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The chief instance in which the federal government has taxed railways occurred during the Civil War and was a war measure. In that exigency, demanding great revenue, the railway business was turned to for fiscal purposes, just as income taxes, stamp duties, licenses upon occupations, and other unwonted taxes were resorted to. As being a business preeminently inter-state in character,—one which the separate states could only with difficulty assess,—the railways of the nation were well suited for federal taxation.


Accordingly, on July 1, 1862, an internal revenue bill was passed which levied a tax upon the gross earnings from the passenger service of railways and other transportation agencies, and upon railway dividend and interest payments. Section eighty concerns railways, steamboats and ferries. It enacted that, after August 1, 1862, the owners or managers of any steam any limita

1 This chapter on taxation has been included in the book on Regulation, not because we regard taxes as regulation of railways analogous to rate regulation, for example, but because of its close connection to the preceding chapter, and because of the fact that taxation falls more nearly under regulation than under aid,-being, in a sense; a restriction upon the private use of railways.

3 "The guiding principle of the internal revenue of July 1, 1862, was the im. position of moderate duties upon a large number of objects rather than heavy duties upon a few. It included rates upon luxuries, represented by spirits, ales, beer, and tobacco ; licenses upon occupations ; duties upon manufactures or products; upon auction sales, carriages, yachts, billiard tables, and plate; upon slaughtered cattle, hogs, and sheep ; upon railroads, steamboats, and ferry boats, railroad bonds, banking institutions, and insurance companies ;" upon income, leg. acies, together with numerous stamp duties. (Dewey, Financial History of United States, p. 301.)

railway or steam vessel should pay a duty of 3 per cent. on the gross amount of all the receipts for the transportation of passengers; and that railways not using steam power and ferry boats should pay 112 per cent. Monthly reports of gross earnings from the passenger service were required, the accrued duties to be paid at the same time. For the purpose of making assessment or of ascertaining the correctness of returns the books of the company were to be open to government inspection, and fines were provided for neglect or evasion. And the section contains this significant proviso: “That all such persons, companies, and corporations shall have the right to add the duty or tax imposed hereby to their rates of fare tions which may exist by law or by agreement with any person or company which may have paid, or be liable to pay, such fare to the contrary notwithstanding."

The provisions concerning the taxation of railway interest payments and dividends are contained in section eighty-one, headed, “Railroad Bonds." Any railroad company having a funded indebtedness payable in one or more years after date, on which interest was to be paid, should pay 3 per cent. on such interest ; and all railways were made subject to a like duty upon all dividends in scrip or money, the company being authorized and required to deduct an amount equal to this duty from pay. ments to bond and stockholders. Reports were to be made to the commissioner of Internal Revenue as often as every six months, and fairly heavy penalty clauses were added.

Thus the salient features of the act are, a tax on gross earnings from passenger services, the rate being higher for steam than for street railways; and a tax on interest and dividend payments. The latter part of the measure is clearly part of the income tax scheme. The proviso that rates might be raised in proportion to the gross earnings tax regardless of existing legislative or contractual restrictions is significant as overruling the maximum rate provisions of certain states—e. g., New Yorkand shows that the tax was looked upon, not as being levied primarily upon the railways, but as being borne by travellers.


The debate on this bill was a long one and throws much light upon its meaning. Among the first points contested was the rate of taxation for street railways. The original proposal was a 3 per cent. rate, the same as for steam roads; but, on motion of Mr. Horton (0.), this was reduced to 112 per cent. in the House; and, though the Senate committee first favored the higher rate, the lower was finally adopted. Senator Fessenden (Vt.) explained that in the case of street railways and ferries the tax could not be added to the fares charged; they could add no less a sum than one cent, while “one gentleman stated

that if they added one cent to the fare, in order to raise a tax of $10,000, they would take $50,000 from the community.” So it was not a knowledge of monopoly price that actuated congressmen, but the (probably) mistaken notion that rates would be raised disproportionately to the tax. As already observed, it was the intention to allow rates to be raised in proportion to the tax rate, thus shifting the incidence of the tax to consumers of the transportation service; and when the interests concerned objected that the least possible increase in rates of fares meant an advance of over 3 per cent. they made their case.

It is interesting to notice that, assuming the same intention as to the incidence of the tax, quite a different argument based upon the impossibility of shifting a tax on gross income when the highest net returns are being received, would have led to the same result, and would have been the economically sound one, for in such a case the street railways could not shift the tax by raising rates without diminishing their returns, and this would have defeated the purpose assumed as truly as would a disproportionate payment by consumers. Such an argument, however, could not have been effective with so hungry a Congress, and to confess to a monopoly would have then been even more bold than at present.

Mr. Conkling (N. Y.) objected strenuously to the lower rate

: Ser Cong. Globe, 1861-62. Tid.. pp. 1480 9., 2331 ff.

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in the case of horse railways, believing that they were more profitable than steam railways,—which is obviously beside the point if the tax was to be shifted.

Another main question concerned the inclusion of freight earnings in the tax. This idea was rejected, apparently on the ground that the railways could not afford it, that it would be difficult to assess it, and that it would discriminate against them in their competition with untaxed water carriers. Mr. Blair (Pa.) argued strongly for the "tonnage tax;'? everyone con

“ sumed things which had been transported and no tax would rest more gently and equably upon the people, while he looked with great favor on the travelling habits of the people and deplored any measure which would hinder mobility. On this point the words of Mr. Horton (O.) are interesting in their naivite: “The provision of the bill simply charges a person for travelling,” he said. “If he does not travel he pays no tax; if he travels on business he can afford to pay the tax; and if he travels for pleasure, of course he will be willing to pay the tax.''

The beginning of the importance of the east-bound grain traffic appears in this connection, for Mr. Horton and Mr Kellogg (III.) opposed the tonnage tax on the ground that it would hinder this traffic.

In addition to the question of passenger revenue versus total revenue, the levying of a rate per passenger rather than a percentage of passenger revenue was debated. As the bill passed the House it provided for a duty of 2 mills per passenger mile, and the 3 per cent. rate was a Senate amendment. The House measure would have meant a rate of about 8 per cent. on the gross passenger earnings and this was well known to that body, so that it evidently favored a higher rate than did the Senate. A strong lobby worked upon the Senate committee, objecting very strenuously to the 2 mill tax as being too high and impossible of assessment. “From the mode in which railroads are connected together, and from their way fares and everything of

• Pennsylvania had had such a tax, having abandoned it only a few yeare previous to this time, on the ground that competition made the tax fall upon the local freight.

that description, it would be absolutely impossible to render an account,'' was Senator Fessenden's somewhat hazy statement of the case, and he told a story related by one gentleman who appeared before the committee to show how the railways guessed at the statistics upon which a similar state tax was based.

When a proposition to adopt the 3 per cent. tax was up in the House, an amendment for a rate graduated according to the carnings and another for exempting bankrupt roads, were rejected.

The debate makes it clear that most of the speakers did not regard this tax as lying upon railway property. In the House Mr. Horton, of the committee of ways and means, said, “The bill merely makes the railway officers the agents of the government in the collection of this tax,” and Mr. Olin objected to the proposed 2 mill tax on the ground that it would be a tax on the railways and not on the travelling public. Senator Sherman said, “They will add 3 per cent. to the cost of a ticket

There is no practical difficulty in the way. They will not have to pay it." The prevailing idea probably was that the railways could and would as a general thing shift the tax; but that no great harm would be done if they paid it themselves.

The provision concerning bonds and stocks was passed by the House and accepted by the Senate. It was expressly recognized as a species of income tax, differing from the income tax proper in that it stopped the income at the source and fell upon foreign security holders as well as citizens of the United States. It was suggested in the House that this latter fact might lead to repudiation. A proposal to exempt roads not paying interest on their bonds was rejected.

The distinction evidently made by some between the railway company and its stock and bond holders is noticeable, Mr. White (Ind.) stating that this was not a tax on railways but on the holders of railway stocks and bonds. This shows not only a superficial analysis of the relation of a corporation to its members, but also a lack of recognition of the effect of such a tax on the price of railway securities and so upon the financing of railways. And, similarly, there seems to have been no clear perception of the possibility of a raise in railway rates

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