Omaha daily bee., 1902-07-19

the property in other states? For instance,
the Iowa lines are fed by the lines from
Missouri. Why should Nebraska be entitled
to participate in those lines? Illinois Is fed
by lines in other states. Why should Ne
braska be entitled to share in that valua-
ton? There is no court and no economist
has yet had the hardihood to say that the
stock and bond theory, or the market quo
tations Of stocks and bonds furnishes a fair
standard by which to measure the value OF
railroads. | have brought with me here a
short address by Henry c. Adams, on the
valuation Of railroad franchises. He is pro-
fessor Of political science, University Of
Michigan, and special expert on franchise
ya'uation for Michigan Tax commission. 1t
is an extract from his recent address before
the National Conference on Taxation, held
by the Civic federation at Buffalo. He says:
There are three reasons, as it appears to
me, Why the valuation of corporate prop
erty according to the market value of
Its stocks and bonds fails to meet the re-
quirements of a valid assessment.
!. In the first place, 1t must be recognized
that the market value of stocks and bonds
Is influenced by considerations quite inde-
erty, and, to the extent that this is true,
a tax on the basis of such valuation would
fail to conform to the generally accepted
rule of equity In assessment. The value
of a particular series of stock, for example,
is frequently influenced by the desire OF
NHG pIbIllOltI U Il new OIkdillLdNlOh W
gain control of the property which they
represent, In which case the price he is
willing TO bid is influenced more by his
estimate of the ultimate advantage to be
gained from the contemplated organiza-
ton than by the earning capacity of the
on the other hand. demands whatever he
thinks he can get. His reasoning is no
longer that of an investor, but. of a %strate-
gist. He Is In q position to block the or
ganization and values his property accord
lngly. This fact is so familiar as TO re-
ton of stocks and bonds also is frequently
influenced by speculation even more than
by considerations of Investment. How, for
example, could one arrive at the Industrial
worth of the Burlington, the Northern
Pacific, the Great Northern or the Union
Pacific by considering the market QUOTA
tons of the securities of these properties
during the last three months? 1t is evil
dent that the stock quotations of securi-
ties do not, and from the nature of the
influence to which they are exposed, can
not be. acceded to as a test of the COM
mereiai worth of the properties which such
be taxed on the basis of assessment de-
termined by the market value of Stocks
and bonds 1t Is likely that those which are
irdustrially weak, but strategically strong,
would pay relatively more in taxes than
those which are. industrially strong, but
The tax ought not in equity to be as
sessed TO corporations on the basis Of
valuation and not the valuation of the
promoter or the speculator which should
pc accepted by the assessor as a guide
In the valuation Of corporate franchises.
2. The second reason why market
value of stocks and bonds cannot be ac-
cepted as a safe basis of appraisal rest
upon the claim that the franchise value of
a business is not a simple or homogeneous
fact. Its analysis shows it to be made up
OF several elements, each of which, in
equity. may be imposed with a different
rate of taxation. This suggestion opens up
not now enter, but l desire to make clear
the meaning of this theoretical criticism
ton. The president of the American Steel
company in his testimony recently given
before the industrial commission explained
The capital of the new company, 1t will be
remembered, exceeds the aggregate capital
of companies organized by many millions
of dollars, and this Increase in capitaliza-
ton was defended on. the ground that the
new company controlled not only the. pro-
terial to be manufactured; that this con-
troll covered 50 per cent of the visible sup
supply at the estimated rate of consump-
ton would last for sixty years All this,
he claimed, was a sound asset of the COM
pany and should be represented by capital.
Admitting for the moment the accuracy
OF this presentation. and there is no reason
to believe that 1t fails to represent truly
the situation, it is evident that the value Of
so much of the capital of this organization
as represents its beds of iron and of coal
depends upon the fact that this organiza-
ton has monopolized the situation. Ordi-
narily an iron mine which cannot be used
for sixty years would have little present
value, but this steel company. it will be OBJ
served, regards this future output as hav-
the market a security which cannot be sup
ported by sale OF product, for sixty years
such a security is to charge a price for the
current output adequate to pay a dividend
upon a property which represents a process
the case cannot be performed for two
1t seems to me evident that the ability Of
this organization to float these excess Sc
curlties is due TO Its monopoly and not to its
assets, n the point l wish to make is
e higher rate of taxation than property
which represents a current process of in
dustry under conditions which guarantee
a fair price for services rendered. II, now,
the franchise of such a corporation is de-
termined by the market value of stocks and
tinguish between these two classes of
value, and the legislature is not able to as
sign a higher rate of taxation upon the
present worth of capital to a future prod
uct than It assigns to the present worth of
conclusion that. insofar as the commercial
success of the so-called industrials de-
Ponds upon their ability to control the price
to the consumer. the franchise value thus
created should be made the basis of spe-
cial taxation, and this cannot be done under
market quotations Of stocks and bonds. 10
express 1t another way, it seems essential
admit should characterize the administra-
ton OF the taxing system that the physical
CltliSnt IN an INDUSTRY, Dy which | mean
its machinery and its plant, should be
valued separately from the nonphysical
element, that the nonphysical element IT.
self should be analysed and a rate of taxa
ton imposed upon II in harmony with its
commercial basis and its social significance,
Should this suggestion be admitted AS
sound there Is no escape from the concl1-
sion that the appraisal of franchise valua.
ton on the basis of the market quotations
OF stocks and bonds fails to conform TO Tho
ton.
The third point is practically along the
same line.
Great stress is laid upon the proposition
that railroad companies are given the
right to exercise the power Of eminent do
main. That is a right which is absolutely
essential to the existence OF the corpora.
ton. and without which II could not &C.
complish the purpose for which 1t is called
into existence. That right is valuable tc
a railroad in its ineipiency, when it starts
out to construct its road, but after the
road is completed and has been in op-
Grafton for years, and desires no Longer
TO extend in any particular direction the
right becomes suspended as 1t we're; it Il
no longer valuable. But. predicated upor
hat right, the state assumes the power L
regulate and control these corporations
and to prescribe and fix the rates which
they shall charge for transporting persons
and property. so that for the use OF tina
power the railroad company surrenders t
the state more than the state gives.