1920 the legislature appropriated over fifty-six million dollars for state activities. The actual receipts of the government that year only slightly exceeded twenty-nine millions.(2) The state lived within its income only by the virtue of the non-utilization of appropriations. Dependence upon lapsed appropriations scarcely makes adequate provision to meet the increasing revenue needs of the state.

The inevitable conclusion is, that in the absence of new revenue sources, the general property tax must be retained as a means of supplying adequate funds to the state government as well as to the political subdivisions of that government.

(1) Report of The Special Joint Taxation Committee of the 83d Ohio Gen. Assby,, p. 18.

(2) Auditor of State Report, Ohio, 1920, p. 34.

Grand Total Receipts

$50,394,364.91

Section 4 — The Increasing Cost of Government in Ohio

One of the outsanding facts in the development of America's social and economic order has been the collective assumption of the necessary acitivities of life through the agency of the state. As our industrial civilization has developed there has been a constantly increasing pressure upon the central government to assume more and more functions for the benefit of the citizens who compose it. The state is asked to provide for the education of the child through his grammar and high school training and even on through university work and technical specialization. The development of motor transportation has necessitated enormously increased expenditures for the maintenance of highways. People are demanding beautiful public buildings, ornamental bridges, libraries, parks and other refinements of civilization. Either in their capacity as producers or in that of consumers, they are constantly calling on the legislature for protection against exploitation. The result of this pressure has been the passage of a great body of legislation, providing for workmen's compensation, mothers' pensions, and the like. With every increase in the activities assumed by the people in their collective organization, the government, must necessarily go a corresponding increase in the funds, which they are called upon to supply to support that organization. During the past few years we have, in addition, witnessed a marked rise in the general level of prices, an increase which affected the cost of state, school and municipal activities just as it affected the necessary expenditures of the man in the street. It is this increase in government expenditures, necessitated by the assumption of additional activities and by the general rise in the price level, which has made the problem of state and local taxation a particularly pressing one at the present time.

Table III — Increasing Cost of Government Activities in Ohio

Per cent

Tax Levied For 1920 1913 Increase Increase

(From the Report of the Tax Commission of Ohio, 1920, p. 15.)

Table IV — Increasing Cost of City Activities in Ohio

(Total Governmental Cost Payments in the Nine Ohio Cities Which

Had a Population of 30,000 or More in 1909.)

Class of Outlay 1900 1915 1918 Increase 1918

over 1909

Amount %

General

Charities, Hospitals,

(From the Report of the Special Joint Taxation Committee of the 83d General Assembly, p. 22.)

Table V — Increasing Cost of School Activities in Ohio

Year Total Expenditure of

Thirteen Districts

1914- 15 $ 91,624.42

1915- 16 98,471.89

1916- 17 115,710.11

1917- 18 130,843.55

1918- 19 133,831.14

1919- 20 161,120.90

1920- 21 211,748.49

Only thirteen of the twenty-five hundred school districts in the state are represented in this computation. These were the only ones out of eighty which were examined that were found to have made no changes in their boundaries or in their capital outlay during this period. If the necessary expenditures of these districts for the maintenance of unextended activities presents such a marked increase it is not unreasonable to assume that the figures given represent a situation which is general in the state.

The School Districts taken were:

Liberty Twp. Rural S. D., Liberty Twp., Highland Co.

Margaretta S. D., Margaretta Twp., Erie Co.

Madison Twp. S. D., Madison Twp., Scioto Co.

Lakeville S. D., Washington Twp., Holmes Co.

Benton S. D., Benton Twp., Ottawa Co.

Adams S. D., Adams Twp., Champaign Co.

Fayette S. D,, Fayette Twp., Fulton Co.

Fox Twp. S. D., Fox Twp., Carroll Co.

Adams Twp. S. D., Adams S. D., Coshocton Co.

Columbia Special S. D. No. 2, Columbia Twp., Lorain Co.

Milton, S. D., Ashland Co.

Ruggles, S. D., Ashland Co.

Green Twp. S. D., Green Twp., Ashland Co.

During the seven years from 1913 to 1920, the total expenditures of the state of Ohio underwent (as is shown in Table III) an increase of nearly 150%. In nine years, from 1909 to 1918, the expenditures of nine Ohio cities increased from $22,574,763 to $34,937,222, an addition of 55.6%. This increase is shown in detail in Table IV, which was prepared by the special taxation committee of the 83d General Assembly. In the words of their report :

"Such a table reveals the presence in our municipal communities of a very potent factor which is everywhere operating to increase public expenditure. This factor is the effort toward a higher level of well being. The percentage increases show that the older governmental activities have expanded least rapidly of all the forms of public outlay. The greatest relative increases have occurred in those forms of public activity which now count much in the promotion of the general well being, such as health conservation, sanitation, education, improved highways, charitable and hospital relief and recreation. Enforced retrenchment in public outlays now means the reduction of these beneficent social activities and an inevitable retrogression toward a lower plane of civilization. "d)

This increase in municipal expenditures was attributed by the committee not to the wastefulness in the administration of city activities, but to the increase in population, in governmental functions and in the price level. In consequence the additional tax charges came inevitably, in spite of the opposition of taxpayers, the legislative restrictions on tax levies and the pruning of budgets practiced by budget officials.

The cost of school operation and maintenance has increased even more rapidly. The total local taxes for school purposes rose nearly 72% from 1913 to 1918. The total cost of education in the nine largest cities of the state increased 62% from 1909 to 1918.(2) Table V shows the increase in the necessary expenditures of thirteen school districts in Ohio over a period of seven years None of these districts had changed their boundaries or increased their capital outlay during that period, yet the 1920-21 disbursements showed an increase over those for 1914-15 of 231%. In some of the individual districts there was a growth in expenditures in this period running as high as 400%. In the case of Fayette Village S. D., Fulton Co., expenditures increased over 220% while the average daily school attendance decreased more than 13%.

(1) Report of the Special Joint Taxation Committee of the 83d General Assembly, p. 22.

The Opiio State University

There are many reasons for this rapid advance in the cost of the common schools. The total enrollment has been growing steadily, that for grade schools being 266.9% greater in 1918 than in 1890.(i) A broadening of high school curriculae has necessitated further equipment and additional instructional staffs. The salaries paid to teachers have necessarily increased in order to meet the competition of other fields of employment. The imposition of higher educational qualifications for teachers has made this increase an inevitable necessity. The progress toward the centralization of rural schools and the inauguration of bus transportation for their pupils, the construction of new and modern buildings, made for permanent occupancy according to the safety and sanitary standards set by law, made imposing and well situated to satisfy local pride, all have contributed to the necessary increase of the tax burden.

There is scant possibility that these expenditures can be decreased to any considerable extent. Maintenance of existing educational activities is imperative if Ohio is to fulfill her duty to her citizens. 41.2% of all the men examined under the selective draft in Ohio were illiterate. 28% of these were negroes, the remaining 13.2% being white. In Ross County 1,100 men were rejected for this cause. (2) These figures scarcely indicate that common school education in the state has reached its limits in extension. In addition to this, further expenditures must be made to provide for the extended activities of those institutions of higher learning which are supported by the state government. New buildings and equipment, larger operating revenues and higher salaries must be provided to keep the universities of the state operating at a high degree of efficiency. These further expenditures can only be met by increases in the total amount of funds provided for by taxation. The citizens of Ohio cannot have the advantages of the essential public enterprises which they demand without paying the price. It is the question as to the manner in which this payment shall be made which gives rise to all the perplexing problems of tax legislation and administration.

(1) Report of the Special Joint Taxation Committee of the 83d General Assembly, p. 25.

Section 1 — Constitutional Provisions

The first constitution of the state of Ohio, that of the year 1802, contained no definite provisions as to taxation. One of the most important reasons for the calling of the second constitutional convention in 1851 was to incorporate in that document requirements for a system of taxation which would be uniform and equitable throughout the state. (D Article XII, Section 2 of the new constitution gave expression to the provision which has come to be known as "The Uniform Rule" and remains to the present day the basis of the Ohio tax system. It declares that

"Laws shall be passed, taxing by a uniform rule, all moneys, credits, investments in bonds, stocks, joint stock companies or otherwise, and also all real and personal property, according to its true value in money."

Specific exception from this rule is granted to burying grounds, public buildings, church property, used exclusively for public worship, and all educational and charitable institutions. Section 6 of the same Article prohibits the state from contracting debt for the purpose of internal improvement. The political subdivisions of the state, however, are not so limited. Article XIII, Section 4 of the same document provided that "The property of corporations shall forever be subject

to taxation the same as the property of individuals," and the sixth Section of this Article directed the general assembly to "provide for the organization of cities and incorporated villages by general laws and restrict their power of taxation, assessment, borrowing money, contracting debts and loaning their credit, so as to prevent the abuse of such power." These requirements stand in the present constitution. It is in pursuance of the provisions of the last section that the present statutes limiting the rate of taxation and restricting the borrowing power of the political subdivisions of the state were passed.

Section 2 — Property Subject to the Tax

The laws passed in pursuance of these constitutional provisions require in the list of taxable property the inclusion of all real property, all moneys, credits, investments and other personal property, in the possession of individuals or corporations within the state. (2) Specific exemptions have been granted among others to state property, federal property, court houses, jails, armories, market houses, public squares, city waterworks, children's homes, churches, colleges, municipal universities, school houses and all other property of any board of education, graveyards and lands held for the support of the poor. (3) In addition to

(1) Auditor's Annual Report, Ohio, 1920, p. 6.

(2) Ohio General Code. Sec. 5328.

these exemptions, it is provided that citizens need not return for taxation as personal property, shares of stock in Ohio corporations or in corporations, three-fourths of whose real and personal property is taxed as such in the state. (D Shares of stock in all other foreign corporations must, however, be returned. The only general exemption granted to all individuals under the Ohio laws is that of one hundred dollars in value, of personal property, a minimum which may be held by all citizens, free from taxation. (2)

Section 3 — The Determination of the Base

The administration of every tax involves three processes. The first of these is the determination of the total amount in quantity or value of the property or income, a portion of which is to be taken by taxation, that is, the determination of the base of the tax. This total or base is determined by the process of assessment. With assessment completed, the next step necessary is the levy, which is the process of ascertaining the portion of the base which it will be necessary to take in order to yield an adequate revenue to meet the expenses of government. With the base determined and the rate ascertained and published, the administration is completed by the third step — the collection of the determined amount from the individual taxpayers.

Part A — The Law as to Assessment(3) —

The county is the unit for the assessment of property in Ohio; the county auditor, the chief assessing officer. It is his duty annually to prepare an alphabetical list of the names of the individuals and business concerns within his county, classified according to the political subdivision in which they reside, giving the description and value of the real estate which they possess and, on a separate list, the value of their personal property. This list is made out in duplicate, one copy constituting the auditor's tax list, the other, the tax duplicate which is held by the treasurer of the county to assist him in his work of collection. If the auditor finds that the property in his county is listed on the duplicate at its true value in money, he enters the existing valuation on the tax list as the base for taxation in the following year. He is required to make an annual report to the commissioners of his county, stating whether he does or does not find the property to be listed at full value. The commissioners then have the power to confirm his finding, modify it or entirely set it aside. If he finds that property is listed at less than its full value in money he is required by law to indicate this fact to this board which may order a revaluation. <4) If he finds that property is listed at its true value, the assessment process consists merely in changing the amounts on the tax list opposite those properties which have changed in value, through the addition of new structures or other changes. The law requires individuals erecting new buildings of a value exceeding two hundred dollars to report this fact to the auditor, or suffer

(3) See Tax Laws of Ohio. Issued by the Tax Commission, 1920, Ch. 10, 13, 15 and 34.

a penalty of an addition of fifty per cent of the value of the structure, when discovered, to the total amount of their taxable property.

The actual determination of the value of real estate is in the hands of assessors, locally elected in small assessment districts for two yeai terms. These men take oath and give bond for the proper performance of their duty and are removable by the county auditor for cause. It is their duty to value property, under the direction of the auditor, administer oaths to individuals making property returns and annually to report to the auditor the value and ownership of all listed property. For this service they receive a compensation of four dollars for every eighthour day that they are employed.