§ 5. The Wisconsin Income Tax From the preceding survey it will be seen how utterly insignificant and unsuccessful had been the experiments with state income taxation up to the year 1911. Under the stress of modern conditions the old faculty tax of the eighteenth century died away everywhere except in Massachusetts, where it still lingers as a shadow of its former self. In the northern and middle states no serious attempt was ever made to impose an income tax, as sufficient difficulty was experienced in enforcing the property tax. In the southern states the absence of a property tax led, as we have seen, in the forties, to an unsuccessful endeavor to introduce income taxes. The only experiment which deserves to be called even a halfway notable one was made by the southern states during the Civil War. In most of the states the current from 1890 to 1900 set strongly against the income tax. As far back as 1889 the special tax commission of Maine reported against the advisability of a state income tax.1 A few years later a New York report took a similar position.2 In Massachusetts, as we have seen above, the commission of 1897 came to a like conclusion as to the inadvisability of any attempt to revive or to generalize the income tax. No further efforts, outside of a few southern states, were made for some years to suggest an income tax for state purposes. In 1907, however, the revenue commission of Colorado discussed the subject, but reported against a state income tax, stating that "as a federal tax, . . . much can be said in favor of an income tax; as a state tax it is utterly indefensible." In 1906 the tax commission of California took up the matter and reported strongly against any attempt to introduce 1 Report of the Special Tax Commission of Maine, 1899. Augusta, 1890, p. 36. 2 Report of Counsel to revise the Tax Laws of the State of New York, 1893. Albany, 1893, P. 7. 3 Supra, p. 397. Report of the Revenue Commission of Colorado. Denver, 1907, p. 18. an income tax.1 A fuller discussion of the subject is found in the report of the special tax commission of New York of the following year. In New York, where the fifteen members of the commission agreed upon certain general recommendations, two members brought in a supplemental report in favor of a graduated lump-sum state income tax. This proposition was voted down in general committee, and the argument against it was presented as a supplemental report by a few members.2 After presenting the various arguments in opposition, the report closed as follows: "In short, we incline to the opinion that even if the income tax is advisable at all, it is advisable at present only as a federal tax. As long as New York is surrounded by commonwealths which seek to attract to themselves much of the wealth of their rival, it is unreasonable to expect a development of interstate comity in taxation which would redound to their disadvantage. Such an interstate comity can probably be forced upon the American commonwealths only from above; and it is a debatable question whether the national government has the constitutional power to do this. At all events, for New York State to act independently in this matter would be, in our opinion, highly inexpedient. "Whatever may be the situation in future years, your Commissioners are convinced that to advance the project of a direct state income tax at the present time is an iridescent dream. The scheme might succeed in bringing in some revenue, but it would, in our opinion, be sure to bring in its train inequality, fraud and corruption. Far from being a remedy for our present evils it would only accentuate those evils. "It is for these reasons that we consider the imposition at the present time of a direct state income tax inexpedient and inadvisable." 1 Report of the Commission on Revenue and Taxation of the State of California, 1906. Sacramento, 1906, p. 14. 2 Report of the Special Tax Commission of the State of New York. Albany, 1907, pp. 46 et seq. While states at the opposite ends of the country, like California and New York, were taking this attitude of dissent, an entirely different movement was in progress in Wisconsin. Wisconsin, as is well known, has been among the leaders in the American states in the reform of its fiscal administration; and since the beginning of the century the state tax commission, which was given considerable powers over local assessments, has done admirable work. As early as 1903 the dissatisfaction with the general property tax led Mr. Nils P. Haugen, a member of the state tax commission, to propose an income tax; and a general resolution authorizing a constitutional amendment for a graduated income tax passed the legislature in 1903. Through a technical defect the amendment could. not be submitted to the people, and in 1905 the resolution was again passed. In 1907 it passed the second time and in 1908 it was finally adopted by the people by a large majority. From now on Professor Thomas S. Adams became one of the leading advocates of the new scheme.1 In 1909 an income tax bill was introduced and referred to a recess committee to investigate the subject. At the next session of the legislature in 1911 the committee reported favorably and the law was adopted on July 15, 1911.2 The fundamental point in the law was a revolution in administrative methods. The administration of the law, instead of being left to local officials, as is the case with all other state income taxes of the United States and as is the general rule with the general property tax, was now centralized in the state 1 Cf. his address on "The Place of the Income Tax in the Reform of State Taxation," in Papers and Discussions of the 23d Annual Meeting of the American Economic Association. Princeton, 1911, pp. 302-321. See also his paper in State and Local Taxation. Fourth International Conference under the Auspices of the International Tax Association. Addresses and Proceedings, Columbus, 1911, pp. 87 et seq. 2 The best discussion of the Wisconsin income tax will be found in the Report of the Wisconsin Tax Commission for 1910, Chapter II; in the Report for 1912, Chapters III and IV; and two articles by Professor T. S. Adams, the one entitled "The Wisconsin Income Tax," in the American Economic Review for December, 1911, the other entitled "The Significance of the Wisconsin Income Tax," in the Political Science Quarterly for December, 1913 (volume xxviii, pp. 569 et seq.). tax commission. The assessors charged with the duty of levying the income tax were to be appointed after civil service examinations and were thus made entirely independent of local influences. This was the first great achievement of the law. The tax itself was not conceived of as a tax over and above the general property tax, as is the case in the other states, but was intended to be a substitute, in part at least, for the unworkable tax on personal property. In the original bill the income tax was declared to be a substitute for the personal property tax. In the bill as finally enacted it was felt very doubtful as to whether it would raise as much money as the old personal property tax, and therefore only a few classes of personal property, like moneys and credits, farm machinery, household furniture and personal ornaments, were exempted from the property tax. It was provided, however, that any tax paid on personal property might be subtracted by the taxpayer from his income tax. Moreover 70% of the proceeds go to the locality where the tax is collected, 20% to the county, and only 10% to the state. The state is expected to spend this 10% in administering the tax, so that it will derive no net income from the tax. Finally, it may be pointed out that the income tax does not apply to those corporations which pay taxes directly to the state government. These are the railroads, street railways, gas and power companies associated with street railways, and insurance companies. By an amendment of 1913 banks and trust companies have also been exempted from the income tax for the same reason that they are subject to an ad valorem tax imposed by the state. The Wisconsin income tax is applicable to persons living in Wisconsin, to the business transacted there, and to income derived from property within the state. The tax is a graduated one. The exemptions are $800 for an individual, $1200 for a husband and wife, and $200 additional for each child entirely dependent upon the taxpayer for support. Only the surplus income above these exemptions is taxable. The rate is 1% on the first thousand dollars and rises to 6% on the taxable income over $12,000.1 In the case of corporations the rate is different. The original law was rather complicated, the rate being determined by the relation between the taxable income and the assessed value of the property used in the acquisition of the income, and amounting to practically one-half of the earnings as calculated on the assessed value of the property. This was found, however, to be a very cumbrous method, and in 1913 the system was changed so as to tax corporations on net incomes according to the same principle as individuals, with the exception that the rates are different. In the case of corporations the rate rises from 2% on the first thousand dollars' income (without any exemptions or deductions) up to 6% on income over $6000.3 2 The original scale of the income tax on corporations was as follows: PER CENT OF TAXABLE INCOME TO ASSESSED RATE ON PER CENT OF TAXABLE INCOME TO ASSESSED VALUE OF PROPERTY ENTIRE INCOME VALUE OF PROPERTY RATE ON |