Publication 216, The First 100 Years


Senate Constitutional Amendment Number One: Separation of Sources

The first attempt to impose a “separation of sources” policy failed with the defeat of the 1908 Senate Constitutional Amendment Number One, which was based upon the 1906 Commission proposals. The undaunted supporters of this amendment were nevertheless convinced that the public was in no way satisfied with the current system of taxation. They urged that a new amendment, substantially the same as the first, be submitted. Subsequently, on March 25, 1909, a new commission was formed by an act authorizing Governor James N. Gillett to appoint one commissioner and one secretary. As members of this commission the Governor chose Senator J. B. Curtin as commissioner and Professor C. C. Plehn as secretary.

On the advice of this commission the Legislature revised the 1908 amendment to eliminate those elements which the public found objectionable. The specific objections cited by the commission were: (1) no provision had been made for meeting a possible deficit without again amending the Constitution; (2) public service corporations had not been made clearly liable for their share of past bonded indebtedness; (3) in the event that a state tax on property had been found necessary, the property of the corporation taxed for state purposes would have been exempt from the levy; and (4) no provision had been made for varying the rate imposed on corporations.37

Accordingly, a new amendment, meeting the objections of the earlier amendment, was submitted to the voters on November 8, 1910. This amendment, generally referred to as Senate Constitutional Amendment Number One, passed by a vote of 141,312 to 96,493. The most significant change produced by this amendment involved the general property tax. Under the new amendment, the general property tax was abandoned as a source of revenue for the state; it was now to be retained as a revenue source for local government only.38 The state, having now lost its primary source of revenue, would derive the bulk of its revenue from gross receipts tax on public service corporations, a gross premiums tax on insurance companies, a capital stock tax banks, and a previously enacted inheritance tax.

Under the provisions of the new amendment, the operative property of the utilities—including railroads, street railroads, express companies, the Pullman Company, gas and electric companies, telephone and telegraph companies, and all other utility companies except water companies—the stocks of banks, insurance companies, corporation franchises, and inheritances were now taxed exclusively for state purposes. While property taxation was-now the exclusive domain of local governments, there remained a provision that in the event of a deficiency in state revenue, the state might levy an ad valorem tax. However, it should be noted that the state never invoked this provision.

With the passage of Amendment Number One it was widely assumed that the need for equalization would be eliminated. Since the state no longer relied on property taxes as a revenue source, what difference would it make whether counties assessed at different ratios?

In fact, a new type of equalization problem had evolved. The rate of tax imposed on each class of public service corporation was to be determined so that corporations and common property would bear equal tax burdens. Ideally the tax rates assigned to the various corporations would approximate the tax burden due had the corporations’ property been considered common property. Although the tax rates could be adjusted by a two-thirds vote of the Legislature, the equalization of tax burdens between individual corporations and between state and local tax sources proved a troublesome undertaking. This difficult assignment fell to the Board of Equalization, which states in its 1911-1912 Biennial Report:

“. . . it has been determined by the State Board of Equalization and approved by other authorities to make a comprehensive examination of the facts and to make a report for the guidance of the Legislature. Appraisers have been appointed and many pieces of real estate in each county selected, fairly distributed between town, city, and county property. These appraisers will endeavor to place a true and fair cash value on all these properties, then the total local taxes paid by each parcel will be ascertained, and from these figures it will be sought to estimate the average rate of taxation paid by all real property in this state.” 39

The results of this “examination” were issued in a 1912 special report,40 which stated:

“lt is the conclusion of the Board that the average tax rate in the state for all property except that of the withdrawn public service corporations is $1.1386 upon each $100 of actual value. The average rates of taxes paid by the several classes of the withdrawn public service corporations, as determined upon the basis of a stock and bond valuation, are:

  1. For railroads and street railways $0.9092 upon $100 of actual value of property.
  2. For gas and electric companies $0.75.
  3. For telegraph and telephone companies $0.9060.
  4. For car companies (Pullman Company only) $0.8813.
  5. For express companies (Wells Fargo and Company only) $1.5413.” 41

If listed in order along with the rate imposed on general property, these rates would appear as follows:

Gas and Electric Companies
Car Companies
Telephone and Telegraph Companies
General Property
Express Companies

These not only exhibited substantial variance in tax rates in general, but also exhibited tax rates favoring public service corporations over the general taxpayers.

Further scrutiny by the Board revealed surprisingly wide ranges in tax rates between one company and the next: “. . . the ratios of the railroads range from 0.3417 percent to 1.6588 percent, those of gas and electric companies from 0.3089 percent to 4.4112 percent, and those of telegraph and telephone companies from 0.6286 percent to 2.5014.” The Board further noted:

“But the difference between companies was no more than the differences between the counties, where the taxes range from $0.609 to $1.75 per $100 of true valuation, or from 1.83 to $40.38 per capita. It appears there are quite as great differences between individual taxpayers as between these companies.” 42

A 1917 Tax Commission reached similar conclusions in reporting:

First—The new system is an improvement over the old system, so far as the separation of assessment of public utility and intangible property is concerned. It would be unwise to return to the old method. Second—With the original rates, it failed as a revenue producer, however, and would have resulted in financial paralysis for the state had it not been for the fact that the Legislature responded to Governor Johnson’s recommendations by increasing the rates upon the gross earnings of corporations, first at the session of 1913 and again at the session of 1915. Third—It has not resulted in equality, either as between the corporations and the people or as between the various classes of corporations. An investigation by this commission demonstrates clearly that the little corporations are taxed far more heavily than are the big corporations." 43

Unfortunately, the findings of the 1917 Tax Commission were largely ignored. The national concerns, generated by the United States’ entry into World War I, seemed far more urgent than state and local tax matters. Nevertheless, the findings of this Commission were later reaffirmed in a report presented by the 1929 California Tax Commission.44 However, between 1917 and 1929, changes occurred in the state's tax structure that influenced the 1929 report.

37 Report of the Commission on Revenue and Taxation (Sacramento, 1910), pp. 12-13

38 The only exception was the Panama-Pacific Exposition Tax. One of the provisions of the 1910 amendment called for the raising of five million dollars for a 1915 world’s fair to be held in San Francisco. This one-time state tax was levied ad valorem on all property of corporations and individuals.

39 Report of the State Board of Equalization 1911-1912, pp. 113-114.

40 Special Report of the California State Board of Equalization on the Relative Burden of State and Local Taxation, 1912 (Sacramento: 1913).

41 Ibid, p. 5

42 Ibid, pp. 19-20.

43 Report of the State Tax Commission of the State of California, 1917. P. 9.

44 Final Report of the California Tax Commission (Sacramento, 1929)