Taxation in Tennessee

Front matter

filass M J"£ 4*

COPYRIGHT DEPOSIT.

-

Preface

The purpose of this book is to furnish an impartial study of the development of the system of State tax¬ ation in Tennessee since the constitutional revision in 1870, in order to provide a manual, topically arranged, for the use of those who are interested in the past his¬ tory of taxation in the state of Tennessee, and those who desire to accomplish needed reforms in taxation.

The general plan adopted in dealing with the sub¬ ject is to trace out the legal changes occurring from time to time in the development of each form of taxa¬ tion, showing the influence effecting such changes particularly with reference to the acts which have had a permanent effect upon the taxing system. In so far as is practicable, each principal form of taxation has been treated as a separate topic.

As far as possible, the writer has attempted to out¬ line not only the legal provisions, including court de¬ cisions, but actual practice in administration. In fact, an effort is made to draw a fair picture of the taxing system in its several stages of development, with the purpose of aiding the reader to understand the present system; and freedom has been exercised in pointing out commendable characteristics, as well as the defects of the various arrangements.

The materials of the book have been mainly taken from the statutes of Tennessee, court reports, annual and biennial reports of the several state departments, and various state documents bearing upon taxation in Tennessee. Special acknowledgement of indebtedness is made to John Trotwood Moore, State Librarian and Archivist of Tennessee, Miss Lutie Jones and other members of the library staff, who furnished working space in the library and placed all the materials on

PREFACE.

hand at the writer’s disposal. Other materials were secured in the library of George Peabody College for Teachers, and the assistance of Miss Emma Watts and other assistant librarians is gratefully acknowledged. Valuable materials in the form of files of newspapers and periodicals were furnished by the Carnegie Library of Nashville. Professor S. L. Smith, Rural School Supervisor, State Department of Education, kindly worked up the material for the topic on public educa¬ tion, which appears in the book in very nearly its original form. Professor Smith has interpreted this subject in the light of several years of successful ad¬ ministration of public education in Tennessee. All these materials were largely supplemented by personal interviews and valuable suggestions of the members of the several departments of the State government and the General Assembly. Among these were the follow¬ ing: In Department of Secretary of State, Ike B. Stevens, Secretary of State; Frank Avent, Chief Clerk, and James B. Brigham, Bookkeeper, the latter giving special attention to certain phases of the manuscript; Department of Comptroller of the Treasury, S. E. Hunt, Chief Clerk; A. S. Thompson, and J. H. Cum¬ mings, assistants, who gave their personal attention to the topics of assessment and collection of taxes; Rail¬ road Commission, Colonel B. A. Enloe, Chairman of the Railroad and Public Utilities Commission and Chairman of the State Board of Equalization, who kindly read and made valuable suggestions in connec¬ tion with the chapter on corporation taxation, and Hon. A. V. Louthan, Chief Tax Statistician. Members of the present General Assembly who discussed with the writer at some length certain tax problems and tax

PREFACE.

reforms in the state are Senators Park Worley, of Sul¬ livan County; E. N. Haston, of Van Buren County; C. Y. Clark, of Maury County; L. E. Gwinn, of Tipton County; John H. Harber, of Gibson County; and Thomas L. Coleman, of Marshall County. Mr. Allen, public accountant, and for many years Commissioner of Building & Loan Associations in Tennessee, gave valuable information concerning the history of the taxation of building and loan associations. Others who granted interviews and offered assistance in securing materials on taxation are Hon. Miles P. O’Connor, revenue attorney; Hon. Dan McGugin, attorney for the Manufacturers’ Association of Tennessee; Chas. G. Gilbert, Secretary of the Manufacturers’ Association of Tennessee, and Richard H. Yancey, of the Nash¬ ville Banner, all of Nashville, Tennessee.

This book was begun as a thesis to meet partial re¬ quirements for the degree of Master of Arts in George Peabody College for Teachers, but it is revised and very much amplified in its present form. Special ac¬ knowledgment of indebtedness is due Dr. L. C. Gray, Economist in Charge of Land Economics, Department of Agriculture, Washington, D. C., formerly Head of the Department of Economics, George Peabody Col¬ lege for Teachers, for directing the compilation of the original thesis and also for constructive and technical criticism of the final manuscript.

The writer also is indebted to Dr. O. C. Ault, pres¬ ent Head of the Department of Economics, George Peabody College for Teachers, and Miss Lula Ocillee Andrews, Head of the Department of English in the same institution, for reading the manuscript and of¬ fering valuable criticism and suggestions.

Nashville, Tennessee, February, 1920, C. O. B.

Contents

CHAPTER PAGE

I. Constitutional Provisions for Taxation. ... 11

II. General Property Taxation. 21

Appendix

A. I. Provisions for taxation in the Consti¬

tution of 1796. 195

II. Provisions for taxation in the Consti¬ tution of 1834. 195

III. Provisions for taxation in the Consti¬ tution of 1870. 196

B. I. Governor Rye’s Message to the Sixty-

first General Assembly, Jan. 7, 1919. . 198

II. Governor Roberts’ Message to the Sixty-

first General Assembly, Jan. 16, 1919. . 233

C. I. Resolution 56 of the General Assembly

of 1919, Providing for an Income Tax

II. Resolutions providing for the Calling of a Constitutional Convention and Elec¬ tion of Delegates Thereto. 250

BIBLIOGRAPHY. 253

INDEX. 255

Chapter I. The Constitutional Provisions For Taxation

The financial system of Tennessee has its origin back in the Revolutionary War period. The Constitu¬ tion of 1796 was modeled after the one adopted in 1776 by the parent state, North Carolina. In this is found the fundamental provisions for the general property tax, which has been the leading source of revenue since the foundation of the state. The provisions deal¬ ing with finance were carried forward and adopted in 1834. To understand the present system of taxation in Tennessee it is necessary to know first of all the con¬ ditions and motives which led to the revision in 1870 of the Constitution of 1834.

The Act authorizing the people to call a constitu¬ tional convention passed the Legislature on November 15, 1869, and the question was voted upon the third Saturday in December. The election resulted in favor of holding the convention by a popular majority of over 40,000 votes. 1

The Constitutional Convention of 1870 was pre¬ eminently a product of reconstruction problems. The war had been one of destruction, and the four years succeeding the close of the war had been a period of extravagance and disorder. The people found them¬ selves in a helpless condition politically and industrially. “The old order had been swept away, and the new had not been fairly established.” 2 There was need of relief

1 Garrett and Goodpasture, History of Tennessee, p. 251.

2 Joshua W. Caldwell, Constitutional History of Tennes¬ see, p. 146 ff.

TAXATION IN TENNESSEE.

from political oppression and the heavy burden of taxation, and the people turned to constitutional re¬ form for that relief. The cause of the convention was championed by the press, with the exception of the ultra-radical division, and the people expressed their desire for it by an overwhelming popular vote.

The purposes for which the convention should be called were aptly stated by Judge Lee of Memphis, in August, 1869, several months before the enabling act was passed. His suggestion provided for: (1) Regu¬ lation of manhood suffrage; equality before the law; (2) restrictions for the debt creating power of the state, including a funding act; (3) prohibition on the Legislature loaning the credit of the state to corpora¬ tions or public enterprises without submitting the ar¬ rangement to a vote of the people; (4) adoption of means to compel railroads that had secured state aid to relieve the state of the load of debt thereby incurred, or if in default to see that the roads should pay the debt; (5) equality of taxes as between agricultural and commercial interests; and (6) miscellaneous items. 3

Practically all state historians agree that the suf¬ frage question was the most important in the minds of the members of the convention. Judge Lee’s sugges¬ tions and also the record of the proceedings of the con¬ vention indicate that the reconstruction of the financial system and policy of the state was at least second in importance. The suffrage appealed more to the pas¬ sions of men, and outwardly overshadowed all other considerations, but the business and financial interests of the state were alarmed at the soaring tax rate and

3 Nashville Union and American, Aug. 24, 1869.

CONSTITUTIONAL PROVISIONS.

the still threatening possibilities of the system of lend¬ ing the state credit, which was a characteristic practice under the former constitution.

Many resolutions and amendments upon the suf¬ frage question were introduced in the Convention, but the poll tax provision was the only one which concerns the subject of taxation. This clause provides that “All male citizens over the age of twenty-one years, except such persons as may be exempted by law on account of age or other infirmity, shall be liable to a poll tax of not less than fifty cents nor more than one dollar per annum.” 4

The framers of the constitution probably had two purposes in view with regard to the poll tax—one, to secure a permanent source of revenue for public educa¬ tion, and the other, to purify the ballot box by limiting negro suffrage. In the latter connection McClure says: “The influx of negro voters into the electorate stimu¬ lated the convention to include the provisions that each voter shall give to the judges of election, where he of¬ fers to vote, satisfactory evidence that he has paid the poll taxes assessed against him for such preceding period as the Legislature may prescribe and at such time as may be prescribed by law; without which his vote cannot be received.” 5

The Convention was restrictive in practically all its revisions, which is “a natural consequence—to curb recent governmental extravagances.” 6

The general property tax remained unchanged in

5 Art. IV, sec. 1; Wallace McClure, State Constitution Making.

C W. McClure, State Const. Making.

TAXATION IN TENNESSEE.

principle. The clause dealing with this subject in the Constitution of 1834 7 included only four items— namely, lands, slaves, and “such other property as the Legislature may deem expedient;” “all property taxed according to its value”—the value to be determined by the Legislature; a tax on “merchants, peddlers, and privileges;” and “a tax on white polls.” 8

Considerable opposition arose from the press of the state against the exemption of one thousand dollars’ worth of personalty, and many resolutions and amend¬ ments were offered, limiting the amount of exemption to a smaller figure, but the members steadily refused to adopt one providing for less than one thousand dol¬ lars. Those amendments offering exemptions as low as two hundred and fifty dollars lost overwhelmingly. By actual count, the one which was offered to exempt seven hundred and fifty dollars’ worth of personalty lost by a vote of 36 to 33. The final amendment which was adopted, permitting an exemption of one thousand dollars’ worth of personalty, passed by about the same majority as the one which provided for the exemption of seven hundred and fifty dollars’ worth of personalty was lost. In other words, the vote gradually increased in favor of exemption until the thousand dollars’ worth was reached, which amendment had the necessary ma¬ jority for its adoption. The all-inclusiveness of the clause caused them, however, to add a special list of exemptions, the most important forms of which were: all forms of property owned by the State, counties, cities and towns, which were used “exclusively for public or corporation purposes;” “such property as

8 Const, of 1834, Art. II, sec. 28.

CONSTITUTIONAL PROVISIONS.

may be held for purposes purely religious, charitable, scientific, literary, or educationalthe direct products of the soil in the hands of the producer or his imme¬ diate vendee; 9 and all articles manufactured from the produce of the state, otherwise than for the purpose of paying inspection fees. 10

The merchants’ tax also came in for a share of popular criticism at the time, particularly from business centers and from some of those who understood busi¬ ness conditions. A member of the House of Repre¬ sentatives made a lengthy, if not exhaustive, speech upon the general theme of inequality of the merchants’ tax. 11 He spoke in behalf of the growing cotton cen¬ ter of Memphis, showing, among other things, that a merchant of Tennessee was taxed one and one-half per cent on invoice capital, with an annual turnover of probably five times per year, which would amount to about seven and one-half per cent per annum; wherein a merchant in Kentucky under the same conditions would pay only about three per cent. This would cause discrimination in favor of merchants of neighboring states, and throw the merchants of Tennessee in an attitude of unjust competition. In spite of the oppo¬ sition the clause providing for the tax was re-incor¬ porated in similar wording to that of 1834, and to it was added: “The portion of a merchant’s capital used in the purchase of merchandise sold by him to non¬ residents and sent beyond the state, shall not be taxed at a rate higher than the ad valorem tax on the prop¬ erty.”

11 Nashville Union and American, Dec. 30, 1869.

TAXATION IN TENNESSEE.

The provision for the taxation of privileges, which became a very important source of revenue in the tax system, occurs only once in the constitution, and then in connection with the taxation of “merchants and ped¬ dlers.” The clause reads as follows: “The Legisla¬ ture shall have power to tax * * * privileges in

such manner as they may from time to time direct.” The constitution itself makes no explanation of the meaning of the term “privileges,” as will be seen from the discussion of privilege taxation, 12 but this clause had, from the beginning, wonderful possibilities as a means of securing revenue.

Another provision added to the general property tax clause was that “the Legislature shall have power to levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem!’ This was for the pur¬ pose of drawing revenue from holders of United States bonds. 13

Other revisions of the constitution, which more nearly reflect the economic conditions of the times, are the sections forbidding state aid to private companies and municipalities, state ownership of banks or the stock of private companies or municipalities, the issu¬ ance of state bonds to any railroad defaulting in its interest payments on bonds previously loaned or having absolutely disposed of any of the same for less than par, and the requirement of three-fourth majority vote of the people before lending or giving in aid to any per¬ son, company, association, or corporation the credit of a county, city or town. 14

12 See Taxation of Privileges, Ch. IV.

13 McClure, State Const. Making, p. 60.

CONSTITUTIONAL PROVISIONS.

These acts of the Convention were, indeed, restrict¬ ive. In its effort to bring about restriction against “the arbitrary tactics of the reconstruction governments,” the Convention effected a reaction against the progress of the state, at a time, too, when progress was all that could redeem the state from its loss during the war. In this connection McClure says: “But that the addi¬ tional checks and balances should have been introduced into the governmental organization just at the time when railroads and other corporations were beginning to become so powerful as to call for state administra¬ tive control, when the number and complexity of gov¬ ernmental functions in other directions were on the eve of substantial increase, and when responsible financial management was becoming rapidly more imperative, impresses one as peculiarly unfortunate.”

However true the above statement may be, a brief history of the credit system of the state during the thirty-five years preceding will plainly reveal the cause for the reaction. A strong feature of the Constitu¬ tion of 1834 was a provision for a “well regulated sys¬ tem of internal improvements,” 15 and under that sys¬ tem the state had lavishly lent its credit to railroads, etc., to the amount of $14,000,000 by 1861. Of course, the state never expected to have to pay this debt, and no doubt would not have been called upon to assume the obligation under normal conditions. But the war not only destroyed private property which would make a railroad pay, but destroyed much of the railroad property itself. The state was then compelled to assist the roads in re-building. 16 Then the “Brown-

16 McGee, History of Tennessee, p. 232.

TAXATION IN TENNESSEE.

low debt” increased the state debt by about $21,000,000. These, together with other forms of indebtedness, made a total state debt of about $41,000,000 at the time the Constitutional Convention was being held in 1870. No wonder, then, that the Convention restricted the power which made the above condition possible. Hence, the features of the Constitution of 1834, which made such extravagances possible, were entirely re¬ moved in the Constitution of 1870.

The foregoing considerations have been largely in connection with the changes made in the Constitution of 1834 by the Convention. The following summary indicates the possibilities of taxation under the present constitution, both as to the revisions effected in 1870 and provisions affecting finance in the preceding con¬ stitution, each of which will be stated fully in its own particular application in the succeeding chapters: (1) The provision for the general property tax includes the taxation of all property, real, personal, and mixed, except such as shall be expressly exempt. The excep¬ tions, including articles manufactured from produce of the state, will be considered in connection with general property taxation. (2) The constitution provides that the Legislature shall have the power to tax “mer¬ chants, peddlers, and privileges in such manner as they may from time to time direct.” This clause has been broadly interpreted, and because of its vagueness it has provided large sources of income. (3) Every male person over twenty-one years of age, except such as are expressly exempt, are required to pay a poll tax of not less than fifty cents nor more than one dollar, which shall be used for educational purposes. (4) The General Assembly is empowered to authorize local tax-

CONSTITUTIONAL PROVISIONS.

ation, and all property shall be taxed according to value, upon the principles established with regard to state taxation. This provision was a restrictive meas¬ ure, and has been used restrictively to control munici¬ palities in matters of taxation and hence largely in other matters of local autonomy. (5) Appropriations of funds are to be made for public schools. (6) A tax shall be levied on stocks and bonds not taxed ad valorem , mentioned in connection with revisions of the constitution.

Other provisions of a different nature are: (7) Prohibition of lending county, town, or municipal credit without the consent of a majority of the qualified voters; (8) prohibition on the state lending its credit or state ownership of stocks and the like; and (9) the regulation and restriction on the state in issuing bonds to railroads, and similar corporations.

One other constitutional provision requires special consideration and emphasis. The importance of the clause makes it desirable to be given in full as follows: “All property shall be taxed according to its value, that value to be ascertained in such manner as the Legisla¬ ture may from time to time direct, so that taxes shall be equal and uniform throughout the state. No one species of property from which a tax may be collected shall be taxed higher than any other species of property of the same value.”

No other clause in the constitution has been so great a stumbling block or handicap to the state, as that quoted above, in restricting the taxing system. The constitution not only fails to provide a means of classi¬ fication of property for taxation, but this provision ac¬ tually forbids that property shall be classified and taxed

TAXATION IN TENNESSEE.

upon its relative merits. It is apparent that this limita¬ tion on the classification of property for taxation may mean practical confiscation of certain classes of prop¬ erty. Moreover, the part of the clause providing for the taxation of property according to its value has al¬ ways been impossible of realization. Consideration will be given to these points in connection with certain special forms of taxation in succeeding chapters.

It will be noted that the provisions for taxation in the constitution as a whole, are characterized by vague¬ ness on the one hand and restrictions on the other. The characteristic of vagueness has been fraught with large possibilities in working out the system, and the restric¬ tions have largely retarded the state’s progress. From these fundamental concepts, though meagre and much hedged about by prohibitions, the State of Tennessee has built her somewhat elaborate but typically southern financial system.

Chapter II. General Property Taxation

The Place Of The General Property Tax In The Tax System Of Tennessee.

In Tennessee, as in many other commonwealths of the United States, the general property tax is funda¬ mental and is the principal source of revenue. The general property tax is supplemented by business taxes, licenses, and fees. A distinguishing characteristic of the system, however, is a carefully worked out plan of privilege taxes based upon the exercise of various forms of occupation and business. There are various special corporation taxes, similar in nature to the priv¬ ilege tax on individuals, poll and inheritance taxes, specific taxes on transfer of realty and on litigations, and a special tax on registered mortgages.

The public debt acquired by the state previous to and during the reconstruction period probably had a fraudulent and unprofitable origin in so far as value received for the large expenditures were concerned, but the fact that it existed and constantly threatened the credit of the state caused the various administra¬ tions to search out new sources of revenue whereby the state might relieve itself of the debt and at the same time meet its increasing expenses. In fact, the eco¬ nomic pressure due to the public debt at different periods caused much consideration to be given, not only to diversification of the tax system, but also to a carefully worked out system of tax collection. The influence of the public debt was especially felt in this particular until it was eliminated by the famous “fifty

TAXATION IN TENNESSEE.

and three” act of 1883, 1 whereby the state debt was funded and removed as an active political issue from the state.

The railroads, then the telegraph companies and other public utilities, were the first to supplement the general property tax. Later the insurance premium tax and inheritance tax were added, both of which have contributed a correspondingly large proportion of the state’s income. In fact, all the special forms of taxa¬ tion, discussed fully in succeeding chapters, have served to minimize the importance of the general prop¬ erty tax in Tennessee’s taxing system.

The general property tax system in the state has also been modified by the possibility of “double taxa¬ tion” in the laws. This influence was especially felt previous to 1889 in connection with corporation taxa¬ tion. Where the general property tax failed to reach certain classes of business property, the principle of double taxation was applied, which resulted in a sys¬ tem, not only of the taxation of certain forms of prop¬ erty under two or more separate heads, but also it caused to evolve certain forms of privilege taxes. Some instances of the latter were intangible property belonging to railroad and similar corporations and mer¬ chant corporations. However, the influence of the principle of double taxation was practically eliminated by acts of 1889 and 1890, except in so far as the prin¬ ciple was applied by a system of privilege taxes.

Another characteristic of Tennessee’s system of taxation, as affecting the general property tax system, is the constitutional exemption of $1,000 of personalty. This exemption virtually operates to produce a progres-

1 McGee, History of Tennessee, p. 244.

sive tax rate. For example, if A, B, and C, respect¬ ively, own $1,500, $3,000, and $5,000 worth of person¬ alty and the rate is 50c on the $100, they will pay taxes proportionately at the rate of 16 2-3c, 33 l-3c, and 40c. This plan, therefore, operates in favor of the small property owners, for the more personal property an owner controls, the greater is his corresponding rate of taxation.

Counties and municipalities are subservient to the state in matters of taxation. Municipalities are re¬ quired to copy the assessment values from the certi¬ fied lists, unless by special act they are permitted to assess and collect their own revenue for local pur¬ poses. Only in recent years has sentiment grown suf¬ ficiently strong to make it permissible for local taxing districts to carry out to an appreciable extent much needed local improvement.

If the system of privilege taxes was worked out more in correspondence with income, instead of being graduated upon the basis of county population or mile¬ age, as in the case of railroads and other corporations similarly organized, the tax system as a whole would approximate more nearly the original purpose of the general property tax system in the state.

Assessment.

Historical Development. A word is necessary to explain the method of dealing with the development of the assessment system from 1870 to the present time. A discussion of the minute changes of the sys¬ tem in the various acts of the Legislature would be un¬ interesting to the casual reader and at the same time

TAXATION IN TENNESSEE.

involve too much technical and legal phrasing, so com¬ mon in the tax digest. At the same time, the nature and plan of the general property tax system are more or less familiar to every taxpayer; therefore for the purpose in hand it is deemed sufficient to select repre¬ sentative periods in the history of taxation under the present constitution and point out the salient features as indicated by the statutes for those particular periods. For this purpose the acts of 1873, of 1895, and the pres¬ ent system under acts of 1907 are chosen. Any other mention of important changes in the plan of assess¬ ment will be incidental to the discussion of the acts for the years named. In fact the laws of 1895 are selected as the pivoting point for the development of the as¬ sessment system previous to that time and the changes occurring afterward.

In acts of 1873 the provisions as to what property should be taxed were made to conform to the require¬ ments of the constitution, and were essentially as fol¬ lows: all property, real, personal, and mixed shall be taxed; but the legislature may exempt such as may be held and used exclusively for public purposes, in¬ cluding that employed for religious, charitable, scien¬ tific, and like purposes, not exceeding $50,000 in value; $1,000 worth of personalty in the hands of each tax¬ payer; and the direct produce of the soil in the hands of the producer or his immediate vendee. In addition cemeteries and monuments of the dead were added to the list of constitutional exemptions.

The basis of assessment under the act was as fol¬ lows: The time of ownership for purposes of assess¬ ment was fixed at January 10. Real property was as¬ sessed at actual value “less 15 per cent in gross.” The

GENERAL PROPERTY TAXATION.

preceding acts 2 provided for the assessment of land and town lots by deducting 10 per cent from half and 20 per cent from the other half of “sale value,” the re¬ mainder of which should be the “cash value.” The basis of the personalty assessment was made the value at which it would be appraised in payment of a just debt. The situs of all property was to be in the ward or district where assessed, except that shares of stock in banks, corporations, or joint stock companies, should take the situs where the business enterprise was lo¬ cated.

The usual description of realty and personalty was required, such as number of each lot and width in front feet, the surveyor’s number for land tracts, and the number of acres per tract. Itemized personalty sched¬ ules included the usual forms of personalty, such as corporation stock, stocks of merchandise, notes and due bills, bonds and securities, live stock, machinery, the amount of income derived from United States bonds, etc. The last item is peculiar and will have separate treatment in another connection. Banks and other corporations were assessed in the manner de¬ scribed in connection with taxation of corporations and banks. 3 By this act merchants were required to file statements with county court clerks, but assess¬ ments were made by the tax assessor, 4 If adequate returns were not made according to law, the proper officer—the county judge, clerk and trustee, or tax col¬ lector—was empowered to require adequate returns

3 See Corporation Taxation; also Bank Taxation.

4 See Merchants’ Tax.

TAXATION IN TENNESSEE.

from the taxpayer with the aim of securing uniform as¬ sessments. 5

The assessor was appointed by the county court, one for each civil district, except in cities of over 20,- 000 inhabitants. In such cities there was one assessor for each ward. This plan of having several assessors for each county, as instituted in the beginning, has been one of the greatest defects of the assessment system of the state, as will be amply shown later.