The San Francisco call., 1896-10-14
Letters From the People.
TAXATION OF MORTGAGES

lAZAA i lOIN OF MIN 1tAJE~o
Viet0s of a Cstise,s Who Fduors the Pro-
posed Constitutional Amendment
E1empttng Them.
To the Editor of the San Francisco Cau-SIR:
In view OF the fact that several articles nave
appeared in the columns of your paper ana
other San Francisco dailies opposed to the
adoption OF the proposed amendment 10 the
constitution exempting mortgages and trust
deeds from taxation, beg leave to submit the
following considerations in its favor.
Before the adoption of the present constitu-
tion 1T was found that the lender or mortgage,
to escape the payment of the mortgage tax in
serted provision in the mortgage that the
borrower or mortgagor should pay the tax on
the m ortgage as well as on the property mort
gagged To prevent this the new constitution
provided by section 8, article XIII (Which is
proposed to be repealed by this anendment),
that every contract hereafter made, by which
debtor is obligated to pay any tax or assess
ment on money loaned, or on any mortgage,
deed of trust, or other lien, shall, as to any in
terest specified the rein, and as to such tax or
assessment, be null and void" This provision
was not SO successful as was anticipated, Tor,
although just and proper on its face, 1t
amounted to little more than usury law
without the binding force OF such an act. For,
although 1t prevented an express provision re-
quiring the mortgagor to pay the tax, 1t did
not prevent the mortgage charging an ex-
or btant rate of interest to cover all possible
expenditures for taxes on his part. Thus the
mortgagor in fact bore the burden as before
That this was the necessary result of the pro-
vision is very forcibly shown by MI. JUS lice
Harrison In Hewitt VS.. Dean, 81 Cal. D, IL:
"lt is well known thai prior to the adopuon OF
the present constitution 1t was the universal
custom for the mortgage 10 Incorporate into
the mortgage stipulation olndlng the mort
gagor to pay all taxes that m1ght De leYleo
upon the mortgage or the debt secured
thereby. This provision engendered a vast
amount OF litigation, and the collection OF this
tax was stoutly resisted at all points, Chiefly
upon the ground that tax imposed upon the
land, and also upon mortgage thereon, was
double taxation and unconstitutional AS
consequence of various decisions OF the Su-
preme Court in this litigation all money
loaned upon mortgage security escaped taxa
| tion, and the owner OF the land mortgaged was
| compelled to pay more than his share OF the
| expense OF government 1t was for the pur-
! pose OF obvlating this consequence tnat the
| constitutional convention adopted the lore
| going provision of section 5, article XIII, In
| order that portion OF the taxes might be col
! iected from the mortgagee and that the burden
| upon the mortgagor might not at the
same TIME De increased. Inc PROVISION III ~,
incorporated into the constitution was IN
| tended for the benefit OF the borrower but IT
! is unnecessary to say that the results expected
| therefrom have not been realized.
| "Al xperience has shown that the rate OF
| interest is governed by the infiexlDle laws OF
| trade, and is regulated by the same law OF sup
ply aud demand as that which governs all
| other articles of commerce., and that leglsla-
| lures and constitutional conventions are DOW
| erless in their attempts TO change this law;
| that whenever the State imposes TAX upon
commodity the burden OF that tax Is borne by
him whose necessities require him TO pur-
! chase, and not by him who holds 1t Tor sale.
1t is unnecessary 10 do more than
| to state the proposition that whatever bur-
| dens in the form of taxation the State i'm poses
| upon money which is loaned are in reality
| borne by the borrower, and not by the lender;
| for the loan, will invariably add the amount
/ OF this tax TO the market value OF the money,
and. under the guise OF interest, collect from
| the borrower sufficient amount TO reimburse
| himself for the amount OF the tax.
Justice Crockett, in the case of Savings and
Loan Society VS.. Austin, 40 Cal. 4l5: uses the
loaned is paid as compensation
for the use of the money, and the rate of
| interest, as agreed upon, is the amount which
| the parties stiDulate will be just equivalent TO
the lender If, however, by the imposition of
tax on the debt the Government diminishes
| the profit which the lender would otherwise
! receive, the rate of interest will be increased
sufficiently to cover the tax, which, in this
| way, will be ultimately paid by the borrower.
The transaction would be governed by the
| same immutable, infexible law of trade by
reason OF which import duties on articles of
| consumption are ultima te paid by the con-
/ sumer, and not by the importer.
| ~ He rate OF interest on money loaned Is reg
| ulated by the law OF supply and demand,
| which governs all articles of commerce, and
| burdens imposed by law, in the form of tax
| on the transaction, which would thereby
| diminish the profit of the lender is paid by
| him, will prompt him to compensate the loss
by increasing to that extent the rate of interest
demanded. II his money, would command
| given rate of interest without the burden he
| Will be vigilant to see that the borrower
sumes the burden. either by express stipula-
tion or in the form of increased interest. This
tc tl,a 1oHu hrlf N h Tnh tl1f
| laws are poweress TO suppress and which per-
vades the whole realm OF trade governed by
| the law OF supply and demand. Nor would
| the enactment of the most stringent usury
| laws produce different practical result. HUI
! man Ingenuity has hitherto proved inadequate
to the task of devising usury laws which were
| incapable of evasion and wherever they exist
! they are and viii continue to be subordinate
TO that highe law OF trade which ordains that
| money, like other articles of commercial value,
| will command just what it is worth in the
| market-no more and no less. Assuming these
! premises to be correct. and / am convinced
| that they are it results that it is the borrower
| and not the lender who In fact pays The tax on
| borrowed money. whethersecured by mortgage
| or not"
/ The tru h of these observations has at last
been seen by the legislature, and what is he
| remedy proposed That the borrower shall
! pay the taxes on the mortgage as well as on
the land mortgaged? ? No. But the only posi-
pie remedy, viz; that The mortgage be exs mpt
| from taxation. The discussion may be summed
| up as follows: If the mortgage is to be taxed
at all the mortgagor must ultimately bear he
| burden, and therefore the only way to avoid
| this is to exempt it from taxation entirely. 1t
| is objected that this will benefit the lender.
| Even granting that it will, will it not also
benefit the borrower? In other words, is IT
not advantageous TO the borrower to obtain
| money at the lowest possible rate or interest !?
1t certainly is Now, can he do SO when the
rate is fixed so as to cover all possible taxes
He certainly cannot. In my opinion, there
| lore, this amendment will be OF great benefit
| to the borrower; of far more benefit than it
| will be to the lender.
Since this conclusion was reached James D..
Phelan has written an open letter poin ting
out the fact that under the present constitu-
ton "credits" are taxable and maintains hat
an exemption of mortgages merely, as is
provided by this amendment, will not exempt
the mortgage debt or the note which the
mortgage secures If this conclusion be
correct, the purpose of the amendment would
be defeated. / do not think, however, that
sound construction OF the section as
amended warrants any such Interpretation.
The section in effect provides that s.aIl" prop
erty shall be taxed; that property includes
"credits," provided that mortgages shall g. ot
be taxed. 1t will be seen at glance that the
word mortgage is intended to limit the
| ord fGpro a,d 1;,,ai+ ~. a