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504. Impairment of Contracts by Taxation.

When, however, the States and their political subdivisions have endeavored to use their taxing power as an indirect means of avoiding explicit contract obligations, the Supreme Court has not hesitated to interpose its veto. Indeed, the court has said that attempted taxation has been the mode most frequently employed for the impairment of contracts.

Thus, in 1871, the city of Charleston by ordinance directed the city treasurer to retain out of the interest due on city stock a tax assessed on all the real and personal property in the city. This ordinance the Supreme Court in Murray v. Charleston" held void

that in consideration of the payment of a gross sum or an annual percentage of its earnings it had been granted the right to construct and operate a street railway in the city of New York, such payments not having been specifically declared to be in lieu of all taxes. In its opinion the following is quoted with approval from the opinion of the court below:

The franchises are grants which usually contain contracts, executed by the municipality, but executory as to the owner. They contain various conditions and stipulations to be observed by the holders of the privilege, such as payment of a license fee, of a gross sum down, of a specific sum each year, or a certain percentage of receipts, as a consideration, or in full satisfaction for the use of the streets.' There is no provision that the special franchise, or the property created by the grant, shall be exempt from taxation. . . . "The condition upon which a franchise is granted is the purchase price of the grant, the payment of which in money, or by agreement to bear some burden, brought the property into existence, which thereupon became taxable at the will of the legislature, the same as land granted or leased by the state. There is no implied covenant that property sold by the State cannot be taxed by the State, which can even tax its own bonds, given to borrow money for its own use, unless they contain an express stipulation of exemption. The rule of strict construction applies to state grants, and unless there is an express stipulation not to tax, the right is reserved as an attribute of sovereignty. Special franchises were not taxed until, by the act of 1899, amending the tax law, they were added to the other taxable property of the State. This is all that the statute does, so far as the question now under consideration is concerned. No part of the grant is changed, no stipulation altered, no payment increased, and nothing exacted from the owner of the franchise that is not exacted from the owners of property generally. No blow is struck at the franchise, as such, for it remains with every right conferred in full force; but, as it is property, it is required to contribute its ratable share, dependent only upon value, toward the support of government.”

41 96 U. S. 432; 24 L. ed. 760.

as an impairment of the obligation of the contract of the city with its creditors.42

505. Instances of Incapacity of the States to Contract.

With reference, also, to various matters which, properly speaking, cannot be said to fall within the domain of the police power, the state legislatures have been held to be incompetent to contract.

42 The court say: "We do not question the existence of a state power to levy taxes as claimed, nor the subordination of contracts to it, so far as it is unrestrained by constitutional limitation. But the power is not without limits, and one of its limitations is found in the clause of the federal Constitution, that no State shall pass a law impairing the obligation of contracts. A change of the expressed stipulations of a contract, or a relief of a debtor from strict and literal compliance with its requirements, can no more be affected by an exertion of the taxing power than it can be by the exertion of any power of a state legislature. The constitutional provision against impairing contract obligations is a limit upon the taxing power, as well as upon all legislation, whatever form it may assume. Indeed, attempted state taxation is the mode most frequently adopted to affect contracts contrary to the constitutional inhibition. It most frequently calls for the exercise of our supervisory power. It may, then, safely be affirmed that no State, by virtue of its taxing power, can say to a debtor, 'You need not pay to your creditor all of what you have promised to him. You may satisfy your duty by retain ing a part for yourself, or for some municipality, or for the state treasury.' Much less can a city say, 'We will tax our debt to you, and in virtue of the tax withhold a part for our use.' . . . Is, then, property which consists in the promise of a State, or of a municipality of a State, beyond the reach of taxation? We do not affirm that it is. A State may undoubtedly tax any of its creditors within its jurisdiction for the debt due to him, and regulate the amount of the tax by the rate of interest the debt bears, if its promise be left unchanged. A tax thus laid impairs no obligation assumed. It leaves the contract untouched. But until payment of the debt or interest has been made, as stipulated, we think no act of state sovereignty can work an exoneration from what has been promised to the creditor, namely: payment to him without a violation of the Constitution. The true rule of every case of property founded on contract with the government is this: it must first be reduced into possession, and then it will become subject, in common with other similar property, to the right of the government to raise contributions upon it. It may be said that the government may fulfill this principle by paying the interest with one hand, and taking back the amount of the tax with the other. But to this the answer is, that, to comply truly with the rule, the tax must be upon all the money of the community, not upon the particular portion of it which is paid to the public creditors, and it ought besides to be so regulated as not to include a lien of the tax upon the fund.

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Thus in Newton v. Commissioner it was declared, with reference to the location of a county seat, that one legislature could not bind its successors. So, also, in Illinois Central R. R. Co. v. Illinois" the Supreme Court held that the people of the State were, as a continuing whole, interested in the navigable waters of the State and in the lands under them, and that, therefore, the title to them was held in trust by the State and could not be ceded away.

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In Munn v. Illinois and in the Granger Cases, the doctrine of the regulative power of the States over public service corporations, and those whose business is affected with a public interest, was established, and that this is a power the exercise of which is not to be construed as restrained by charter provisions except when it plainly appears that this has been intended. And, even when the grant is in unequivocal language, it will not be held valid against subsequent legislation as to matters which vitally or even seriously affect the public welfare, that is, relate to subjects within the field of legitimate police control. In this respect the protection of private rights under the due process clause and under the obligation clause is the same.

§ 506. Regulation of Rates.

With reference to the foregoing it is perhaps worthy of special mention that the right of public service corporations to fix their own charges or tolls is one which the legislature may grant, and, when granted, constitute a contract which the legislature may not The creditor should be no otherwise acted upon than as every other possessor of moneys, and, consequently, the money he receives from the public can then only be a fit subject of taxation when it is entirely separated' (from the contract), and thrown undistinguished into the common mass.' 3 Hamilton, Works, 514 et seq. Thus only can contracts with the State be allowed to have the same meaning as all other similar contracts have."

43 100 U. S. 548; 25 L. ed. 710.

44 146 U. S. 387; 13 Sup. Ct. Rep. 110; 36 L. ed. 1018.

45 94 U. S. 113; 24 L. ed. 77.

46 C. B. & Q. R. Co. v. Iowa, 94 U. S. 155; 24 L. ed. 94; Peik v. C. & N. Ry. Co., 94 U. S. 164; 24 L. ed. 97; C. M. & St. P. R. R. Co. v. Ackley, 94 U. S. 174; 24 L. ed. 99.

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subsequently impair. It does not need to be said, however, that this agreement upon the part of the State not to exercise its regulative power is one that must be explicitly stated. A general grant to the corporation of the power to fix, or alter its charges or tolls as it may think proper, is not an abdication by the State of its power of control.48 Nor does a grant to the corporation of a power to fix its own rates, provided they are not unreasonable, have this effect;19 nor does a grant of power to fix the charges, provided they be not in excess of a specified rate, prevent the State from later fixing a lower rate.50 And, generally, the reservation by the State of a power to amend or revoke the charter, carries with it a power to regulate the charges that may be made.51

§ 507. Eminent Domain and the Obligation of Contracts.

That property of incorporated companies, like other species of property, are subject to the State's power of eminent domain, is not questioned. In Long Island Water Supply Co. v. Brooklyn52 it is declared: "A contract is property, and, like any other property, may be taken under condemnation proceedings for public use. Its condemnation is of course subject to the rule of just compensation. The true view is that the condemnation proceedings do not impair the contract, do not break its obligations, but appropriate it, as they do the tangible property of the com pany, to the public uses." 53

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47 Los Angeles v. Los Angeles City Water Co., 177 U. S. 558; 20 Sup. Ct. Rep. 736; 44 L. ed. 886.

48 Stone v. Ill. Cent. Ry. Co., 116 U. S. 347; 6 Sup. Ct. Rep. 348; 29 L. ed. 650.

49 Chicago, etc., Ry. Co. v. Minn., 134 U. S. 418; 10 Sup. Ct. Rep. 462; 33 L. ed. 970.

50 Georgia R. & Bkg. Co. v. Smith, 128 U. S. 174; 9 Sup. Ct. Rep. 47; 32 L. ed. 377.

51 Peik v. Chicago, etc., R. R. Co., 94 U. S. 164; 24 L. ed. 97.

52 166 U. S. 685; 17 Sup. Ct. Rep. 718; 41 L. ed. 1165.

53" Into all contracts, whether made between States and individuals or between individuals only, there enter conditions which arise, not out of the literal terms of the contract itself; they are superinduced by the preëxisting and higher authority of the laws of nature, or nations, or of the community to which the parties belong; they are always presumed, and must be presumed, to be known and recognized by all, are binding upon all, and need

§ 508. The Construction of Contracts.

Under the obligation clause no general power is given to the federal Supreme Court to review the decisions of state courts as to the proper construction to be given to the terms of a subsisting contract. In Lehigh Water Co. v. Easton the court say: "The argument in behalf of the company seems to rest upon the general idea that this court, under the statutes defining its appellate jurisdiction, may re-examine the judgment of the state court in every case involving the enforcement of contracts. But this view is unsound. The state court may erroneously determine questions. arising under a contract which constitutes the basis of the suit before it; it may hold a contract void which in our opinion is valid; it may judge a contract to be valid which in our opinion is void; or its interpretation of the contract may in our opinion be radically wrong; but in neither of such cases would the judgment be reviewable by this court under the clause of the Constitution protecting the obligation of contracts against impairment by state legislation, and under the existing statutes defining and regulating its jurisdiction, unless that judgment, in terms or by its necessary operation, gives effect to some provision of the state Constitution, or some legislative enactment of the State, which is claimed by the unsuccessful party to impair the obligation of the particular contract in question."

never therefore be carried into express stipulation, for this could add nothing to their force. Every contract is made in subordination to them, and must yield to their control, as conditions inherent and paramount, wherever a necessity for their execution shall occur. Such a condition is the right of eminent domain. This right does not operate to impair the contract effected by it, but recognizes its obligation in the fullest extent, claiming only the fulfilment of an essential and inseparable condition. . . . A distinction has been attempted, in argument, between the power of a government to appropriate for public uses property which is corporeal, or may be said to be in being, and the like power in the government to resume or extinguish a franchise. The distinction, thus attempted, we regard as a refinement which has no foundation in reason, and one that, in truth, avoids the true legal or constitutional question in these causes; namely, that of the right of private persons, in the use or enjoyment of their private property, to control, and actually to prohibit the power and duty of the government to advance and protect the general good. We are aware of nothing peculiar to a franchise which can class it higher, or render it more sacred, than other property."

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