The Question of Railway Taxation
Publication:
The Empire Club of Canada Addresses (Toronto, Canada), 24 Mar 1904, p. 125-137


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Pettypiece, H.J., Speaker
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Text
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Speeches
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This question of railway taxation only two or three years old in this Province. Opponents of railway taxation and what they say. The speaker's response to that opposition. Our miles of railway and what they have cost the people. The advantage, under the bonding privilege, that there is no International boundary line. Railways in Canada and in the United States may freely cross into the other country to seek traffic for which they charge. The issue as to the burden of taxation being shared by the United States. How the question of railway taxation became a serious problem in the U.S. after the Civil War. Different systems of taxation that have been tried in the U.S. and in Canada. Our two current systems of taxation of railways properties in Ontario: Municipal assessment of railway property and the supplementary revenue on the flat rate of $5 per mile of every mile of railway in the Province. The fact that neither one of these systems are satisfactory, and a discussion as to why that is so. Systems of taxation on earnings, as seen in Manitoba and Quebec. The "ad valorem" system of taxation for Municipal purposes in Ontario: should it be applied to railways and who should apply it. Boards of Assessment. A discussion, and an examination of the U.S. system of railway property assessment. Problems and difficulties, and examples from the U.S. Figures for the Grand Trunk Railway system: miles and dollars. The speaker's point of view and his expectation that the people of Ontario will receive in a few years from now, if not immediately, a great source of revenue from the railways of this country. Lightening the burden of taxation to every individual in the Province of Ontario by having the railway companies pay into the treasury or into the municipalities their fair share of taxes. The argument that the more the railways are taxed, the better the rates will be.
Date of Original:
24 Mar 1904
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English
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THE QUESTION OF RAILWAY TAXATION.
Address delivered before the Empire Club, at their Luncheon, on March 24th, 1904, by Mr. H. J. Pettypiece, M.P.P.

MR. PRESIDENT,--me say that this question of railway taxation is one of only two or three years growth in this Province. Until two or three years ago, in the Legislature, or in Municipalities, or anywhere that taxation is a subject of discussion the question of taxing railways was not considered to any great extent. I brought up the matter, however, and it has proven to be today a Provincial subject, being discussed everywhere; and when I was asked two or three weeks ago to address the Canadian Club in this City I thought probably that was they highest point which I could reach in connection with it. Of course the Canadian Club is the Canadian Club, but the Empire Club is something bigger.

Sometimes we are told, and a great many of the opponents of railway taxation say, that you should not tax railways because, being public utilities, deriving all their revenues from the people, if you put any burden of taxation upon them they will increase their rates and shift the burden back on to the people. But let us bear in mind that there is no class of investment in the Dominion of Canada today which has been so much favoured by the people as that which we call railway investment. The railways of this country have been bonused or aided by Dominion, Provincial and Municipal grants to the amount of about $325,000,000, which is equivalent to our National Debt today, or, in other words, if we handed today back to the people the money and lands and lines that we have built and then given to railway companies we could wipe out our National Debt, principal and interest at once, so that every dollar of interest of the ten or twelve million we are paying practically represents what we have given to the railway companies of this country.

We have here nearly 20,000 miles of railway and these have been aided to the extent of about $18,ooo per mile by the people. They have that special advantage. They have other special advantages that no other class of investment has. The manufacturers of this Province or anywhere in this Dominion are handicapped to a certain extent by an International boundary line, or in other words by two tariff walls, one built up by our people and one by our rivals to the south of us. Under the bonding privilege the railway companies of this country know no International boundary line, and have no tariff walls to contend with. The railway systems of the United States which operate through this country are as free to go across the boundary line at the Detroit River, the St. Clair River, the Niagara River and any other place as they are to cross from one township to another to seek the traffic on which they charge, both passengers and freight.

Our Grand Trunk system or C. P. R. system, which are the two great Canadian systems, are as free to go into Chicago on the west and all of the Western States, and into New York and Boston and the populous cities of the east to seek traffic as they are to go to Montreal or Winnipeg. So that they have all the advantages; whereas if you invest in manufacturing enterprises you are confined to the limited market that we have at home. I say under those conditions our own railway systems and especially the American railway systems that find it to their advantage to utilize our roads that have practically been built by the people for the conveyance of their products from the Western States and Provinces to the sea-board, should bear some of the burden of taxation as well as other people; and if there is any argument to be used I think one of the best is that they bear the burdens elsewhere. In discussing this matter I refer to the States sometimes. We often do. There is hardly an important measure that comes before the Legislature but what somewhere in the debate a comparison will be made with what is done in New York or Michigan or some of the different States of the Union; and in most of the matters under discussion we are in a position to point out that Ontario is in advance of the States; but in this question we are twenty-five years behind them.

The question of railway taxation became a serious problem in the United States after the Civil War. Their great debt incurred in carrying on that war necessitated the taxing of everything in sight and railways among other classes of property, and the thirty-five years of experience they have had has resolved itself into this that there is only one proper and satisfactory way by which railway property can be taxed and that is by State Boards of Assessment Commissioners. I did not bring with me, but I received yesterday in reply to an application for its publications to the American Inter-State Commerce Commission at Washington, a volume containing twelve years review of railway taxation in every State in the Union, and I find out of fifty of the States forty-five of them have already adopted the ad valorem system of taxation. I want to refer to this briefly. Different systems have been tried and we have now in a small way a system of taxation of railway properties in this country, in fact two of them. We have Municipal assessment of railway property, which means that railway property running through a township or in a city shall be taxed just as the adjoining lands are.- There are eight acres of railway land to every mile of right-of-way. Those are taxed. Then we have next the supplementary revenue on the flat rate of $5 per mile of every mile of railway in the Province.

Neither one of these systems are satisfactory. A flat rate is unsatisfactory because it is unfair to the railroads as between themselves. Take a little line like the Irondale, Bancroft and Ottawa, serving a local community and having no other sort of revenue but what comes from the people within a short distance of it, passengers and freight; having a train up in the morning and back in' the evening; and to say that that railway should pay the same amount of taxes per mile as the Michigan Central operating between Niagara and Detroit, having the cream of through traffic of all the Western States, the Pullman business, all the Armour and Swift meat business, and all the traffic that Kansas City and the Western States gives to it, with the traffic back from the Atlantic cities to Chicago, where local traffic is a very secondary consideration and very often a poor second at that, with a double track line; to say that the little line that I refer to serving a local community should be imposed upon to the same amount by taxation is just as unfair as to say that a foot of frontage at the corner of King and Yonge Street should be taxed the same as a foot of frontage at the other end of the street.

Then there are systems of taxation on the earnings. Manitoba is doing that today. Quebec is doing it. Every mile of railway subsidized in Quebec pays back, on its earnings 5 percent every year to repay to the Province the amount of subsidy they got. Manitoba collects from 3 to 4 percent according to the earnings of the road, and so on. But that class of taxation of railway property is unfair as between the railway properties and other classes of property. We will say there is a prosperous year; crops are large; manufacturers are booming; wholesale merchants are sending out big orders of goods; and the railway traffic is consequently large and its earnings are large and we assess them say 5 per cent. on their gross earnings and they pay that share into the Provincial or Municipal treasury as the case may be. But it may be that lean years will follow when crops are short, prices are bad and there is a general depression in trade; railway traffic falls off 50, or 25 per cent., or whatever it may be; and of course the taxes we get from them fall off in the same proportion. But the State needs the same amount of money, and when the railway tax has fallen off eventually it turns back on the people to make up the deficiency, and at the very time they are least able to pay it you have to increase the general rate of taxation. So that we must have in this country one system of taxation on all classes of property.

The system of taxation for Municipal purposes all over Ontario is the ad valorem system. That is a valuation by an assessment or board of assessors of the property and then a rate of taxation sufficient to meet the requirements of the community. We must apply the same rate to railways, and if we adopt the ad valorem system should it be brought about by Municipalities or by Provinces? As I have said already an experience of thirty-five years in the United States shows it must be done by State Boards. Why? Railway property in its character is different from any other class of property. It extends in many cases from one ocean to the other. The Grand Trunk system operates over this Province; comes in at Montreal and out at the St. Clair tunnel and Windsor; and it operates through some four or five Municipalities. If you allow four or five hundred Municipal Assessors to undertake to assess the railway property within their respective municipalities it will lead to confusion. It has been tried in a great many of the States, such as Michigan and Illinois and particularly in New York-because municipalities there, like men here, are jealous of what they call municipal rights; they do not want any powers taken away from them and concentrated in Provincial or State Governments-they tried that and the result has been confusion, and some most laughable incidents.

For instance, the Assessor in one municipality having ten or twelve miles of railway across his township, in which there was an expensive cutting, an expensive culvert, a bridge or maybe a tunnel, and an expenditure of maybe a million dollars where the average cost of the road might be only fifty or sixty thousand dollars a mile, felt that that was an expenditure which necessitated or was a reason why he should tax it accordingly. Another Assessor having twelve miles of prairie country, where there was no cost in building the road except in turning it up, said, Well, they have got the roads built so cheaply they can afford to pay more taxes," and he would assess them up on the other hand; and there were instances pointed out where in adjoining townships one Assessor would assess at $1,000 a mile and another at $50,000 a mile. So it led to much confusion. The result was that the railways had to appeal to the Courts of Revision and finally to the judges, and when their appeal would come up in Court and the judge would say, " Mr. Assessor, on what ground did you fix that valuation?" He would know nothing about it and the Courts would decide the matter.

The United States Supreme Court decided that if railway property is to be assessed every railway must be assessed as an entire system indivisible in its operation, in its construction, in its responsibility for debt, in its sale, if it be sold under the hammer; the whole system must be considered and every Assessor prepared to say how much the part of the railway in his municipality is to be taxed and ascertain the cost. There are five principal elements of value entering into the cost of a railway: The right-of-way, the cost of building the road, the cost of its rolling stock, the amount of its capital including bonded debt, etc., and its earnings, gross and net. What Municipal Assessor has access or ability to obtain that information? Each Municipal Assessor will have to be provided, as each State Board in the United States is provided, with the machinery to enable him to ascertain all these details. These five elements of value in some States are divided into as many as thirty different other elements of value. In some cases they go so far as to make the railroad return the facts as to the weight of the rails, number of ties to the mile, character of the ballast, whether it is rock or gravel or cinder ballast, and so on. That is utterly impossible for the Municipal Assessor, to undertake and, if he did, maybe the next year a new council puts in a new Assessor and he wants to improve on his predecessor's work and he adopts something new. So that the whole thing has led to confusion and utter inability to derive any benefit in the way of assessment or taxation of railway property.

The State of Wisconsin four or five years ago appointed a special Commission to investigate the system of railway taxation all over the United States. It gave them an unlimited amount of money and time to look into the matter thoroughly. They spent four years at the work. Last year, at the Session of 1903, that Commission made its report before the Legislature. I have the Report. They dealt with other matters of taxation, but railway property principally, and they sum up the whole thing in a few words. The Board recommended that they abandon that principle; that it had been abandoned in nearly every State where it had been tried; and appoint a Board of Commissioners to assess the property, the same as we assess the property on King Street or a farm up in my County, and then impose upon it the average rate of taxation throughout the State. They recommended and they pointed out that that Board of Commissioners must have at their command the expert assistance of, first, a civil engineer and a competent accountant. A civil engineer who can go over a piece of road,, if the Board is not satisfied with the report made by the Company, and with his practical knowledge say whether the assessment is right or wrong. A competent accountant to examine their books and say whether in reporting their earnings the figures are being cooked or not. It goes on to say that every railway company on this continent is armed with the best available talent on both these lines regardless of expense and if the State is going to cope with the railroad in the matter of taxation the State Board must be armed with the same talent and just as good. That recommendation was adopted by the State Legislature and last year they made their first assesment under that system. I have not seen it yet.

The State of Michigan two years ago abandoned the earning system. Under the earning system they were collecting from the railways $1,200,000 upon the percentage basis. And let me say here that the mileage of railroads in Michigan is just about the same as in Ontario, probably a couple of hundred miles more, and their railways in regard to their location are pretty much the same. They have two or three trunk lines running from Chicago to the tunnel and Windsor and the other lines up in the peninsula are local lines. We have just the same. They adopted the ad valorem system. The State Board of Assessment in 1902 made their first appraisal or assessment of railway property in that State for the purpose of taxation. I have here a list of them received from the Secretary of the State Board Commission the other day, for 1902 and 1903. Bear in mind that the assessment is made in 1902 for taxes to be collected in July of the following year. The assessment made in 1903 will be the taxes payable on the 1st of July, 1904. The first year the total amount of assessment of railways made by the Board was $198,000,000. In Michigan all the revenue from railway taxation goes for educational purposes to the primary schools first, etc. The Detroit Board of Education being interested as they were to receive their share of the revenue from railway taxation felt that the Commission did not assess the railways high enough and they appealed against it.

The Supreme Court of the State sustained their appeal and increased the amount of taxes which they would pay. They were paying originally about $1,200,000 under the percentage on earnings. The Board made its assessment and increased it to over $2,000,000. Then under the Supreme Court decision the amount was increased to $2,800,000. Acting on that, taking a cue I suppose from the Supreme Court's decision, the Assessment Commission in making their assessment in the following year, 1903, increased the assessment of the railways in the State from $198,000,000 to $227,000,000, or an average of $28,000 per mile, which at their present rate of taxation means $445 per mile for every mile of railway in the State of Michigan. Under that rate of taxation let me refer briefly to the two or three lines which operate through Michigan as welt 'as Ontario, and I think we should take that into consideration. Take the Grand Trunk System, the Michigan Central, the Wabash, the Pere Marquette and the C. P. R. which crosses at the 500. All the earnings of these roads go into one common treasury. All the expenses, taxes included, are paid out of that fund. Under the Taxation law of Michigan the Grand Trunk is paying to it from the tunnel to Chicago $700 per mile in taxes in Michigan and $800 per mile in Indiana; in Ontario they are paying $56 per mile; in Maine, Vermont and New Hampshire, not to be compared with this Province in wealth, population or anything that goes to make up a country, they are paying $120 per mile, or more than double what they are paying here. The C.P.R. not quite as much over there.

Now, the Board of Assessment over there increased the assessment on the Grand Trunk proper, the main line from the tunnel to Chicago, from $11,000,000 to $13,000,000. The assessment on the 15 miles of the St. Clair Tunnel is $1,800,000. I brought that up in the House the other day and I found to my surprise that an Act had been passed by the Ontario Legislature in 1893 fixing or confirming a by-law of the town of Sarnia under which the tunnel property on this side of the river and all the buildings and yards in connection with it, station, round house and so on was fixed at $30,000 for twenty years and the Dominion Government had given to the tunnel a subsidy of $375,000. I sat down and figured that up and found out, I don't know what term to use, how easy we are in this country. That tunnel was going to be built; it was a necessity to the Grand Trunk; they found by building a tunnel under the river it was better than carrying the cars across on ferry boats. They did not get any railway subsidy from the United States or Michigan, they did not get any exemption from taxation, but they got from our people as I say $375,000 in cash, they got exemption for twenty years, or what practically meant that, because $30,000 assessment is a mere bagatelle; and the result is that while we gave them that amount of subsidy all , we get in taxes is about $630 a year. That is what we actually got last year. On the other side where they did not get a cent they paid last year $29,400 in taxes and I find under the increased assessment it will amount to $30,000 this year; $30,000 in taxes for twenty years is $600,000. Add to that the $375,000 we gave them and the interest on that would have practically given .them the best of it by a million dollars; and the rate charged on passenger traffic on the other end of the tunnel is 50 percent less than it is on our end of it. It is two cents a mile there and three cents here.

The assessment on the Pere Marquette system, which is now crossing this Province, from Sarnia and out at Buffalo, is $37,500 in Michigan. The Wabash is assessed over there for $5,000,000. So that we in this country are practically letting the railways escape taxation. One of the worst features about it is this, while we have built and subsidized these roads to the amount of about $20,000 a mile the main lines are used today principally for carrying across the Province of Ontario to the Atlantic seaboard products of the Western States to enter into competition in the free market of Great Britain with our own product, and they carry the products of Iowa and Michigan at a lower rate than they charge the Ontario manufacturer and Ontario farmer. So that we are handicapped when we reach there by the very means of transportation that we have built up in this country.

I will give you the Grand Trunk, figures because it is the line in which we are principally interested and which controls a network of lines over Ontario. The Grand Trunk Railway system has about 4,000 miles of track in round numbers; 3,000 of them are in Canada and 1,000 in the United States; there are 167 miles in Maine, New Hampshire and Vermont. Their gross earnings last year amounted to $1,200,000, operating expenses $1,120,000, leaving net earnings of that whole system of only $87,000 or $526 per mile. They paid in taxes in those three eastern States $52,000, or $111 per mile. Across in Michigan, Indiana and Illinois they have 870 miles in their system; gross earnings of six million odd; operating expenses five million odd; net earnings of $1,200,000, or $1,464 per mile; they pay in taxes $354,000, or $454 per mile, exclusive of what the tunnel taxes were.

In Canada there are 3,000 miles; their net earnings were $2,400 per mile and their taxes only $56 per mile. So you see the difference. They pay more taxes over there on their 1,000 miles four times over than they do here on their 3,000 miles; and they take the earnings that they have in Canada to help pay the taxes over there. The last Report of the Grand Trunk Company says that they transferred from the earnings in Canada to the credit of the Grand Haven and Milwaukee branch in Michigan the sum of $80,000 to meet the requirements of that road. Turn up the Michigan State Tax Commission Report and you will find the taxes of the Grand Haven and Milwaukee branch of the Grand Trunk were $84,000, so they practically took that out of the earnings of this people of Ontario, and we don't get any benefit of it when we are paying taxes over there instead of here. I think, and I have contended that in the House, that is the essence of my Bill, that the railway companies in this country should bear their fair share of taxation; and I think that probably they will have to do so.

I have not time to enter into the details of what we call Municipal assessment as compared to Provincial. In arguing this before the Committee last fall Mr. Hellmuth, who represented the Grand Trunk there, said "Oh, yes, you get this information from State Boards and of course they are in favour of State Boards taxing railways." I put myself in communication with the City Boards of Assessment in Buffalo, Cleveland, Detroit, Indianapolis, Chicago and Milwaukee, six representative and progressive cities in six of the adjoining States, and the replies from all are similar. , For instance, the Chairman of the City Board of Assessment in Detroit says, " We have nothing to do with the taxation of railways; the taxation of railways is done by a State Board at Lansing." I asked for certain information. I asked him first: What is the assessed value of railway property in your city? Does that railway property include round-houses, stations, repair shops, and so on? I wanted to ascertain whether they were assessing simply the railway itself or all the property used in connection with the operation of it. Is an assessment made by the State Board Assessors or by the City Boards, or partly by both? Indianapolis' reply was this: We have $9,800,000 worth of railway property in our city and that includes elevators, round-houses, stations, depots and everything in connection with the operation of the roads. Assessment is made by the State Board of Commissioners. Then I asked how the taxes were divided and the answer was, partly going to the State, partly td 'the school board and partly to the municipality. Is it satisfactory?" "Yes." There was one mile of railway, a terminal, that was assessed at $1,200,000 and under their rate of taxation it pays as much as all the railway property in the City of Hamilton and half as much as all the railway property in the City of Toronto pays. They collect two mills on that, on practically $10,000,000 worth of railway property, which amounts to $200,000. The answer of the Board of the City of Chicago was just exactly the same. They have about $57,000,000 worth of railway property in Chicago and it is all assessed by the Board sitting at Springfield, which is a country town compared with Chicago.

My argument is that if a city like Chicago or Detroit, or Indianapolis does not feel ,that its municipal machinery is sufficient to cope with and to assess railway property what are the Boo municipalities in Ontario going to do in attempting it? Chicago, no doubt, with its 2,000,000 people has possibly got as good legal counsel and as good expert assessors as can be obtained anywhere and still they hand over to the State Commissioners the taxation of railway property for the simple reason that a railway must be assessed as an entirety. The whole system must be taken into consideration, and then the proceeds of it go to the municipalities through which the road runs to be divided on some equitable basis. In a word, I know that this question is one of the live questions in Ontario today. I feel some self gratification about it. I cannot help but do so. I think I have done my share in bringing the public mind to the state it is, in. My expectation is, whether I live to see it or not, that the people of this Province will receive in a few years from now, if not immediately, a great source of revenue from the railways of this country.

If the railway companies of this Province should pay into the treasury or into the municipalities their fair share of taxes it would lighten the burden of taxation to every individual in the whole Province of Ontario. From a Report I have, it is shown that in thirty-three States of the Union the principal source of revenue is from railway taxation. Connecticut collects $1,000 a mile; Massachusetts $1,400 a mile; they put the principal burden of taxation on the railway for the reason that railways in collecting from people their revenues are collecting it from the people doing the business, sending their products abroad, whether it is the merchant or the manufacturer or the farmer, and the taxes are divided better than probably they could be divided in any other way. In twenty-two States of the Union railway taxation is practically the whole source of the revenue. So that railroads are made tax collectors.

Of course in this Province it is said if you increase their taxes they will run the rates up. The experience is, and the fact is, that the rates of freight and passengers in this Province are higher than in the adjoining States. They have a two cent a mile rate in Michigan. We don't get it in Ontario. The Grand Trunk has what it calls the Muskoka season, you see it advertised in all the papers. I can go into any station of the Grand Trunk in Michigan and buy a ticket to Gravenhurst or Huntsville, or any point in Muskoka, good for thirty days for $3.50. When I cross to Sarnia or my own town of Forest the best rate I can get is $10. In Forest if we want to take our wives or anybody and go up to Muskoka we write over to some friends in Port Huron, U.S.: "Buy me a couple of tickets and send them in a letter," and the conductors don't want to take those tickets because we didn't go to Port Huron and get on. So that if there is any argument in the thing it is that the more you tax railways the better rates you will get from them; and there is something in it. If you make the railways feel that in the contribution of taxes they have a responsibility to the Government of this country you will have a better class of railway rates and everything else. Just as soon as you make the citizen feel in making him pay taxes that he has got some responsibility you make a better citizen of him and the same applies to railways. I thank you very much for the kindly hearing you have given me.

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The Question of Railway Taxation


This question of railway taxation only two or three years old in this Province. Opponents of railway taxation and what they say. The speaker's response to that opposition. Our miles of railway and what they have cost the people. The advantage, under the bonding privilege, that there is no International boundary line. Railways in Canada and in the United States may freely cross into the other country to seek traffic for which they charge. The issue as to the burden of taxation being shared by the United States. How the question of railway taxation became a serious problem in the U.S. after the Civil War. Different systems of taxation that have been tried in the U.S. and in Canada. Our two current systems of taxation of railways properties in Ontario: Municipal assessment of railway property and the supplementary revenue on the flat rate of $5 per mile of every mile of railway in the Province. The fact that neither one of these systems are satisfactory, and a discussion as to why that is so. Systems of taxation on earnings, as seen in Manitoba and Quebec. The "ad valorem" system of taxation for Municipal purposes in Ontario: should it be applied to railways and who should apply it. Boards of Assessment. A discussion, and an examination of the U.S. system of railway property assessment. Problems and difficulties, and examples from the U.S. Figures for the Grand Trunk Railway system: miles and dollars. The speaker's point of view and his expectation that the people of Ontario will receive in a few years from now, if not immediately, a great source of revenue from the railways of this country. Lightening the burden of taxation to every individual in the Province of Ontario by having the railway companies pay into the treasury or into the municipalities their fair share of taxes. The argument that the more the railways are taxed, the better the rates will be.