§ 7. Value for taxation and for rate purposes.

As to the relation between valuation for taxation and valuation for rate purposes, the Valuation Committee of the National Association of Railroad Commissioners says: 9

There is no inherent inconsistency in using one method of valuation for tax purposes and another method for rate purposes. The tax, by whatever method assessed, is considered an operating expense in fixing rates, and is therefore borne by the user of the service wherever rates of charge are strictly regulated. Methods of ad valorem taxation must be worked out with an eye single to what is just and practicable in taxation, and methods of valuation for rate purposes must be worked out with an eye single to what is just and constitutional in rate making.

Substantially the same position is taken by the Railroad Commission of Indiana in a case entitled In the Matter of Local Merchandise Rates of the Express Companies in the State of Indiana, No. 495, January 31, 1912. In Indiana, express companies are taxed on the so-called unit rule on the entire value of their property as a going concern. In the above case the companies claimed that they were entitled to a fair return on the tax value of their property in the State of Indiana, but Commissioner Wood in delivering the opinion of the Commission states that tax value and fair value for rate purposes may be entirely different. He says:

With reference to taxation values in the State of Indiana, we hold that this is not the value upon which the carriers can claim a rate. We hold that they are entitled to earn and to pay to the State whatever assessment is made against them, no matter on what method the assessment may be made, and that the amount paid must be allowed to them just as the cost

'National Association of Railway Commissioners, Proceedings of the 23d Annual Convention, October, 1911, p. 148.

of operation is allowed to them, but on the other hand the taxation value is not the value upon which to base the rate, but the rate must be based upon the amount which they have invested, and not otherwise.

In Spring Valley Water Co. v. San Francisco, 165 Fed. 667, 696, decided Oct. 7, 1908, District Judge Farrington says:

The argument that the franchise ought to be worth something for rate-fixing purposes if it is worth millions for taxation is not without force. The value fixed by the assessors, however, is not admissible as evidence of value in condemnation proceedings. Lewis on Eminent Domain, § 448. And such evidence is of little worth here. If the aggregate value of the franchise and physical property as assessed did not exceed the total valuation for water rates, the company suffered no injustice.

In Willcox v. Consolidated Gas Company, 212 U. S. 19, 51, 29 Sup. Ct. 192, 53 L. ed. 382, decided Jan. 4, 1909, the United States Supreme Court rejected the company's claim that the tax value of special franchises should control their value for rate purposes, saying:

The fact that the State has taxed the company upon its franchises at a greater value than is awarded them here, is not material. Those taxes, even if founded upon an erroneous valuation, were properly treated by the company as part of its operating expenses, to be paid out of its earnings before the net amount could be arrived at applicable to dividends, and if such latter sums were not sufficient to permit the proper return on the property used by the company for the public, then the rate would be inadequate. The future assessment of the value of the franchises, it is presumed, will be much lessened if it is seen that the great profits upon which that value was based are largely reduced by legislative action. In that way the consumer will be benefited by paying a reduced sum (although indirectly) for taxes.

The Wisconsin Railroad Commission, in Hill v. Antigo Water Co., 3 W. R. C. R. 623, 728, decided August 3, 1909, follows the same reasoning as the United States Supreme Court in the Consolidated Gas Case, saying:

Public utilities, like other property, are supposed to be taxed upon their earning or market value. This assessment is made annually. The market value depends very largely upon the net earnings of an enterprise, and the net earnings, in turn, to a considerable extent rest upon the rates charged per unit for the services rendered. When the rates are increased, there is apt to be increase in the net earnings and in the market or assessed valuation. When the rates are reduced, the net earnings, together with the values named, are also apt to be reduced. There is thus a rather close relation between the assessed valuation and the rates. If utilities are permitted to charge high rates and thereby increase their net earnings or market value, it would seem to be only fair that they should also be required to pay taxes on the higher valuation. On the other hand, if the rates and the net earnings and market value are reduced, corresponding reductions should also be made in the assessed valuation. This is precisely what takes place. The assessments for taxation are changing with the net earnings or with market values. This practice would seem to be fair and to be in line with public policy. Since the assessment for taxation thus varies with the rates, it is difficult to see on what just grounds the state should be compelled to use the same valuation for rate-fixing purposes as that upon which taxes are levied.

There is no authority for the doctrine that an appraisal for taxation is necessarily a proper valuation for rate purposes. Tax laws differ widely and the bases of appraisal are many. It is needless to say that precedents as to appraisal for tax purposes are of no importance in considering valuations for public purchase, rate making or capitalization. It may be that when the method of valuation for rate purposes has become clearly and

authoritatively defined it may seem just and practicable to adopt it also as the basis for taxation. But until that time comes talk of a common valuation is futile. The basis of taxation can be fixed by the legislature but the basis of a just and reasonable valuation for rate purposes or for condemnation purposes can only be worked out in the last instance by the Supreme Court of the United States. In view of these facts valuation for tax purposes is not included in this treatise.

There are a few cases, however, quoted in the following sections, that seem to hold that under the special provisions of the state tax law fair value for rate purposes is the same as fair value for taxation.

§ 8. Tax and rate purpose-Nebraska Supreme Court in Bee Building Co. Case, 1902.

The case of State ex rel. Bee Building Company v. Savage, 10 decided Sept. 18, 1902, involved the assessment for tax purposes of the railroads of Nebraska. An action of mandamus was brought for the purpose of compelling the members of the State Board of Equalization to reassemble and reassess the property of the railroad, telegraph and sleeping-car companies doing business in Nebraska subject to taxation for general revenue purposes. The Supreme Court of Nebraska held that under the Nebraska law the railroads should be valued at the true value of their tangible and intangible property, including franchises, and taking into consideration the net earnings and the market value of the stocks and bonds. In other words, the fair market value of the property as a going concern should govern. In discussing this question the court states that the property can have but one true value whatever the purpose of the investigation, whether for the purpose of fixing fair value for rate making or for

10 65 Neb. 714, 91 N. W. 716.

purposes of taxation. The court, by Judge Holcomb, says (at page 724 N. W.):

As to just what will determine the value of the entire railroad property, a part of which is to be assessed in any one state or taxing jurisdiction, the courts themselves are not in entire accord. There are, doubtless, many elements and factors which conduce to a correct determination of the true value, and may properly be considered, which have received the approval of the courts generally. It is not so important what the nature of the inquiry is when the question of the true value of the property is involved. The property can have but one true value, whatever may be the purpose of the investigation. Whether it be for the purpose of fixing reasonable rates for the transportation of passengers and carrying of freight, or for the purpose of taxation, the rule to be applied in ascertaining the value of the property should be the same. If the railroad companies insist that their property is of a certain value for the purpose of determining what are reasonable maximum charges for the transportation of passengers and carrying of freight, they have no ground of complaint if the same property is assessed at the same value for taxation purposes. The same property cannot rightfully be valued at one sum for one of the purposes mentioned, and at a different amount for the other. The state is too just in the administration of its laws to insist that railroad property should, for taxation, be considered as of very great value, and for the purpose of regulating rates to be charged by such corporations as common carriers that the value of the same property is altogether lower.

As valuation for rate purposes was not submitted in evidence or considered in any way in this case, the above reasoning is pure dicta.

§ 9. Tax and rate purpose-District Judge McPherson in St. Louis & S. F. R. Co. Rate Case, 1909.

St. Louis & S. F. R. Co. v. Hadley, Atty. Gen. of Mo., 168 Fed. 317, decided March 8, 1909, is a railroad